MACROECONOMICS IMI612S

1. MACROECONOMICSIMI612S At the end of this unit, you should be able to: Explain the meaning of an economic aggregate Assess the problems involved in aggregation Define the terms national product, national expenditure, national income, consumption, saving and investment. These notes are incomplete without having attended lectures

2. Introduction • Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. • This looks at economy-wide phenomena, such as gross national product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. These notes are incomplete without having attended lectures

3. Introduction Most important aggregates in the economy • The economy’s total output of goods and services • The total demand for and supply of this output • Total employment and unemployment • The general price level • The balance of payments • The rate of economic growth These notes are incomplete without having attended lectures

4. Introduction Aggregate demand is the sum of the demands for goods and services by consumers, businesses, the government and foreign residents Aggregates are made up of their constituent parts. For example: Where AD is aggregate demand, C is the sum of all individual consumers’ demands for goods and services, I is the sum of all individual firms’ demand for investment goods, G is the governments’ demand for foods and services, X is the total demand for the country’s exports and M is the demand for imports. These notes are incomplete without having attended lectures

5. Introduction The problems of aggregation Difficulty in finding an appropriate unit of measurement. For example apples are measured in tones while clothes are measured in meters. How do you add tones to meters? The problem is overcome, at least partially, by using money as the unit of measurement. But there is another problem of distinguishing between nominal and real value. If the value of total output double from N$10 million to N$20, this does not necessarily mean that total output itself have double. Two possible reasons why it has double: • Increase in physical output • Increase in price level In this case we need to estimate the real output These notes are incomplete without having attended lectures

6. Introduction The problems of aggregation Real output is the quantity of goods and services produced in an economy. An estimate of the monetary value of real output can be obtained by adjusting the value of output measured in current prices by an appropriate price index. Price index is used to measure changes in the price level by comparing the price of a basket of goods and services in the current year to the price of this basket in a selected base year. These notes are incomplete without having attended lectures

7. Introduction The problems of aggregation Another problem with aggregates is that they hide their constitute elements. An increase in the economy’s total output tell us nothing about who receives that output. It is possible for a country to have an increase in economic total output and at the same time some people will be worse off. An increase in economy’s total output cannot be necessarily be interpreted as an improvement in the country standard of living. These notes are incomplete without having attended lectures

8. Introduction Three ways of measuring the annual value of total output in an economy are by calculating its: National product This is found by adding up the value of all the final goods and services produced by firms during the year National expenditure This is found by adding up all the spending on the final goods and services produced by firms National income By adding up all incomes (wages, salaries, interest, rent and profits) of factor of production, those producing intermediate goods as well those producing final goods. These notes are incomplete without having attended lectures

9. Introduction The Black Economy It refers to those unrecorded economic transaction conducted on a cash basis with a view to illegal evasion of tax. Official statistic tend to underestimate the actual volume of economic activity that occurs. National Income and economic welfare Two steps of how to convert national income into real output per capita. • National income must be deflated by an appropriate price index to convert it to real terms • The figure must then be divided by the population to convert it to per capita terms These notes are incomplete without having attended lectures

10. Introduction Two years, 1995 and 1999, price increases by 20% between 1995 and 1999, National income in 1995 is N$12 m and in 1999 is N$24, the population in 1995 is 5000 and in 1999 is 7500. Real national income = money value of national income in that year times 100 divided by price index in that year These notes are incomplete without having attended lectures

11. Introduction HOME WORK Try to understand the following three types of Improvements • An actual improvement • A potential improvement • A pseudo-improvement Macroeconomic Equilibrium These notes are incomplete without having attended lectures