Second Part Macroeconomics Lecture 6 Macroeconomic Aggregates

1. Second PartMacroeconomicsLecture 6Macroeconomic Aggregates

2. Macroeconomics • Macroeconomics is the field of economics that studies the behaviour of the economy as a whole. It is the study of aggregate measures of the economy and this aggregation is done by understanding how individual economic units function. So it deals with the issues like growth, inflation, unemployment etc. • Macroeconomics can be best understood by comparing it with microeconomics which considers the decisions made at an individual or firm level. Macroeconomics considers the larger picture, or how all of these decisions sum together. An understanding of microeconomics is crucial to understand macroeconomics. To understand why a change in interest rates leads to changes in real GDP, we need to understand how lower interest rates influence decisions, such as the decision of how much to save, at the firm or household level. Once we understand how an individual, on average, will change their behaviour we will then understand the large scale relationships in an economy. • Examples of macroeconomic aggregate are GDP, GNP, CPI, inflation etc.

3. Economic Agent • In economics, an agent is a decision maker in a model. Every agent takes part in transaction with another agent. • In microeconomics there are two agents: • Consumer / Buyer/Household • Producer / Seller/Firm • In macroeconomics there are four agents: • Consumers/Households • Producers/Firms • Government • Foreign Country

4. Circular flow model (A Simple Model of Economic Interaction) Wages, rent, COST Interest, Factor MARKET capital profit RESOURCES Labor, land HOUSEHOLDS BUSINESS FIRMS & services expenses Goods & goods PRODUCT MARKET Consumption, services revenue Investment ( Injection) Capital market Savings (Leakage)

5. Gross Domestic Product (GDP)is the total market value of all final goods and services produced within a country in a given period of time. Breaking down the definition: “GDP is the Market Value . . .” • - Output is valued at market prices. “. . . Of All Final . . .” • -Records only the value of final goods, not intermediate goods (as value is counted only once). “. . . Goods and Services . . . “ • - Includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits). GDP

6. “. . . Produced . . .” • Includes goods and services currently produced, not transactions involving goods produced in past (Used goods) • “ . . . Within a Country . . .” • Measures the value of production within the geographic confines of a country. • “. . . In a Given Period of Time.” • Measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months).

7. Calculating GDP • Suppose there are two goods in the economy. For example: Rice and Wheat • Formula is GDP= ( Price of Rice X Quantity of Rice) + ( Price of Wheat X Quantity of Wheat) • Here we can use either current price or base price.

8. REAL VERSUS NOMINAL GDP • Depending on which price we are using in GDP calculation we can make two classification of GDP. Nominal GDP and Real GDP 1) Nominal GDP values the production of goods and services at current prices. 2) Real GDP values the production of goods and services at constant prices.

9. Table: Real and Nominal GDP Source: books and web materials

10. Gross national product (GNP): Gross national product (GNP): If weadd receipts of factor income (wages, profit, rent and interest) and grant/aid from the rest of the world and subtract payments of factor income and grant/aid to the rest of the world from GDP then we get GNP . GNP = GDP + Factor Payments from Abroad + aid received from Abroad - Factor Payments to Abroad - aid given to Abroad GDP VERSUS GNP Whereas GDP measures the total income domestically, GNP measures the total income earned by nationals. Question: What are the other differences between GDP and GNP?