Business Economics ( ECO 341) Fall: 2012 Semester

1. Business Economics (ECO 341)Fall: 2012 Semester Khurrum S. Mughal

2. Origin of Macroeconomics John Maynard Keynes (1883-1946) • “The General Theory of Employment, Interest and Money” (1936)

3. So what is ‘the economy’? The economy is made up of four sectors sometimes called economic agents: • Households who receive payments (income) for their services (eg labour and land) and use this money to buy the output of firms (ie consumption or household spending). • Firmswho use land labour and capital to produce goods and services for which they pay wages rent etc (income) and receive payment (expenditure) • Government(also known as the public or state sector) and • Internationaleg consumers buying overseas products (M) and Foreigners buying your (X)

4. What is macroeconomics? • Macroeconomics considers the performance of the economy as a whole. • We try to understand changes in • The rate of economic growth • The rate of inflation • Unemployment • Our trade performance with other countries • Macroeconomics also includes an evaluation of the relative success or failure of government economic policies

5. What is macroeconomics?

6. Tools of Macroeconomic Policies • Fiscal Policy • Government expenditures and taxation • Used to affect long term economic growth • Monetary Policy • Conducted by central bank and determines short term interest rate.

7. Key Concepts • Gross Domestic Product (GDP) • The monetary value of all goods and services produced within the country in a given time period • Economic Growth • The percentage rate of increase of real GDP • Inflation • The annual percentage rate of change of the general price level • Unemployment • Percentage of unemployed labour force.

8. Measuring Economic Activity • Most important concept in macroeconomics • GDP is part of national income and national accounts • Shows state of the economy – contraction or expansion? • Level of economic activity is judged by GDP per Capita

9. Measuring GDP Two Approaches • Flow of Product Approach or Expenditure Approach • Earnings or Income or Cost Approach Approach

10. GDP – Expenditure Approach • Defined as the total value of all goods and services produced within that territory during a given year • GDP = C + I + G + (X-M) where C: Household spendingI: Capital Investment spendingG: Government spending X: Exports of Goods and Services M: Imports of Goods and Services • Using market prices of different commodities

11. GDP – Income Approach • GDP is the sum of the incomes earned through the production of goods and services. The main factor incomes are as follows: Compensation of Labor+ Corporate Profits + Rent income from land+ Depreciation + Net Production Taxes • Excludes Transfer Payments and Shadow Economy

12. Measuring GDP

13. Double Counting • Treatment of Intermediate goods that are used in production of other goods • Value added is the increase in the value of a product at each successive stage of the production process.

14. Real Vs. Nominal GDP • Nominal GDPvalues the production of goods and services at current prices. • Real GDPvalues the production of goods and services at constant prices. An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator.

15. Real Vs. Nominal GDP • The GDPdeflatormeasures the current level of prices relative to the level of prices in the base year. • It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.

16. Real Vs. Nominal GDP of Pakistan

17. Concepts of National Income • Gross Domestic Product (GDP) • Net Domestic Product (NDP) • Gross National Product (GNP) • Net National Product (NNP) • National Income (NI)

18. Disposable Income

19. GDP and Economic Well-Being GDP is not a perfect measure of the happiness or quality of life, however. Some things that contribute to well-being are not included in GDP. • The value of leisure. • The value of a clean environment. • The value of almost all activity that takes place outside of markets.