Macroeconomics

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Macroeconomics
ECO 105 Lecture 3.3 17 October 2008
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What the Subject Is About

• The Big Picture
• Economys level of
• General level of
• Rate of growth of
• Economic

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The Economys Income and Expenditure

• What should we
• We need a

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Circular Flow Model

• Shows flow of real
• Shows opposite flow of spending on
• It would seem to make sense to measure

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Gross Domestic Product

• GDP is the market value of all final goods and
  services produced within a country in a given
  period of time.

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Market value

• How can we add tons of steel, gigabytes of
  memory, passenger miles, and gallons of milk?
• We need a
• the
• Market values put all goods

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. . . of all . . .

• GDP is meant to be a comprehensive measure of
• But goods that arent traded in markets

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. . . final . . .

• Only goods purchased by their
• Including intermediate goods would lead to

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. . . goods and services . . .

• Both tangible goods and intangible services
• Unfortunately, its more difficult to count
  services and theyre becoming

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. . . produced . . .

• GDP does not include transactions in goods
  produced
• Used goods
• Pre-owned cars dont count but the net income
  earned by the used-car dealer does.
• Financial transactions dont count, but the stock
  brokers fee does.

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. . . within a country . . .

• GDP is produced within a countrys
• Who owns the company
• The Mitsubishis produced in Normal add to
• The earnings of domestic residents is measured by

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. . . in a given time period.

• GDP measures a flow of production
• Production does not occur
• GDP is generally stated on an annual basis

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Other National Income Measures

• Net National Product - GDP less depreciation
  maximum sustainable
• Disposable personal income - the income of
  households and unincorporated businesses

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GDP and Social Well-being

• GDP doesnt measure all goods, nor does it
  subtract
• E.g., crime may actually increase GDP
• E.g., production may cause pollution, which

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• But income per person is highly correlated with
  
• Life expectancy, years of education, economic and
  political freedom
• Environmental problems actually decline as per
  capita income rises

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Components of GDP

• Simple CF model does not distinguish among
• Different reasons for spending
• Four sources of spending
• H
• B
• G
• F

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Expenditure Equation

• Y C I G NX
• C -
• I -
• G
• NX -

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A couple of details . . .

• Government purchases do not include transfer
  payments
• NX X - IM
• Exports - sales of domestically produced goods
  services to foreigners
• Imports - purchases of foreign-produced goods
  services by domestic residents

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GDP and Price Movements

• GDP is the sum of P x Q
• Example Simple 3-good economy
• If prices rise, GDP increases -