Macroeconomics: Key Concepts and Issues
Explore the essential concepts in Macroeconomics, including Gross Domestic Product (GDP), unemployment, inflation, and balance of payments. Learn how these factors impact the economy as a whole and the importance of government policies in maintaining economic stability. Gain insights into the circular flow of income and the relationships between savings, investments, taxes, and imports.
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Presentation Transcript
At the end of the lecture the student should be recognized the four macroeconomic issues The student should understand how the circular flow of income is done What are the major issues in the economy as a whole 1- Gross Domestic Product (GDP) : is the money value of all final goods and services produced within a country in a given period of time We highlight two parts of the definition of GDP First : GDP consists of all final goods and services produced this is to avoid double counting intermediate goods e.g Second : nominal GDP is equal the sum of quantity produced of good and services multiple by its prices so nominal GDP can increase for two reasons If the output of real good and services increases or the average price level increases Economic Growth is the percentage increase in real GDP overtime period ( one year)
2- unemployment : reducing unemployment is another major macroeconomics aim of government not only for the sake of the unemployed themselves , but also because it represents a waste of human resources on government revenues Unemployment rate = NO of unemployed people / labor force 100 3- inflation : by inflation we mean a general rise in prices throughout the economy Reducing inflation or keeping price level stable is another aim of macroeconomic of the government The rate of inflation is the annual percentage increase in the price level
Government policy is to keep inflation both low and stable , there is a rule in economy : the real purchasing power of money is equal one divided by price level e.g Which means that there is an inverse relationship between the value of money and the price level e.g .. We calculate the inflation rate from the consumer price index which is published by center bank of Jordan as follow Inflation rate = C.P. I ( current year ) C.P.I (previous year ) x 100 % e.g . C.P.I ( previous year)
4- the balance of payment Balance of payment account : is a record of all country s financial transaction with the best of the world e .g .. * circular flow of income W = S + T + M Where : w : withdrawals s : saving T : taxes M : imports e.g .. J = I + G + X Where J : injections I : investment G : government expenditures X : exports e.g ..
The Economys Income and Expenditure When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning. To have this number make sense, it is also best to look at income per person.
The Economys Income and Expenditure For an economy as a whole, income must equal expenditure because: Every transaction has a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller. Say s Law-Supply creates it s own demand This process can be seen using a Circular Flow Diagram.
Gross domestic product (GDP) Gross domestic product (GDP) is a measure of the income and expenditures of an economy. It is the total market value of all final goods and services produced within a country in a given period of time. How much is the current GDP?
The circular flow of income and expenditure
The Measurement of GDP GDP is: the market value of all final goods and services produced within a country in a given period of time
What Is Counted and Not Counted in GDP? GDP includes all items produced in the economy and sold legally in markets. GDP excludes services that are produced and consumed at home and that never enter the marketplace. Caring labor, the work that is normally produced by women. Because GDP does not count it, it diminishes its importance. GDP also excludes black market items, such as illegal drugs.
Other Measures of Income Gross National Product (GNP) Net National Product (NNP) National Income Personal Income Disposable Personal Income
The Components of GDP GDP (Y ) is the sum of the following: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX) Y = C + I + G + NX
Measuring Economic Growth We use real GDP to calculate the economic growth rate. The economic growth rate is the percentage change in the quantity of goods and services produced from one year to the next. We measure economic growth so we can make: Economic welfare comparisons International welfare comparisons Business cycle forecasts
Measuring Economic Growth Business Cycle Forecasts Real GDP is used to measure business cycle fluctuations. These fluctuations are probably accurately timed but the changes in real GDP probably overstate the changes in total production and people s welfare caused by business cycles.
Real versus Nominal GDP Nominal GDP values the production of goods and services at current prices. Real GDP values the production of goods and services at constant prices.
