INTRODUCTION TOMACROECONOMICS

MACROECONOMICS:The branch of Economics dealing with the

performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. (This includes regional, national, and global economies).

AGGREGATE:A whole formed by combining many separate units or items. The “aggregate economy” is the product of the combination of all the decision-making done by

individual actors in the world.

Individuals

Firms

Local Gov.

Households

National Gov.

Global Organizations

3 GOALS OF MACROECONOMICS:

1. Economic Growth2. Full Employment3. Economic Stability

We begin with goal #1:

ECONOMIC GROWTH

GROWTH HISTORY:Economies did not grow at a meaningful rate until the

1800s during the Industrial Revolution.

Economies in leading nations have grown at about 2% a year for the last two centuries. (A 2% growth rate

will double the size of an economy in 36 years!)

GROWTH RATE

GROWTH:Macroeconomics is all about measuring economic

growth. But how should it be measured?

By the amount of money being spent every year?

By the amount of money being made every year?

This is called total expenditures.

This is called total revenues.

In a given economy, total revenues and total expenditures are always about the same. Every

transaction has a buyer and seller.

GROWTH:Macroeconomics is all about measuring economic

growth. But how should it be measured?

Always remember that there is no measure of ALL economic

activity, and the measures we do use (like GDP) are inaccurate. GDP is a simplification of massive amounts of

information.

GDP:GROSS DOMESTIC PRODUCT

The market value of all final goods and services produced in an economy within a

given time period.

Normally, we focus on the economy of a country,

...and the length of one year.

GDP:The market value of all final goods and services produced in an economy within a given time period.

The current price at which people are buying/selling

goods and services.

If these bananas are produced in Brazil

and sold at the market price of $2,

we say that the GDP of Brazil has increased by $2.

GDP:The market value of all final goods and services

produced in an economy within a given time period.

Includes everything produced in the selected region EXCEPT:

• Illegal things (like drugs) being sold in the “black market”

• Good and services produced AND consumed within the same home.

GDP:The market value of all final goods and services

produced in an economy within a given time period.

Final goods are ready for sale. GDP does not include the value of

intermediate goods.

Intermediate goods are unfinished goods, or

goods used as inputs in the production of a more final product.

Intermediate goods...Intermediate goods are unfinished goods, or goods used

as inputs in the production of a more final product. Whether or not something is called an “intermediate

good” depends on its final destination.

If pencil lead is produced as a component of wooden pencils, it is

an intermediate good.

If pencil lead is produced to be sold as pencil lead,

it is a final good.

Intermediate goods...

When making blue jeans, there are many inputs to production, including dye, thread, cloth, and labor. The value of these things is not included in GDP. Only the

market value of the final pair of blue jeans becomes part of the GDP total.

* Screenshot & example from Khan Academy!

GDP:The market value of all final goods and services

produced in an economy within a given time period.

GDP includes the market value of all items produced, whether they are sold

or not!

GDP:The market value of all final goods and services

produced in an economy within a given time period.

GDP is calculated by location. If people in South Korea own factories in other countries,

the value of the goods/services produced there are NOT included in South Korean GDP.

Likewise, if foreigners living in South Korea produce goods/services here, this value IS

included in GDP.

“REAL” VS. “NOMINAL”Real GDP: inflation has been subtracted from the total GDP. This allows us to compare GDP from year to year, and make a direct comparison between the

state of a country’s economy in the past and present.

(Inflation: increase in price of products over time. )

Nominal GDP: A gross domestic product figure that has not been adjusted for

inflation. Sometimes called “current dollar GDP.”

OTHER MEASURES OF ECONOMIC GROWTH:

Per Capita GDP: A measure of the total output of a country that takes the gross domestic product (GDP) and

divides it by the number of people in the country.

This measure allows us to better compare

one country’s growth to another’s.

OTHER MEASURES OF ECONOMIC GROWTH:

Per Capita GDP: A measure of the total output of a country that takes the gross domestic product (GDP) and

divides it by the number of people in the country.

Per Capita GDP shows us how productive the workforce of a country is...

Country A Country B

Total GDP: 100 Total GDP: 100

# of People: 23 # of People: 68

Per Capita GDP: 4.3

Per Capita GDP:1.5

OTHER MEASURES OF ECONOMIC GROWTH:

Purchasing Power Parity measures the purchasing power of one currency against another after taking the

exchange rate into account.

This measure is used to determine the relative

value of different currencies.

OTHER MEASURES OF ECONOMIC GROWTH:

Purchasing Power Parity measures the purchasing power of one currency against another after taking the

exchange rate into account.

The “Big Mac Index” is used to measure the PPP between nations with the cost of a big

mac as the benchmark.

Big Mac cost:USDvs.

otherworld

currencies

OTHER MEASURES OF ECONOMIC GROWTH:

Real Growth Rate is a measure of economic growth from one period to another expressed as a percentage

and adjusted for inflation.

The “Big Mac Index” is used to measure the PPP between nations with the cost of a big

mac as the benchmark.

Questions:

What problems do you think we face when trying to calculate GDP?

What problems do you think we face when we compare GDP of different

countries?