Macroeconomics

(Energy Planning and Management)

Rabin Shrestha
Visiting Faculty
Pulchowk Campus, 2009

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 Macroeconomics
Macroeconomics is the study of the structure and
performance of national economies and government
policies. Key issues:
•Economic growth, GDP, GNP
•Unemployment and Inflation
•Money Supply and Demand
•Exchange Rate
•Government Spending and its financing
•International Trade and Balance of Payment
Accounting
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 Gross Domestic Product
• GDP is the broadest measure of aggregate
economic activity
• GDP may be measured by product
approach, expenditure approach or the
income approach
• The product approach defines a nation’s
GDP as the market value of final goods and
services newly produced within a nation
during a fixed period of time.
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 GDP…
• The expenditure approach to measuring
considers GDP as total spending on final
goods and services produced within a
nation during a specified period of time
• The income approach to measuring GDP
adds the incomes received by producers,
including profits and taxes paid to the
government

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 GNP and GDP
• GNP (Gross National Product)
• The main difference between GNP and GDP
is the treatment of output produced by capital
and labor working outside its home (domestic)
country.
• GNP is the market value of final goods and
services newly produced by domestic factors
of production during the current period (as
opposed to production within the country)
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 GNP
• GNP = GDP + NFP
• NFP is net factor payments from abroad
• NFP is defined as income paid to domestic
factors of production by rest of the world
minus income paid to the foreign factors of
production by the domestic country

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 Real and Nominal GDP
• GDP when expressed in current price is known as
NOMINAL GDP.
• Changes in nominal GDP may be due to changes in
physical quantities and/or changes in price.
• An economic variable that is measured by prices of a
base year is called real variable.
• REAL GDP or constant price GDP measures the
physical volume of an economy’s production at base
year price

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 Price Indexes
• A price index is a measure of the average
level of prices for some specified goods and
services, relative to the prices in a specified
base year.
• GDP deflator is a price index that measures
the overall level of prices of goods and
services included in GDP
• GDP deflator = 100 x nominal GDP/ real GDP

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 Consumer Price Index
• GDP deflator measures the average level of
prices of good and services included in GDP
• CPI measures the prices of consumer goods.
CPI is normally calculated monthly
• CPI for a particular month is calculated as
100 times the current cost of the basket of
consumer items divided by the cost of the
same basket of items in the reference base
period
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 Inflation
• An important variable that is measured from
price indexes is the inflation rate
• The inflation rate equals the percentage rate
of increase in the price index per period
• When CPI increases from 100 to 105 next
year, the inflation rate between two years is
(105-100)/100=0.05 or 5%
• When CPI increase form 105 to 112, inflation
rate is (112-105)/105=6.67%
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 Balance of Payment
• The BOP is a record of a country’s
international transaction.
• It helps to examine the factors affecting
international trade and lending.
• Any transaction that involve inward flow is a
credit item and is entered with positive sign,
any transaction out side is a debit item and
entered with negative sign.
This lecture note is based on “Abel and Bernanke, 2005, Macroeconomics, Fifth
edition, Pearson Education Inc.”
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The End

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