MACROECONOMICS

a branch of economics dealing with the

performance, structure, behavior and decision
making of an economy as a whole, rather than as
an individual market.
This include:
- inflation, price levels, rate of growth, national
income, gross domestic product and changes in
unemployment.
THE BIG FOUR MACRO ISSUES
1.Inflation
2.Unemployment
3.The Rate of Economic Growth
4.Forecasting Movement in the Business
Cycle
MACRO PROBLEM #1: INFLATION
An upward movement of prices from one year to the
next.

Measured by the percentage change in price indices:

Consumer Price Index (CPI) - A measure of only goods bought
by consumers.
Producer Price Index (PPI)- Measures the degree of inflation in
the eyes of producers.
GDP Deflator - A measure of the prices of all goods and service.
MACRO PROBLEM #2: UNEMPLOYMENT

Unemployment Rate:
- The number of unemployed persons divided by
the number of people in the labor force.
 3 KINDSUnemployment
1.Frictional OF UNEMPLOYMENT
- People quit their jobs just long enough to look for, and find
another one.
2.Cyclical Unemployment
- Workers lose their jobs because of downturns in business
cycle.
3.Structural Unemployment
- Mismatch between the jobs available and the skill levels of
the unemployed.
 MACRO PROBLEM #3:
ECONOMIC GROWTH RATE

The rate at which a nation's gross domestic product

(GDP) changes/grows from one year to another.
 MACRO PROBLEM #4: BUSINESS CYCLE

The natural rise and fall of economic growth that

occurs over time.
MAIN SOURCE OF DATA
National Income Accounting
a system that collects statistics on
production, income, investments and
savings.
GROSS DOMESTIC PRODUCT
GROSS NATIONAL PRODUCT
 GROSS DOMESTIC PRODUCT
It is the total market value for all final
goods and services produced within a
countrys border in a given year.
Intermediate
Final goods & goods
services - Goods that are
- Goods and produced by
services one firm for use
produced for in further
final use. processing by
another firm.
 GROSS DOMESTIC PRODUCT
A.GDP is concerned only with new and current
production.
B.GDP also excludes output produced abroad by
domestically owned factors of production.
C.Intermediate goods are not counted in the GDP.
 GROSS NATIONAL PRODUCT
It is the total market value for all final
goods and services produced within a
given period of time by factors of
production owned by countrys citizens,
regardless of where the output is
produced.
 GDP CAN BE COMPUTED IN TWO WAYS:
1.Expenditure Approach method of computing
GDP that measures the amount spent on all final
goods during a given period.
2.Income Approach method of computing GDP
that measures income wages, rents, interests and
profits receive by all factors of production in
producing final goods.
 CALCULATING GROSS DOMESTIC PRODUCT
1.Expenditure Approach
GDP = C + I + G + ( EX IM )
Where:
C = Personal Consumption Expenditures
I = Gross Domestic Investment
G = Government Consumption and Investment
EX IM = Net exports net spending by rest of the
world or exports minus imports
1. Durable Goods goods that last a
C PERSONAL CONSUMER EXPENDITURES CATEGORIES
relatively long time such as cars
and household appliances.
2. Nondurable Goods goods that are used
up fairly quickly such as food and
clothing.
3. Services things we buy that do not
involve the production of physical
things such as legal and medical
services and education.
 I GROSS PRIVATE DOMESTIC INVESTMENT
TYPES OF INVESTMENT
1.Gross Private Investment total investment in
capital, it is the purchase of new housing,
equipment and plants by private sector.
2.Nonresidential Investment expenditures by firms
for machines, tools, plants and so on.
3.Residential Investment expenditures by firms
and on new houses and buildings.
4.Change in Business Inventories amount by
which firm inventories change during a period,
inventories are goods that firms produce now but
intend to sell later.
GOVERNMENT CONSUMPTION AND INVESTMENT
refers to federal, state and local
governments for final goods and services.

NET EXPORTS (EX-IM)

is the difference between exports and
imports, figure can be negative or positive.
 CALCULATING GROSS DOMESTIC PRODUCT

2.Income Approach
GDP = National Income + Depreciation +
(Indirect taxes Subsidies) + Net factor
payments to the rest of the world
 A. NATIONAL INCOME
is the total income earned by the factors of production
owned by countrys production.
a.Compensation of Employees includes wages,
salaries and various supplements.
b.Proprietors Income income of unincorporated
businesses.
c.Corporate profits income of corporate businesses.
d.Net Interest interest paid by business.
e.Rental Income income received by property
owners in form of rent.
B. DEPRECIATION the amount by which assets value
falls in a given period.
C. INDIRECT TAXES are taxes like sales tax, customs
duties and license fee.
D. SUBSIDIES are payments made by the
government for which it receives no goods or
services in return.
E. NET FACTOR PAYMENTS TO THE REST OF THE WORLD
payments of factor income to the rest of the
world minus receipt of factor income from the
rest of the world.
 HOW GDP IS CALCULATED
Expenditure Approach
1. Suppose an
economys entire
output is cars and
trucks.
2. This year, the
economy produces:
10 cars at $15,000 each =
$150,000
+ 30 trucks at $20,000 each =
$200,000
Total =
$350,000
3. The economys GDP Engineers
Managers
for this year is
Income Approach
1. Suppose an economys entire output is cars and
trucks.
2. All employed citizens, therefore, would work in the
car and truck industry, or for its supplier.
3. The combined selling price of all the cars and
trucks reflects the money paid to all the people
who helped build the vehicles.
4. The economys GDP for this year, then, is the sum
of the income of all its working citizens, or
$350,000.
Designers Planners Assembly-line
Suppliers
GNP AND OTHER NATIONAL INCOME ACCOUNTS
NET NATIONAL PRODUCT Gross national product
minus depreciation; a nations total product minus
what is required to maintain the value of its capital
stock.
PERSONAL INCOME The income received by
households after paying personal tax.
DISPOSABLE PERSONAL INCOME Personal income
minus personal income taxes.
PERSONAL SAVING The amount of disposable
income that is left after total personal
PERSONAL SAVING RATE Percentage of disposable
personal income that is saved. If personal saving rate is
low households are spending a large amount relative to
their incomes, if it is high households are spending
cautiously.
GDP, GNP, NNP, NATIONAL INCOME, PERSONAL INCOME & DISPOSABLE INCOME
GDP
Plus: receipts of factor income from the rest of the world
Less: payments of factor income to the rest of the world
Equals: GNP
Less: depreciation
Equals: NNP
Less: Indirect taxes minus subsidies plus others
Equals: National Income
Less: corporate profits minus dividends
Less: social insurance payments
Plus: personal interest income received from government
and consumers
Less: transfer payments to persons
Equals: Personal income
Less: personal taxes
Equals: Disposable personal income
 OTHER ACCOUNTS
DEPRECIATION normal wear and tear of a
specific product by reason of time.
INDIRECT TAXES tax imposed on goods before
they reach the customer who ultimately
pays for them not as tax but as part of the
purchase price like sales tax.
SUBSIDIES payments made by the
government for which it receives no goods or
services in return.
TRANSFER PAYMENTS payments made by the
government to people who do not supply
goods or services in exchange like welfare
payments.
SOCIAL INSURANCE PAYMENTS taxes levied
at a flat rate on wages and salaries, proceeds
support government-administered social
benefit programs including SSS and
unemployment benefits system.
 NOMINAL VERSUS REAL GROSS DOMESTIC PRODUCT
1.NOMINAL GDP
GDP measured in current price or pesos all
components of GDP valued at their current prices
Example: Burger
Year 1 (Price = 20 pesos, Quantity = 100 pcs.)
Year 2 (Price = 30 pesos, Quantity = 100 pcs.)
 NOMINAL VERSUS REAL GROSS DOMESTIC PRODUCT
2.REAL GDP
Nominal GDP adjusted for price changes is
called real GDP.
All the main issues in computing real GDP can
be discussed using the simple three-good
economy for 2 years provided by the table
below.
 NOMINAL AND REAL GDP
Year 1
Nominal GDP
1. Suppose an economys
entire output is cars and
trucks.
2. This year, the economy
produces:
10 cars at $15,000 each =
$150,000
+10 trucks at $20,000 each=
$200,000
Total =
$350,000
3. Since we have used the
current years prices to
express the current years
output, the result is a nominal
GDP of $350,000.
Year 2
Nominal GDP
1. In the second year, the
economys output does
not increase, but the
prices of the cars and
trucks do:
10 cars at $16,000 each =
$160,000
+10 trucks at $21,000 each
=$210,000
Total =
$370,000
2. This new GDP figure of
$370,000 is misleading. GDP
rises because of an increase
in prices. Economists prefer
to have a measure of GDP
Year 2
Real GDP
1. To correct for an increase
in prices, economists
establish a set of constant
prices by choosing one
year as a base year. When
they calculate real GDP
for other years, they use
the prices from the base
year. So we calculate the
real GDP for Year 2 using
the prices from Year 1.
10 cars at $15,000 each =
$150,000
+10 trucks at $20,000 each
=$200,000
2. Real GDP for Year 2,
 PER CAPITA GDP / GNP
A countrys GDP or GNP divided by its population.
It is better measure of well-being for the average
person than total GDP or GNP.
Notes: Switzerland has the highest per capita GNP of
$40, 630, followed by Japan $39, 640, and Norway
$31, 250.
Philippines has a per capita GDP/GNP of $1, 050.
Mozambique has a per capita GDP/GNP of $80.
 LIMITATIONS OF THE GDP CONCEPT
1.GDP is not always reflective of increases in social
welfare.
Example:
a.Decrease in crime rate not considered as increase
in output and is not reflected in GDP.
b. Increase in leisure may be associated with
decrease in GDP (less time on producing
output)
 LIMITATIONS OF THE GDP CONCEPT
2.GDP seldom reflects losses or social ills.
GDP accounting rules DO NOT ADJUST for
production that POLLUTES the environment.
Thus:
The MORE PRODUCTION there is, the LARGER the
GDP, regardless of how much pollution results in the
process.
 LIMITATIONS OF THE GDP CONCEPT
3.GDP does not measure the effects of redistributive
policies.
It does not distinguish between in which most output
goes to a few people and the case in which output is
evenly divided among all people.
4.GDP is also neutral about the kinds of goods an
economy produces.
 AGGREGATE SUPPLY AND DEMAND
Aggregate demand is the total amount of goods and
services people want to buy; in other words, it
measures what people wish to purchase rather than
what is actually produced. The aggregate demand is
the sum of consumption, investment, government
expenses, and net exports.
 AGGREGATE SUPPLY AND DEMAND

Aggregate supply is the total output an economy

produces at a given price level.
AGGREGATE SUPPLY AND DEMAND