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    Macro Session 1

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    Susmriti Shrestha
    Macroeconomics studies the economy as a whole and addresses issues like inflation, unemployment, recessions, trade deficits, and poverty. The need for macroeconomics arose in the 1930s after events like the Great Depression showed economists that factors beyond individual markets could significantly impact the overall economy. Key macroeconomic variables include GDP, inflation, and unemployment rates. GDP measures the total value of goods and services produced, and can be calculated through expenditure, income, and value-added approaches.

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    Macro Session 1

    Uploaded by

    Susmriti Shrestha
    35 views27 pages
    Macroeconomics studies the economy as a whole and addresses issues like inflation, unemployment, recessions, trade deficits, and poverty. The need for macroeconomics arose in the 1930s after events like the Great Depression showed economists that factors beyond individual markets could significantly impact the overall economy. Key macroeconomic variables include GDP, inflation, and unemployment rates. GDP measures the total value of goods and services produced, and can be calculated through expenditure, income, and value-added approaches.

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    Macroeconomics studies the economy as a whole and addresses issues like inflation, unemployment, recessions, trade deficits, and poverty. The need for macroeconomics arose in the 1930s after events like the Great Depression showed economists that factors beyond individual markets could significantly impact the overall economy. Key macroeconomic variables include GDP, inflation, and unemployment rates. GDP measures the total value of goods and services produced, and can be calculated through expenditure, income, and value-added approaches.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    35 views27 pages

    Macro Session 1

    Uploaded by

    Susmriti Shrestha
    Macroeconomics studies the economy as a whole and addresses issues like inflation, unemployment, recessions, trade deficits, and poverty. The need for macroeconomics arose in the 1930s after events like the Great Depression showed economists that factors beyond individual markets could significantly impact the overall economy. Key macroeconomic variables include GDP, inflation, and unemployment rates. GDP measures the total value of goods and services produced, and can be calculated through expenditure, income, and value-added approaches.

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    Macroeconomics & the Global Economy

    Ace Institute of Management

    Session 1
    Instructor

    Rijan Dhakal
    [email protected] 98510 69004

    What you studied in Microeconomics..


    Basic demand and supply functions of individuals and markets Profit maximization of individual firms in different markets Consumers and Producers welfare theories Cost and benefits of firms in different markets. And so on But NOW .

    Introduction to Macroeconomics
    Macroeconomics, the study of the economy as a whole, addresses many topical issues:
    Why does the cost of living keep rising? Why are millions of people unemployed, even when the economy is booming? What causes recessions? Can the government do anything to combat recessions? Why does Nepal have such a huge trade deficit? Why are so many countries poor?

    Until 1930, economists didnt feel the need to study macroeconomics separately..
    but..after 1930..

    things changed..

    How did the need to study Macroeconomics arise?

    U.S. Real GDP per capita


    (2000 dollars)
    40,000

    30,000

    long-run upward trend


    20,000

    Great Great Depression Depression

    10,000

    0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

    U.S. inflation rate


    (% per year)
    25 20 15 10 5 0 -5 -10 -15 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

    Very low inflation-Deflation

    U.S. unemployment rate


    (% of labor force)
    30

    Very high Unemployment


    25 20 15 10 5 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

    Introduction to Macroeconomics
    Macroeconomics:
    Deals with the study of economy as a whole. Coined by Ragnar Frisch in 1933. Its goal is to explain the economic changes that affect many households, firms, and markets simultaneously. It is related to the study of interdependence between various sectors of an economy. It rules out the assumption of ceteris paribus.

    HOW DO WE STUDY MACROECONOMICS? Macroeconomic models : Symbols and Equations Model is the simplified representation of the economic world.
    Macroeconomic models are toy economies to help explain the relationship between various macroeconomic variables. Two important variables in a model: Exogenous variables and Endogenous variables. Exogenous (Independent) variables : that a model takes as given. Endogenous (dependent) variables : which the model tries to explain. (What happens to..??)

    THE MODEL OF SUPPLY AND DEMAND


    Assume the following two relationships for CD market: Qd = D(P,Y) (i) Qs = S(P,Pm) (ii) Equation (i) shows that Quantity of the CD demanded is the function of the Price of the CD and Income level of the consumer or the aggregate income of the economy. Equation (ii) shows that Quantity of the CD supplied is the function of the Price of the CD and Input price of the materials.

    The equilibrium in the CD market is given by:

    Q d = Qs

    THE MODEL OF SUPPLY AND DEMAND


    Price
    P
    *

    Supply, Qs

    Demand, Qd Q
    *

    Quantity

    THE MODEL OF SUPPLY AND DEMAND


    Exogenous Variables: Aggregate Income, and Price of the materials (taken as given) Endogenous Variables: Price of the CD, and Equilibrium quantity of CD Price P* Demand Q
    *

    Supply

    Quantity

    The model explains what happens to Endogenous variables (Price and Equilibrium Quantity of CD sold) when one of the Exogenous variables (Aggregate Income and Price of the materials ) changes.

    EXAMPLE: CHANGES IN EXOGENOUS VARIABLES


    P
    S
    SHIFTS IN DEMAND

    D Q

    D' P

    SHIFTS IN SUPPLY

    S'

    D Q

    PRICES: FLEXIBLE VS. STICKY


    General Assumption: Market equilibrium of supply and demand, (market clearing process).
    Markets clearing continuously, is unrealistic.
    Need prices to adjust instantly to changes in supply and demand. But, prices and wages often adjust slowly.

    Although market clearing models assume that wages and prices are flexible, in actuality, some wages and prices are sticky. But they do depict the equilibrium toward which the economy gravitates.

    Short term analysis vs Long term analysis for Price Sticky vs Price Flexibility

    IMPORTANT STATISTICS FOR MACROECONOMISTS Three statistics that economists and policymakers use:

    Gross Domestic Product (GDP) is the monetary value of all final goods and services produced within an economy in a given period of time-best single measure of economic well being of a society
    Inflation rate measures changes in level of prices. The unemployment rate tells us the fraction of workers who are unemployed.

    Gross Domestic Product (GDP)


    Two ways of viewing GDP
    Total income of everyone in the economy Total expenditure on the economys output of goods and services Income $ Labor
    Households Firms

    Goods/ Services Expenditure $ For the economy as a whole, income must equal expenditure. GDP measures the flow of dollars in the economy.

    If:
    $0.50 $1.00

    GDP = (Price of apples Quantity of apples) + (Price of oranges Quantity of oranges) = ($0.50 4) + ($1.00 3) GDP = $5.00

    Y = C + I + G + NX
    Total demand for domestic output (GDP) Investment spending by businesses and households

    Net exports or net foreign demand


    Government purchases of goods and services

    Consumption spending by households

    This is the called the national income accounts identity.

    Calculating GDP
    Components of U.S. GDP, 2004: The Expenditure Approach
    BILLIONS OF DOLLARS PERCENTAGE OF GDP

    Personal consumption expenditures (C) Durable goods Nondurable goods Services Gross private domestic investment (l) Nonresidential Residential Change in business inventories Government consumption and gross investment (G) Federal State and local Net exports (EX IM) Exports (EX) Imports (IM) Gross domestic product (GDP)
    Note: Numbers may not add exactly because of rounding. Source: U.S. Department of Commerce, Bureau of Economic Analysis.

    8,214.3 987.8 2,368.3 4,858.2 1,928.1 1,198.8 673.8 55.4 2,215.9 827.6 1,388.3

    70.0 8.4 20.2 41.4 16.4 10.2 5.7 0.5 18.9 7.1 11.8

    -624.0

    - 5.3

    1,173.8 1,797.8
    11,734.3 100.0

    10.0 15.3

    Practice Problem-1.1 Consumption Income earned by the national abroad Gross Investment : Income earned by foreigners at home Capital consumption Indirect Business Tax Government Purchase Net Export Undistributed corporate profit Personal tax payment Calculate GDP from the above data Answer: 12485.8 : 8746.2 : 587.8 2103.1 : 287 : 86.6 : 700 : 2363.4 : - 726.9 : 350 : 1650

    Measuring GDP from Income side


    Sum of income of all factors of production gives the GDP from income side (Gross Domestic Income) GDI or GDP (I) = Compensation of employees + Proprietors Income + Rental Income + Corporate Profit + Net Interest

    Practice Problem-2 Compensation of the employees Personal Income Taxes Corporate Profits Indirect Business Taxes Corporate Tax payment Proprietors Income Net Interest Rental Income Personal Saving NFI Capital Consumption Answer: 7469.7 : 5299.8 : 1152.0 : 856.0 : 657.5 : 485.7 : 663.5 : 507.0 : 143.4 : 147.6 : 1818.5 : 1161.0

    Calculate GDP(income approach) from the above data

    World Top 10 GDP in Millions of US Dollars in Market Price (Source: IMF 2010)

    11. India 1,430,020

    107. Nepal - 15,108

    162. Bhutan - 1,397

    1) Used goods 2) Intermediate goods (use value added method) 3) Treatment of inventory 4) Housing services and other imputations

    Measuring GDP by the Value Added Method


    FIRM VALUE OF PRODUCT VALUE ADDED

    Cotton Farmer
    Textile Mill

    Value of raw cotton = $1.00


    Value of raw cotton woven into cotton fabric = $3.00

    Value added by cotton farmer


    Value added by cotton textile mill = ($3.00 $1.00)

    = $1.00
    = $2.00

    Shirt Company

    Value of cotton fabric made Value added by shirt manufacturer = $12.00 = ($15.00 $3.00) into a shirt = $15.00
    Value of shirt for sale on L.L. Beans Web site = $35.00 Value added by L.L. Bean = ($35.00 $15.00) Total Value Added = $20.00

    L.L. Bean

    = $35.00

    Other Exclusions from Expenditures


    Avoid neither good nor a service
    Does not reflect production such as bonds/ stocks

    Avoid expenditure by governments for which it does not receive a good or service in return
    Transfer payments such as Social security, unemployment compensation etc.

    All expenditures on goods/services sold illegally

    Thank You

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