Chapter 6 – Macroeconomics

Macroeconomics studies the growth of the overall economy, including inflation and unemployment. Aggregate supply and demand are studied under both the Keynesian and Neoclassical models.

Gross Domestic Product

Gross domestic product (GDP) is a measure of the size of a nation’s economy. This is the final value of all goods and services a country produces within a given year.

The four major components of GDP include:

• Consumption (consumer spending)
• Investment (business spending)
  • Investment refers to the purchase of capital assets, not financial securities
• Government spending
• Trade (imports and exports)

During recessions, governments may stimulate GDP growth through spending such as infrastructure bills. This may compensate for a lower percentage of consumption.

GDP by Demand

$$GDP=C+I+G+(X-M)$$

• Consumption
• Investment
• Government
• $(X-M)$ = Trade balance
  • eXports
  • iMports

GDP by Production

When looking at what is produced, GDP can be broken down into the five following categories:

• Durable goods (goods that last; not immediately consumed)
• Nondurable goods (immediately consumed)
• Services
• Structures
• Changes in inventories

The GDP remains the same regardless of wether it is viewed from what is demanded and what is produced.

Double Counting

Only final goods and services are included in GDP calculations.

Goods that are excluded from the GDP include:

• Intermediate goods (goods used in the production of another good)
• Non-market activities (such as when you cook for yourself)
• Used goods
• Illegal goods

Gross National Product

GNP calculates the production of a nation’s labor and firms, including those abroad, less the payments sent by foreign labor and firms to other nations. In contrast, GDP includes all activities within a nation’s borders.

Net National Product

NNP is the GNP less depreciation. Net national income (NNI) includes all income to businesses and people. Gross national income (GNI) is the value of all goods and services produced by a nation’s people, regardless of location.

Nominal and Real GDP

Nominal values are measured in terms of actual price when measured.

Real values are adjusted for inflation and are more important, since they can be compared.

$$\text{Value = Price}\times \text{Quantity}$$ $$\text{Nominal GDP = GDP Deflator}\times \text{Real GDP}$$

The GDP deflator is a price index that is typically multiplied by 100 to obtain an integer value.

Calculating Real GDP

Given that the nominal GDP was $543.3 billion with a price index of 19.0:

$$\text{Real GDP = }\frac{\text{Nominal GDP}}{\text{Price Index}/100}$$ $$\text{Real GDP = }\frac{\$543.3\text{B}}{19/100}$$ $$\text{Real GDP = \$2859.5B}$$

Calculating Real GDP Growth

$$\frac{GDP-GD{P}_0}{GD{P}_0}\times 100=\%\text{ change}$$

Since $\text{Nominal = Price}\times \text{Quantity}$:

$$\%\Delta \text{Nominal}=\%\Delta \text{Price}+\%\Delta \text{Quantity}$$

and therefore

$$\%\Delta \text{Quantity}=\%\Delta \text{Nominal}-\%\Delta \text{Price}$$

Where:

• $\%\Delta \text{Quantity}$ is the real GDP growth rate
• $\%\Delta \text{Nominal}$ is the nominal GDP growth rate
• $\%\Delta \text{Price}$ is the inflation rate

Tracking Real GDP

Quarterly GDP rates are annualized by convention, meaning they are multiplied by four as if it was over the span of an entire year.

For example, a 4% growth rate during the first quarter means that real GDP grew by 1%.

Recessions are significant declines in real GDP. Long recessions are called depressions. Changes in real GDP correlate with employment and unemployment.

• Troughs are the lowest point in recessions before the economy recovers
• Peaks are the highest points before recessions
• Recessions last from peak to trough, known as the business cycle

Comparing GDP Across Countries

GDP can be compared using two types of exchange rates:

• Market exchange rates vary each day in forex markets due to supply and demand
• Purchasing power parity (PPP) are longer run exchange rates which are commonly used to compare GDP

$${\text{GDP}}_{\text{A}}\text{ in \$B}=\frac{{\text{GDP}}_{\text{A}}}{\text{exchange rate A/B}}$$

GDP Per Capita

$$\text{GDP per capita = }\frac{\text{GDP}}{\text{population}}$$

GDP and Well-Being

GDP only measures economic activity, thus it cannot account for all factors relating to well-being. For example, a nation with a higher GDP per capita may work much longer hours than a nation with a lower GDP. Additionally, an overall increase in GDP does not account for inequality, as some groups may have benefitted more than others.