Macrovariables

GDP
Nominal(currentdollar)
Real(constantdollar)
Unemployment
Inflation
Budgetdeficit
Tradedeficit(thedifferencebetweenexportsandimports)

Oftenassumeaninverserelationshipbetweenpricesandunemployment(e.i.inflation),butthis
isnotalwaysthecasestagflation

Dontlookatmacrovariablesinisolationtodeterminestatusofentireeconomy:during
recessiontradedeficitimproves

WhatisGDP?
GDPisameasureofallcurrentlyproducedfinalgoodsandservicesevaluatedat
marketprices
Needtoaddpricestofindvalues

FinalGDPdoesnotinclude:
1) Intermediategoodsandservices
a) Capitalgoodsandinventoryinvestmentareincludedthough
2) Transfers
a) Welfare&socialsecuritypayments
3) Stocks
4) UndergroundEconomy
a) Workdoneforthehome(cookingcleaning,childcare)
b) Unreportedpaidservices(babysitting)
5) Nonmarketproductiveactivities
6) Secondhandgoods

GDPisnotameasureofwelfareorhappiness!

GDPunderestimateswhatisreallygoingonAmantyaSen:GDPdoesnotcaptureeverything
(specificallyintermsofdevelopment).Needcapabilitiesapproach
Newindex:HumanDevelopmentIndex(HDI)
1. Income(GDP)
2. Education
3. Health

PercapitaGDP= TPotalGDP
opulation

(implicit)GDPDeflator= N ominalGDP
RealGDP

GDPvs.GNP

GDP:Thevalueofallfinalgoodsandservices
currentlyproducedforsaleduringaparticular
periodoftime(flowmeasure)*Alldomestic*

GNPincludestheearningsofAmericans&
Americanfirmsabroad,excludesforeignersand
foreignfirmsinAmerica.

HowtocalculateGDP?
Canbemeasuredinthreedifferent,butequivalentways
1. Expenditureapproach
2. Incomeapproach
3. Productionapproach

TheExpenditureApproach

GDP=C+I+G

Cconsumerexpenditure:Consumption
Ibusinessexpenditure:Investment(gross,privateanddomesticinvestment)
Ggovernmentexpenditure:Governmentpurchasesofgoods&services
GEX
=G+Tr(governmentexpenditures=governmentspending+transfers)
GREV
=T(governmentrevenue=taxes)
IfGEX
>
wegetbudgetdeficit
GREVthen

Threewaystofixthis:
G,
Tr,or
T
Y=C+I+G=nominalGDP

OpenY=C+I+G+(XM)?

TheIncomeApproach
Factorsofproductionincome
1. Capitalinterest(i)
2. Laborwages(w)
3. Landrent(r)
4. Entrepreneurship
a. Singleproprietorshipproprietorsincome(Prop Y)

b. Partnershipproprietorsincome
c. Corporationscorporateprofits(Corp )=taxes(t),dividends(div),retained
earnings(RE)
GDP:Y=i+w+r+Prop Y+Corp

GrossNationalProduct(GNP):GDP+Imports&Exporttax+Depreciation
i+w+r+Prop Y+
Corp +TP+M+Depreciation
NetNationalProduct(NNP):GNPDepreciation
i+w+r+Prop Y+
Corp +TP+M
NationalIncome(NI):NNPImport&Exporttax
i+w+r+Prop Y+
Corp
PersonalIncome(PI):NICorptCorpRE
i+w+r+Prop Y+
Corpdiv
DisposableIncome(YD):PI+Transferspersonaltaxes
Eitherconsumeorsavedisposableincome

Personalincome=consumption+savings+tax
Y=C+S+T

MeasuresofGDP
1. GDPdeflator
2. ConsumerPriceIndex(CPI)
Whatconsumersbuy

Measurestheretailpricesofafixedmarketbasketofseveralthousandgoods
andservicespurchasedbyhouseholds(abilitytoconsume)
3. ProducerPriceIndex(PPI)
Measuresthewholesaleprices(costbeforeaproductgetstoaconsumer)of
approximately3,000items
Comparestheaveragecostsofastandardsetofproducts,oftencalledabasketof
goods,overtimeatthewholesalelevel
i.

Itisthefirsttomove,ifitchangesthatisanindicationthatCPIwith
change

BusinessCycle

@peakthereislowunemployment
U nemployed

Unemployment= Laborf orce

Unemployedwantandareabletowork,but
cantfindwork(activelylooking)
Laborforceemployed+unemployed

Frictionalunemployment:lookingforabetterjob
Structuralunemployment:structureofeconomychanges,mayneedtoberetrained
Cyclicalunemployment:incycle(variesbyseason,region,industry,sex,race,age,ethnicies,
etc.)

ClassicalModelVsKeynesModel
Unemploymentwasntpossible,butwhenithappenedKeynescameoutwithhistheory
ofdemand
(17761936)

MacroPolicy
Useeitherf iscalormonetary
Fiscal:taxesandexpenditures
Monetary:interestrateandmoneysupply
Bothexpansionaryandcontractionarypolicyuse
Expansionary:toexpandtheeconomy(duringrecessions)
Contractionary:tostabilizeeconomy(duringpeaks)


Y=C+I+G* equilibriumoutcome
YD=YPT(YD=C+S)
YP=YD+T
YP=C+S+T

C+I+G=C+S+T
I+G=S+T*equilibriumoutcome