Business Economics I Introduction to Macroeconomics Macroeconomics: Chapter 20: Measuring a nation’s well-being 1. Economics - Microeconomics = study of how individual households and firms make decisions and how they interact with one another. - Macroeconomics = the study of the economy as a whole global look o GOAL: Explain economic changes that affect many households, firms and markets simultaneously. There are 2 measures of well-being: o Subjective well-being = the way in which people evaluate their own happiness. o Objective well-being = measures of the quality of lie and uses indicators such as educational attainment, measures of the standard of living, … Many macroeconomic variables can be linked with well-being, BUT: how can it be measured? o Gross Domestic Product (=GDP), BUT: even that has its limitations >>> it only focuses on income consumerist value system o Objective & subjective well-being do NOT rise in the same way 2. Economy’s income and expenditure Income is used as a measure of well-being >>> can be used to buy life’s necessities and luxuries. - Standard of living = amount of goods and services that can be purchased by the population of a country higher income = higher standard of living. Same principle with country, BUT: instead of measuring standard of living we use GDP. GDP measures 2 things: 1) Total income of everyone in economy 2) Total expenditure on economy’s output of goods and services 3. Measurement of Gross Domestic Product - - Gross Domestic Product (GDP)= Market Value of ALL final goods and services produced within a country in a given period of time. o Market value = measures value in physical terms have to add all those values up, BUT: How? Express it + add up in market value, BUT: NOT of informal economy things that happen within households without market value EX. Washing the dishes, gardening, … o Final = only final goods and services are counted otherwise you might double count some things EX. When making bread you could double count the flour, milk, bakery, … GDP is the sum of ALL value added value at market price – cost of nonfactorial inputs = cost of intermediate goods that aren’t production factors. o Goods and services = both have value massages might be physical, BUT: still have value. o Produced = goods and services have to be produced within that time period secondhand goods and services don’t count >>> they have already been included in GDP of the year when that good was new, BUT: customer service of sold secondhand good IS included in GDP of that year >>> hasn’t happened before. o Within a country = does NOT matter if it’s a company from that country or not, as long as it is produced in EX. Belgium, then it is counted as domestic product. National product = what is nationality of firm that produces good or service. o In a given period of time = there are 2 measures of time: Flow measures = quantity/ period of time Stock variables = quantity/ point in time 1 Business Economics I Introduction to Macroeconomics 4. Components of GDP Y = C + I + G + NX = national income Consumption = C: o Spent by households on goods and services, with exception of purchases of new housing o Services are also included intangible assets like haircuts, doctors’ appointments, … Investment = I: o Spending on capital equipment, inventories and structures, including household purchases of new housing. o Contribute to future productive output o Goods produced in certain time period and that are added to inventory are part of that period’s production, even though they might not be sold in that same time period. Government spending = G: o Spending on goods and services by local and national governments. o Includes salaries of government workers and spending on public works. - Transfer payment = a payment for which no good or service is exchanged are part of government general spending, BUT: NOT part of government spending when counting GDP Net export = NX: o Spending on domestically produced goods and services by foreigners (= export) minus spending on foreign goods by domestic residents (= import) o No matter where company factory is, revenue goes to base country company o Goods and services are included in consumption, BUT: do NOT affect GDP o EXPORT – IMPORT Most common way of representing GDP is GDO per capita = GDP per country Population of country = national income per head of population easiest way to compare different GDP’s of different countries 5. Real GDP VS Nominal GDP 1) Economy is producing larger output of goods and services real increase 2) Goods and services are being sold at higher prices nominal increase Answers the question: “What would be the value of goods and services produced this year if we valued these goods and services at the prices that prevailed in some specific year?” 2 types: o GDP at constant prices = GDP calculated using prices that existed at a particular base year, which takes into account changes in inflation over time. o GDP at current/ market prices = GDP calculated by multiplying output of goods and services by price of those goods and services in reporting year - Real GDP = The measure of value of output in the economy which takes into account changes in price over time takes inflation into account. - Nominal GDP = production of goods and services valued at current prices total expenditure in economy – sum of expenditure on goods does NOT need to take inflation into account because goods and services are already measured at current prices. - GDP deflator = measure of price level calculated as ratio of nominal GDP to real GDP times 100. Reflects prices of goods and services, BUT: not quantities produced. GDP deflator is ALWAYS 100 in base year >>> nominal GDP and real GDP are the same In the other years: measures current level of prices relative to the level of prices of base year o Constant GDP deflator = prices remain the same o GDP deflator rises = prices rise, BUT: quantities NOT Nominal GDP . 100 Real GDP 2