INTRODUCTION TO MACROECONOMICS LECTURE 1 Microeconomics versus macroeconomics • Microeconomics study the behavior of individual economic agents like consumers and firms • Macroeconomics examine the aggregate economy as a whole. The economic indicators like income per capita, unemployment rate are measures of the well being of the citizens. • Gross Domestic Product(GDP) per capita is the most common way of measuring the well being of the citizens. • GDP is the market value of all final goods and services produced within a country in a given period of time. • Income distribution also effects the well being of the citizens. • GDP can be measured by 3 methods: 1) Production approach(GDP is equal to the value of final goods and services produced in and economy. It is calculated by summing the value added at each stage of production) 2) Expenditure approach(GDP is equal to the total spending in the economy) 3) Income approach(GDP is equal to the sum of incomes of the factors of production) These 3 approaches yield the same result. Why? Think of the education service you receive in our university Think of the lunch you eat in Havzan/Cemo • According to expenditure approach: GDP=Consumption expenditure+Investment expenditure+ Government expenditure+Net Exports(Exports-Imports) GDP=C+I+G+NX • Lets look at the circular flow diagram in your book. • GDP is the market value of all final goods and services produced within a country in a given period of time. • Market value: Reflects the willingness to pay for this good. • Market activities are included in the GDP calculations. • Some non-market activities cannot be included in the GDP calculations: Farmers grow agricultural products for their own use, housewives clean their own houses and take care of the children. Also shadow or black economic activities are not included, when you don’t pay the social security for a service like house cleaning or repair. • • • • What is the distinction between a final good and an intermediate good? A final good: Is the end product An intermediate good: is a good which is used up to produce other goods Flour is a final good when purchased by the consumer and is an intermediate good when used up to produce biscuits by Torku • Only final goods are included in GDP • Why? • Because if intermediate goods are included then it will be a double counting error, that is counting the flour twice. • Goods: food, clothing, ect. • Services: haircuts, doctor’s visits, movies in the movie theatre • To be counted in the GDP, the good or service should be produced within the current year, not within the years before. The value of used cars when changing hands is not included in the GDP • GDP measures the economic activity within the borders of a country. It includes domestic production. It includes the income of foreign factors of production earned within the country and excludes the income of national factors of production earned abroad. • GDP is calculated yearly and/or quarterly. It includes economic activity that took place during this interval • GDP=C+I+G+NX • C: Consumption expenditure on goods and services. • Durable goods: Used for a long time like washing machines and cars • Non-durables: Used up soon like food and clothing • I:Investment expenditure on capital goods like buildings, equipment and machinery that will contribute to future productive output. Investment expenditure includes purchases of housing by the consumers. • G:Government spending: is the spending on goods and services by the local and national governments. It includes the salaries of government workers and public goods and investments • transfer payments: Are transfers from one part of the society to the other. Examples are social security and unemployment benefits. • Because they do not reflect an increase in production, they are not counted in GDP • NX:Net exports= Exports-Imports Real versus nominal GDP • From one year to other, the amount of goods and services produced usually increases. The price level also increases almost always. • When we calculate the GDP using the current prices, how can we understand if it is the amount of goods or the price level that has increased? • Real GDP: GDP that is calculated using fixed prices. (For example, by using one of the past years as the base year) • Nominal GDP: GDP that is calculated using current prices • To calculate the real GDP: • First, choose one of the past years as the base year • Use the prices of the base year to calculate the value of output in the current year. • Real GDP shows how much the value of production increased in fixed prices, or the increase in quantity produced. • Growth rate of GDP: 𝐺𝐷𝑃𝑡 − 𝐺𝐷𝑃𝑡−1 = 𝐺𝐷𝑃𝑡−1 GDP Deflator • GDP deflator shows the price level for each year, taking base year as 100. • GDP deflator is also referred as the implicit price level • 𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 ∗ 100 Chain Weighted Measures • Using a base year to calculate the GDP has some drawbacks: Some goods may not exist anymore, new products may have appeared, the price of products may have fallen substantially so that using the old price will overcalculate the GDP • How frequently does TÜİK update the base year? • Thus it is better to update the base year frequently. • Annual chain linking: Update the base year every year, using the previous year’s prices or using the average of current year’s and previous year’s prices to calculate the GDP of both years • Look at statistics by TÜİK: They use chain weighted measures.