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
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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
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