Introduction to Macroeconomics
Measurement in Macroeconomics: GDP
Macroeconomics Week 1
Klára Major
15 Sept, 2022
Institute of Economics
Corvinus University of Budapest
Email: major@uni-corvinus.hu
Outline
About the course
Introduction to Macroeconomics
Measuring Economic Activity: The GDP
Concepts and basic approaches to GDP
Modifications
About the course
Course Outline: first quarter i
Week
Date
1
15 Sep
16 Sep
Introduction to Macroeconomics
Measuring Macroeconomic Data
1
2
2
22 Sep
23 Sep
Aggregate Production and Productivity
Aggregate Production and Productivity
3
3
3
29 Sep
30 Sep
Exam 1
Saving and Investment, Fiscal policy in the long-run
4
Money, money demand, the quantity theory of money
Monetary policy in the long-run, inflation
5
5
4
6 Oct
7 Oct
Topic
Chapter
3
Course Outline: first quarter ii
Week
Date
5
13 Oct
14 Oct
Economic Growth: concepts and empirics
The Solow model
6
6
6
20 Oct
21 Oct
The role of technological development
Factors of growth beyond technological development
7
7
27-28 Oct
Topic
Chapter
Autumn Break
4
Course Outline: second quarter i
Week
Date
7
3 Nov
4 Nov
Topic
Exam 2
Business cycles, IS curve
Chapter
8, 9
8
10 Nov
11 Nov
MP curve
Aggregate Demand
10
10
9
17 Nov
18 Nov
Aggregate Supply
Okun’s law, Phillips curve
11
11
10
24 Nov
25 Nov
Exam 3
AS-AD model, Case studies
12
5
Course Outline: second quarter ii
Week
Date
Topic
Chapter
11
1 Dec
2 Dec
Monetary policy in the short run
Monetary policy in the short run, cont.
13, 14
13, 14
12
8 Dec
9 Dec
Fiscal policy in the short run
Fiscal policy in the short run
13, 16
13, 16
13
15 Dec
16 Dec
Exam 4
Quiz
6
Learning Material
Textbook Frederic S. Mishkin:
Macroeconomics: Policy and
Practice, 2nd Edition. Pearson
Education, 2015.
Classes Complete material of the
classes
E-Learning Additional material on the
Moodle site of the course
7
Elements of the Evaluation
• Class attendance is compulsory, and will be checked on each class!
• Grades will be based on the following elements:
• Home assignments (max 30 points)
• 10 weeks, each for 3 points
• Student-specific exercises on the Moodle site of the course, combined paper-based and
online exercises
• Written exams (max 60 points)
• 4 tests, from which the best 3 will count
• A test is 90 minutes long, worth 20 points
• It is written at the Thursday class on weeks 3, 7, 10, and 13
• Final quiz (max 10 points)
• On Week 13
• The test is 90 minutes long, worth 10 points
• Tests cannot be repeated!
8
Grading
Points = x
Grade
84 ≤ x ≤ 100
73 ≤ x < 84
62 ≤ x < 73
51 ≤ x < 62
0 ≤ x < 51
5
4
3
2
1
Grade can only be achieved in the training period, there are no exams in the exam
period!
9
Introduction to
Macroeconomics
What Is Macroeconomics?
Definition
Macroeconomics is the study of economic activity and prices in the overall economy of a
nation or a region.
Some Examples of Macroeconomic Questions
• How can poor countries get rich?
• Is saving too low?
• Do government budget deficits matter?
• How costly is it to reduce inflation?
• How can we make financial crises less likely?
• How active should stabilization policy be?
10
A Macroeconomist’s Way of Thinking
11
A Macroeconomist’s Way of Thinking
Definition
An economic model is a simplified representation of a particular economic phenomenon
that takes a mathematical or graphical form.
The Process: Developing Macroeconomic Models
1. Identify an interesting economic question
2. Specify endogenous vs. exogenous variables
• Endogenous variable: we want to explain it, it is determined inside the model
• Exogenous variable: it is used to explain the endogenous variables, it is
determined outside the model
3. Connect movements in the exogenous variables to the endogenous variables
• Equations or graphs
4. Compare model conclusions with the observations
5. Make predictions
12
Measuring Economic Activity:
The GDP
GDP = Gross Domestic Product
Definition
Gross Domestic Product (GDP) measures the market value of all final goods and
services produced in an economy over a fixed period of time.
13
Real GDP per Capita
14
Real GDP per Capita in International Comparison
There are huge
cross-country
differences in real GDP
per capita.
Data source: World Bank
15
Real GDP per Capita
Data source: Maddison Project
Database 2020, https:
//www.rug.nl/ggdc/
historicaldevelopment/
maddison/releases/
maddison-project-database-2020
16
Measuring Economic Activity:
The GDP
Concepts and basic approaches to
GDP
Measuring Economic Activity
Definition
National income accounting is an accounting system to measure economic activity
and its components.
The Fundamental Identity of National Income Accounting
Total Production = Total Expenditure = Total Income
• In the production approach, GDP is the current market value of all final goods and
services newly produced in the economy during a fixed period of time
• In the expenditure approach, GDP is the total spending on currently produced
final goods and services in the economy
• In the income approach, GDP is all the incomes received by households and firms
in the economy, including profits and tax revenue to the government
17
Measuring GDP: Production approach i
Market Value
• Imagine an economy that produces two types of goods: apples and oranges
• Does it make sense to calculate GDP as the sum of all apples and oranges?
• Only if their economic value is the same
• National income accounting bases the economic value of a good or service on its
market value, i.e. the price it sells for
GDP = (Price of Apples × Quantity of Apples)
+ (Price of Oranges × Quantity of Oranges)
18
Measuring GDP: Production approach ii
Definition
• Intermediate goods and services are used up entirely in the stages of
production.
• Final goods and services are the end goods in the production process.
Final Goods and Services
• Does it make sense to include both final and intermediate goods in GDP?
• No, only final goods are included in GDP
• Including intermediate goods would be double counting
19
Measuring GDP: Production approach iii
A firm’s value added is the value of the firm’s output minus the cost of the
intermediate goods and services purchased by the firm.
Total value added in the economy equals the total value of final goods and services.
Y=
N
X
VAi + NT,
where
i=1
• Y = GDP = Total production
• VAi = Value added of firm i
• N = Number of firms in the economy
• NT = T − SUB = Taxes less subsidies on production and imports
20
Measuring GDP 2: Expenditure approach
The expenditure-side national income identity is
Y = C + I + G + NX
where
• Y = GDP = Total expenditure
• C = Consumption expenditure
• I = Investment
• G = Government purchases of goods and services
• NX = EX − IM = Net exports = Exports − Imports
21
GDP and Its Components
GDP Component
Billions of Dollars
Percent of GDP
Consumption (C)
Investment (I)
Government purchases (G)
Net exports (NX)
14 145
3 605
3 831
−645
67.6
17.2
18.3
−3.1
Total = GDP (Y )
20 937
100.0
Data source: U.S. Bureau of Economic Analysis
22
Measuring GDP
• Consumption expenditure is the total spending for currently produced
consumer goods and services
• Durable goods, nondurable goods, services
• Investment is spending on currently produced capital goods that are used to
produce goods and services over an extended period of time
• Fixed investment, inventory investment, residential investment
• Government purchases is spending by the government on currently produced
goods and services
• Government consumption, government investment (no transfers and interest
payments!)
• Net exports (the trade balance) is the value of currently produced goods and
services exported minus the value of goods and services imported
• Spending on imports has to be subtracted: it is included in consumption expenditure,
investment, and government purchases, but imports are not domestically produced
23
The Shares of GDP Components
The shares of GDP
components have been
quite stable during the last
70 years.
Data source: U.S. Bureau of
Economic Analysis
24
The Shares of GDP Components
The case is similar in
Hungary with a larger
investment share, a smaller
government share and
positive net exports since
2007.
Data source: Hungarian Central
Statistical Office
25
Measuring GDP: Income approach i
The income-side national income identity is
Y = W + Π + NT
where
• Y = GDP = Total income
• W = Wage income
• Π = Profit income (capital income)
• NT = T − SUB = Net taxes = Taxes less subsidies on production and imports
This is sufficient in most macroeconomic models, but in reality, we have to pay
attention to some additional details.
26
Measuring GDP: Income approach ii
• Compensation of employees: wages and salaries, employee benefits
• Other income: income of the self-employed, rent, net interest, indirect business
taxes
• Corporate profits: profits of corporations
• Depreciation is the loss of value of capital from wear and tear or because capital
has been scrapped because it is obsolete
• Net factor income equals factor income (wages, profits, and rent) paid to
residents by foreigners minus factor income paid by residents to foreigners
27
Income Approach to GDP
GDP Component
Billions of Dollars
Percent of GDP
Compensation of employees
Other income
Corporate profits
Total = National income
Depreciation
Total = Gross National Product (GNP)
−Net factor income
11 491
3 116
3 002
17 609
3 559
21 141
−204
54.9
14.9
14.3
84.1
17.0
101.0
−1.0
Total = Gross Domestic Product (GDP)
20 937
100.0
−Depreciation
Total = Net Domestic Product (NDP)
−3 559
17 378
−17.0
83.0
Data source: U.S. Bureau of Economic Analysis
28
Income Approach to GDP
GDP Component
Billions of Forints
Percent of GDP
Compensation of employees
Mixed income
Net operating surplus
Total = Net Domestic Product (NDP)
Depreciation
Total = Gross Value Added (GVA)
Taxes less subsidies on production and imports
16 858
3 302
6 817
26 978
6 357
33 285
5 948
43.0
8.4
17.4
68.8
16.2
84.8
15.2
Total = Gross Domestic Product (GDP)
39 233
100.0
Net factor income
Total = Gross National Income (GNI)
-1 537
37 696
-3.9
96.1
29
Measuring Economic Activity:
The GDP
Modifications
Real GDP versus Nominal GDP
Definition
• Nominal variables are variables measured at current market (nominal) prices.
• Real variables are variables measured in terms of quantities of actual goods and
services.
• Changes in nominal GDP may be explained by
1. Changes in prices
2. Changes in produced quantities
Definition
Real GDP is the value of goods and services produced using constant prices.
• Real GDP adjusts nominal GDP for changes in the price level
Definition
The price level is the average level of prices in the economy.
30
Real GDP versus Nominal GDP
Relationship between Real GDP and Nominal GDP
Real GDP =
Nominal GDP
Price Level
or
Nominal GDP = Price Level × Real GDP
Example
• Let’s return to the two-good economy that produces only apples and oranges!
• Let’s set all prices at the values they had in a base year!
• Real GDP in 2020 with the base year chosen to be 2019 is
Real GDP in 2020 = (Price of Apples in 2019 × Quantity of Apples in 2020)
+ (Price of Oranges in 2019 × Quantity of Oranges in 2020)
31
Seasonality
Quarterly GDP data exhibit a
typical within-year pattern.
Seasonally and calendar
adjusted time series serve as
the basis of macroeconomic
analyses.
Hungarian GDP Data,
1995Q1–2021Q1
Data source: Hungarian Central
Statistical Office
32
Trend and Cycle
GDP time series can be decomposed into
long-run growth (trend) and short-run
cyclical fluctuations (cycle).
33