Macroeconomics

Week 1:

What is Macroeconomics?

Macroeconomics studies the overall economy. It focuses on broad aspects like business cycles, living standards, inflation, unemployment, and the balance of payments.

How does Macroeconomics help governments?

It guides how governments can use monetary and fiscal policies to stabilize the economy.

Why is Macroeconomics important?

It allows us to understand economic events affecting the entire economy without getting bogged down in the details of specific products and sectors.

What does a firm contribute to the economy?

Its “value added”: the firm’s total sales minus its costs on goods/services from other firms.

What is GVA?

GVA stands for Gross Value Added. It’s the total of all firms’ value added in the economy.

What are basic prices?

Prices received by producers, after removing taxes and adding subsidies.

How do we prevent counting the same value twice in the economy?

By only counting final goods for national output; everything else used in making these goods is called intermediate goods.

What is GDP?

GDP stands for Gross Domestic Product and is the main measure of a nation’s economic activity.

How can GDP be calculated?

GDP can be calculated in three ways:

◦ Value-Added Approach: Sum of values added by all producers.

◦ Income Approach: Total income generated from production.

◦ Expenditure Approach: Total expenditure on final goods and services.

What does ‘GDP at market prices’ mean?

It means GDP measured including taxes on products and subtracting subsidies.

What are market prices in the context of GDP?

These are the actual prices consumers pay, used to measure real GDP which adjusts for inflation effects

GDP formula?

GDP=C+I+G+(X-M)

C= consumption I=investment

G=government spending X=export of goods and services M=imports of good and services

What is Potential GDP?

Potential GDP is the level of GDP when the economy is at full capacity, with no cyclical unemployment and all firms operating at normal levels. It is also referred to as “full-employment GDP.”

What is the GDP Gap?

The GDP Gap is the difference between the actual real GDP and potential GDP.

What does a negative GDP Gap indicate?

A negative GDP Gap indicates that the actual GDP is below the potential GDP, suggesting underperformance in the economy.

What is Real GDP?

Real GDP measures the value of economic activity adjusted for inflation, reflecting the real quantity of goods and services produced.

When do we use the term ‘Real GDP’ vs. ‘Nominal GDP’?

We usually refer to GDP as ‘Real GDP’ unless specified otherwise. ‘Nominal GDP’ refers to GDP calculated at current market prices, without adjusting for inflation.

What does the income-based approach to GDP involve?

It involves summing up all income earned from production, including operating surpluses, mixed incomes, and compensation of employees. This sum is equivalent to the gross value added in production.

What is GDP at market prices?

GDP at market prices is calculated by adding net taxes on products to the gross value added from the income-based approach.

How does the UK measure GDP?

The UK’s GDP measures all production located within the United Kingdom.

What does Gross National Income (GNI) measure?

GNI measures all income accruing to UK residents, including income earned abroad.

What is the difference between GNI and GDP?

The difference lies in net income from overseas. GNI includes net income from abroad, while GDP does not.

What is the relationship between GNI and GNP?

GNI is the same as what used to be called Gross National Product (GNP); both measure the total income residents receive from domestic and international activities.

What does ‘gross’ mean in GDP terms?

‘Gross’ indicates that the measurement does not subtract for depreciation of the nation’s capital assets.

What are implicit deflators?

Implicit deflators are ratios used to convert nominal GDP to real GDP, revealing price changes over time.

What is personal income?

Personal income is the total income received by individuals before any personal taxes are deducted.

What is personal disposable income?

Personal disposable income is the amount of money individuals have available for spending or saving after paying taxes.

What should be considered when interpreting GDP and related measures?

GDP and related measures should be interpreted with their limitations in mind, recognizing what they exclude and do not measure.

What does GDP exclude?

GDP excludes production in the underground economy and any activities that do not pass through official markets. GDP does not measure everything that contributes to human welfare.

Why is GDP considered a valuable measure?

GDP is one of the best available measures of the total economic activity within a country and is valuable for observing changes in economic activity.

How is GNI per capita useful internationally?

GNI per capita, especially when adjusted by Purchasing Power Parity (PPP), is used for international comparisons of real income.

Are there other indicators used for international comparisons besides GNI per capita?

Yes, many other indicators are available for international comparisons.