01 Intro to Macroeconomics & Measurement

Intro

• Microeconomics: looks at individual behaviour (of people, firms, markets, governments)

• Macroeconomics: looks at how individual behaviour affects aggregate outcomes

Measurement: Output (GDP)

• Systematic method for aggregating total production of cars, food, education and health care services

• Relates aggregate production with total income and total spending in an economy

• Examples: bricks, only house revenue is counted (image two firms is merged, intermediate goods are not included), no wages included

• the value of a firm production is the revenue of the production minus the cost of immediate prodcution cost. (only consider goods, not include wages)

• two types of income:
• labour income: revenue paid to workers
• capital (or profit) income: revenue paid to owners of capital

• total value of the purchase, what if the houses are not all sold ⇒ counted as firm2’s inventories.

• GDP is a measure of aggregate economic activity and society’s overall well-being (living standards)

• GDP only includes transactions made to the market
• Home production and services are no accounted in GDP
• An exception is owner-occupies housing

• The informal economy is not measured
• Legal (to avoid taxes or other laws) and illegal activities

• Physical capital depreciation is not measured

• Externalities

• The health of population is not measured
• Life expectancy and “depreciation” of human capital

• Nominal GDP:
• sum of quantities of final goods and services produced times their current prices

• Real GDP
• sum of quantites of final goods and services producted times constant prices

• If there is more than one final good, real GDP is the weighted average of the output of all final goods, weights of which is relatvie prices.
• if relative prices change over time: choose a base year, and change it frequently; chain-type indexes

• GDP per capital: ratio of GDP (nomianl or real) to popultaion

• rate of growth of real GDP used to assess the performance of the economy from year to year.

• GDP growth rate:
• positive GDP growth are called expansions
• negative GDP growth are called recessions

• Many goods and services change their quality over time

• when assessing the value of a good, see how much utility it provides

Inflation Rate

• GDP deflator
⇒ reflects price level
• is an index number, the level is arbitrarily chosen and has no economic interpretation.
• inflation rate
, the rate at which the general level of prices increases over time
• GDP deflator gives the average price of output

• Consumer Price Index (CPI)
• the price of a basket of goods and services relative to the price of the same basket in a base year
• measure the average price of consumption or, equivalently, the cost of living
• CPI methodology
• Construct a representative basket of goods
• by collecting prices of goods and services
• by weighting different items by the purchases of a typical consumer
example

• CPI is to measure the cost of living. It uses a representative basket of goods and tracks its value over time. The representative basket tries to capture the consumption habits of an average consumer in the economy; GDP deflator gives the average price of output.

• CPI does not measure the prices of the goods and services that firms and governments purchase while GDP deflator captures movements in the price of goods and services purchased by firms and governments.

• GDP deflator only includes goods produced domestically; it does not measure final imported goods. While the final imported goods are measured in CPI. GDP deflator may indirectly capture the effect of the price of imported inputs if these inputs affect the final prices set or the revenues obtained by firms.

• CPI has fixed weights while GDP deflator captures the potential change in the composition of GDP over time.