Macroeconomics and Inflation: Key Concepts

Posted on Feb 13, 2025 in Economy

Item 11: Macroeconomics

1. Macroeconomic Vision

Macroeconomics studies the operations of the economy as a whole. It analyzes aggregate economic behavior and the forces that cause the global economy to expand or contract. The main macroeconomic issues are:

  • Economic cycles
  • General living standards
  • Inflation
  • Unemployment
  • Public deficit

Macroeconomic variables are calculated from accounting definitions, reporting on specific aspects of a country considered globally. Economic policy is the set of measures designed to influence macroeconomic variables. It is generally considered that government economic policies control inflation and the public deficit, as well as the external deficit, while promoting employment and growth of the national product.

2. Gross Domestic Product and Gross National Product

b) Gross Domestic Product (GDP) measures the value of all final goods and services produced in an economy during a determined period of time. Two considerations should be made regarding this calculation:

  1. Only final goods and services are taken into account.
  2. Goods and services are valued in monetary terms, not in physical units.

c) Gross National Product (GNP) is the total value of all final goods and services produced in a period of time by all inputs of Spanish nationals, both inside and outside the country.

d) Nominal GNP: It can vary from year to year for two reasons:

  1. The physical production methods vary that year.
  2. Market prices vary that year.

GNP Deflator: The relationship between the nominal GDP of a given year and the real GDP is calculated as the year’s production and prices of the year for which we want to measure whether there has been inflation.

3. National Income and Disposable Income

National Income: Includes the remuneration of all factors of production methods: wage and salary income, rental income, business profits, and equity interests.

Personal Income: This is the part of national income received by individuals and families.

Disposable Personal Income: Direct personal income taxes and social security contributions paid by workers should be deducted from personal income.

4. Income Distribution

Income distribution, or national product distribution, among the population of a country is related to GDP. Three points of view are used:

  • Functional Distribution: Income distribution among factors of production methods for their participation in the gathering process of the product.
  • Functional Distribution: Distributes income among social groups; income inequality is represented by the Lorenz curve.
  • Spatial Distribution: Consists of the study of income distribution among the various geographic regions of a country.

Item 9: Inflation

4. Consequences of Inflation

  1. Effects on Production: Inflation creates uncertainty for corporations when making decisions about their level of production.
  2. Effects on the Allocation of Inputs: When inflation occurs, relative prices are altered, but the prices of all goods and services and the salaries of all workers do not increase equally.
  3. Loss of Competitiveness: Countries with higher inflation will offer products whose appeal diminishes in comparison with other countries.
  4. Loss of Purchasing Power of Certain Groups:
    • Groups affected by inflation: Savers, workers, creditors.
    • Groups benefiting from inflation: Debtors, the state, big business.

5. Inflation and the CPI

The CPI (Consumer Price Index) is a measure of the price level at a given time and is based on measuring the price of a basket of purchases of an average citizen, which is considered representative. The products are selected from those that families typically buy. The index is obtained by calculating the weighted average of the prices of these goods and services. Data is collected by the INE (National Statistics Institute).

The inflation rate of a country is the difference between the CPI for two years, divided by the CPI of the first year.