Understanding Macroeconomics: Objectives, GDP, and Key Indicators
Macroeconomics: Objectives and Instruments
Macroeconomics deals with the study of the functioning of the economy as a whole. Its purpose is to obtain a simplified view of the economy, but at the same time allows us to understand and influence the level of economic activity in a particular country or set of countries.
Macroeconomic policy is made by governments to influence the course of the economy as a whole.
A. Objectives of Macroeconomics
- Growth of production
- Full employment
- Price level stability
- Reduce the government deficit (G > T)
- Reducing the external deficit (M > X)
- Exchange rate stability
- Interest rate management
GDP is the total monetary value of final goods and services produced for the market during a given year within the borders of a country.
GDP by Expenditure Approach
- Consumption (C): Purchased by households.
- Investment (I): Purchased by firms.
- Government Expenditure (G): Goods and services purchased by the public sector.
- Net Exports (NX): Goods and services purchased by foreigners, less imports.
GDP expenditure approach GDP = C + I + G + NX
GDP by expenditure approach measures the monetary value of the flow of products (goods and services) produced in the country.
Net Exports (NX)
(NX = X – M)
The sum of all is GDP at market prices (GDPmp).
GDPmp = C + I + G + NX
GDP by the Cost Method
GDP by the cost method: the revenue or income received by households in return for providing their factors or resources to the productive process must be added.
B. The Relationship Between GDP at Market Prices and GDP at Factor Cost
GDPmp = GDPcf + Ti (indirect taxes) – Sb (operating subsidies)
Real GDP and Nominal GDP
A. The Consumer Price Index (CPI)
The Consumer Price Index is a measure of aggregate prices and is calculated as a weighted average of final consumer goods. The average household expenditure on each of the goods is the weighting used.
To find the CPI basket, a group of properties called ICOF were used. To find the real GDP, divide nominal GDP by the price index.
B. The CPI and Inflation
The CPI represents the cost of a basket of goods and services consumed by a representative household. It is used to calculate the real GDP and avoid thinking that a year-on-year increase was produced by an increase in quantity when it has been an increase in prices.
Gross National Product and Net National Product
NNP = GNP – D
The National Income
National Income (NI) refers to total income received (labor, capital, and land).
National income is the sum of wages paid to domestic production factors (wages, rents, interest, and profits) over a period of time.
NNI = GDPcf + RNN – RRE – D
Personal Income and Disposable Income
National income minus undistributed profits and the profits tax.
Personal Income
PI = NNI – Bnd – Tb – CSS + TR
Personal income less direct taxes (Td).
PDI = PI – Td
Personal Disposable Income (Disposable Income)
PDI = C + S