What is MICRO ECONOMY?

Macroeconomics is the branch of economics concerned with aggregates, such as national

income, consumption, and investment ".
the Economist's Dictionary of Economics defines Macroeconomics as "The study of
whole economic systems aggregating over the functioning of individual economic units.
It is primarily concerned with variables which follow systematic and predictable paths of
behaviour and can be analysed independently of the decisions of the many agents who
determine their level. More specifically, it is a study of national economies and the
determination of national income." Macro Economics examines either the economy as a
whole or its basic subdivisions or aggregetes such as the government,household,and
business sectors.

An aggregate is a collection of specific economic units treated as if they were one

unit.Therefore, we might lump together the millions of consumers in the U.S.
economy and treat them as if they were on huge unit called consumers.

In using aggregates,macro economics seeks to obtain an over view,or general outline,of

the structure of the economy and the relationships of its major aggregates.

Macroeconomics speaks of such economic measures as total output,total

employment,total income,aggregate expenditures,and the general level of prices in
analysing various economic problems.
No or very little attention is given to Specific units making up the various
aggregates.Macro economics examines the forest,not the trees.

Gross Domestic Production

What Does Gross Domestic Product - GDP Mean?

The monetary value of all the finished goods and services produced within a country's
borders in a specific time period, though GDP is usually calculated on an annual basis. It
includes all of private and public consumption, government outlays, investments and
exports less imports that occur within a defined territory.

GDP = C + G + I + NX

where:

"C" is equal to all private consumption, or consumer spending, in a nation's economy

"G" is the sum of government spending
"I" is the sum of all the country's businesses spending on capital
"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX
= Exports - Imports)
GDP is commonly used as an indicator of the economic health of a country, as well as to
gauge a country's standard of living. Critics of using GDP as an economic measure say
the statistic does not take into account the underground economy - transactions that, for
whatever reason, are not reported to the government. Others say that GDP is not intended
to gauge material well-being, but serves as a measure of a nation's productivity, which is
unrelated.
GNP and GDP tend to be used as synonyms, although GDP is definitely the preferred
measure among economists and is gaining popularity in general conversation as well; the
two measures are fairly close numerically.
The difference is that GDP measures all production within a country's borders, by
whoever happens to be working here; GNP measures the production of all citizens of a
country, wherever they happen to be working. (Maybe you can remember the "N" in
GNP stands for "anywhere").

Real Vs Nominal GDP

Real GDP:
The number reached by valuing all the productive activity within the country at a
specific year's prices. When economic activity of two or more time periods is valued at
the same year's prices, the resulting figure allows comparison of purchasing power over
time, since the effects of inflation have been removed by maintaining constant prices.

inflation-adjusted measure that reflects the value of all goods and services produced in a
given year, expressed in base-year prices. Often referred to as "constant-price",
"inflation-corrected" GDP or "constant dollar GDP".
Or
Real GDP is gross domestic product in constant dollars. In other words, real GDP is a
nation's total output of goods and services, adjusted for price changes.

Nominal GDP
Nominal GDP is GDP evaluated at current market prices. Therefore, nominal GDP will
include all of the changes in market prices that have occurred during the current year due
to inflation or deflation. Inflation is defined as a rise in the overall price level, and
deflation is defined as a fall in the overall price level.

Nominal Interest Rates vs. Real Interest Rates

Suppose we buy a 1 year bond for face value that pays 6% at the end of the year. We pay
$100 at the beginning of the year and get $106 at the end of the year. Thus the bond pays
an interest rate of 6%. This 6% is the nominal interest rate, as we have not accounted for
inflation. Whenever people speak of the interest rate they're talking about the nominal
interest rate, unless they state otherwise.

Now suppose the inflation rate is 3% for that year. We can buy a basket of goods today
and it will cost $100, or we can buy that basket next year and it will cost $103. If we buy
the bond with a 6% nominal interest rate for $100, sell it after a year and get $106, buy a
basket of goods for $103, we will have $3 left over. So after factoring in inflation, our
$100 bond will earn us $3 in income; a real interest rate of 3%. The relationship between
the nominal interest rate, inflation, and the real interest rate is described by the Fisher
Equation:

Real Interest Rate = Nominal Interest Rate - Inflation

If inflation is positive, which it generally is, then the real interest rate is lower than the
nominal interest rate. If we have deflation and the inflation rate is negative, then the real
interest rate will be larger.

2. Nominal GDP Growth vs. Real GDP Growth

GDP, or Gross Domestic Product is the value of all the goods and services produced in a
country. The Nominal Gross Domestic Product measures the value of all the goods and
services produced expressed in current prices. On the other hand, Real Gross Domestic
Product measures the value of all the goods and services produced expressed in the prices
of some base year. An example:

Suppose in the year 2000, the economy of a country produced $100 billion worth of
goods and services based on year 2000 prices. Since we're using 2000 as a basis year, the
nominal and real GDP are the same. In the year 2001, the economy produced $110B
worth of goods and services based on year 2001 prices. Those same goods and services
are instead valued at $105B if year 2000 prices are used. Then:

Year 2000 Nominal GDP = $100B, Real GDP = $100B

Year 2001 Nominal GDP = $110B, Real GDP = $105B
Nominal GDP Growth Rate = 10%
Real GDP Growth Rate = 5%

Once again, if inflation is positive, then the Nominal GDP and Nominal GDP Growth
Rate will be less than their nominal counterparts. The difference between Nominal GDP
and Real GDP is used to measure inflation in a statistic called The GDP Deflator.

3. Nominal Wages vs. Real Wages

These work in the same way as the nominal interest rate. So if your nominal wage is
$50,000 in 2002 and $55,000 in 2003, but the price level has risen by 12%, then your
$55,000 in 2003 buys what $49,107 would have in 2002, so your real wage has gone
done. You can calculate a real wage in terms of some base year by the following:

Real Wage = Nominal Wage / 1 + % Increase in Prices Since Base Year

Where a 34% increase in prices since the base year is expressed as 0.34.

GDP Deflator
The GDP deflator is utilized as a measure of shifts in the prices of goods and services that
are produced in a given country. It is understood that the GDP deflator can help provide a
more accurate picture of the current status of the gross domestic product within the
country. Because the GDP deflator is understood to be an example of an implicit price
deflator for GDP, economists consider calculating this economic indicator as an essential
component in ascertaining the current strength or weakness of the country’s economy.

The formula for calculating the GDP deflator is relatively simple. Essentially, the
calculation requires current information regarding the chain volume measure or real
GDP, and the current price or nominal GDP. This figure is calculated by taking the
nominal GDP, dividing it by a known deflator, and multiplying the result by one hundred.
This final figure will represent the real current status of the gross domestic product, as it
allows for the change or deflation of the nominal GDP into real world terms.

One of the easiest ways to think of the GDP deflator is to think of it as current dollars and
conditions compared to the same set of factors in a previous time period. For example, an
idea of the GDP deflator associated with the most recent calendar year can be ascertained
by looking at the state of the GDP in a previous calendar year. This can be helpful in
determining if an inflation of the GDP is taking place from one period to another.

It is possible to use this approach both with the broad GDP for an entire country, or to
understand the economic stability of some sub-category within the economy of the
country. Businesses will often use this approach to gauge conditions within their own
industry. Using the current year price and the number of units produced, as compared to
the price and production of a previous year can help to indicate whether there is actually
growth or shrinkage taking place.

The formula for the GDP deflator may indicate that the relationship between units and
unit price is shifting in some manner, such as more generated revenue but less units
produced. This would indicate the presence of upward price changes or price inflation. At
the same time, less revenue generated from more produced units indicates downward
changes in prices that may eventually drive some manufacturers out of the industry.

Gross Domestic Product (GDP) deflator: The GDP deflator is the

broadest measure of inflation available for the national economy. This
series is broken down into great detail for the wide range of output
measures in the accounts. Deflators for individual items are developed
from a variety of sources:

Personal Consumption Expenditure deflator: CPI estimates form

the basis of this deflator.

State and Local Government deflator: This deflator is frequently

used in government programs. It is heavily weighted by wages and
salaries in state and local government but also includes estimates for
the entire range of government purchases.

GDP deflator. Using the statistics on real GDP and nominal GDP, one can calculate an
implicit index of the price level for the year. This index is called the GDP deflator and
is given by the formula

The GDP deflator can be viewed as a conversion factor that transforms real GDP into
nominal GDP. Note that in the base year, real GDP is by definition equal to nominal GDP
so that the GDP deflator in the base year is always equal to 100.

Gross Domestic Product Deflator Inflation Calculator

GDP Deflator
Cost:
From: fiscal year
To: fiscal year
Inflation Index:
% Change:
Inflated Cost:

This is an inflation calculator for adjusting costs from one year to another using
the Gross Domestic Product (GDP) Deflator inflation index. This inflation calculator is
based on the inflation rate during the US Government Fiscal Year, which begins on
October 1 and ends on September 30. This inflation calculator will compute inflation
from 1940 to 2009.

Consumer Price index