BSP2701 – Global Economy

Macroeconomics studies the behavior of aggregate economies and the impact of policies on their
performance.

 How the economy behaves over long periods of time (Economic Growth)
 What determines economic fluctuations (Business Cycles)
 What causes unemployment
 What drives price changes (Inflation)
 What is the role for economic policy and the government (Monetary and Fiscal Policies)
 How does the domestic economy interact with the rest of the world (International Linkages)

Chapter 1 – GDP Measurement

Meter 1: Money flow from producers to consumers in the form of wages, profits and rental

Meter 2: Consumers spend income to purchase goods and services (expenditure: CIGNX)

Meter 3: Across stages of production, each firm value adds to the product
Gross Domestic Product (GDP) is the market value of final goods and services produced in a country
during a given period of time.

 Market value means all goods and services sold in the marketplace (market price)
o Home production is not included in GDP
o Bonds and stocks are not goods and services
o Exceptions
 No market value: National defence. Cost of production used instead
 Final Goods and services
o Final goods are sold to final user
o Intermediate goods are used up to produce some other good and is excluded
 Included as part of final good’s GDP value to prevent double counting
 In a given period (must define a period)
o Measured over a time period (flow variable)
o Flow vs Stock
 Stock variable is measured at one point in time
 Flow variable is measured over a time period
 Income Method
 Expenditure Method
 Value-added by industry Method

Income Method

GDP at factor cost can be measured by summing up the income received by the owners of primary
resources (Labor, Land, Capital)

 Labor -> Wages

 Land Owners -> Rental
 Capital Owners and Entrepreneurs -> Profit

GDP = Wages + Gross Operating Surplus + Net Indirect Taxes

GOS/Capital Income = Rental + Profit

Expenditure Method

Summing up the market value of final goods and services consumed or used by the households,
government, investors for capital formation, and overseas consumers.

GDP = C+I+G+X-IM

Value Added Method

The sum of factor payments (value-added) made by each of the industries of the economy engaged
in the production

GDP=VA1+ VA2+ …+Van

Nominal vs Real

Nominal GDP values output in the current year using prices from the current year

 Current value dollar of production

Real GDP values output in the current year using the prices from the base year

 Physical volume of production as opposed to price fluctuations

 Adjusted for inflation

GDP Deflator = Nominal GDP/Real GDP

 Higher means higher CPI and hence higher inflation

GDP vs Well-being

 GDP does not value leisure

o Place zero on all leisure time
 GDP omits services that are not traded in markets
o Household production
o Bartered goods and services
 Underground economy is unreported transactions, legal and illegal
o Legal includes private tuition
 Environmental Pollution
o Clean-up activities are included in GDP
 Resource Depletion
o No adjustment is made for the decline in resources availability (when mining or
harvesting)
 GDP does not capture effects of income inequality

Classical Model

Provides basis to consider how level of GDP is determined in the long run.

Assumptions:

 Perfect flexibility of prices and flexible wages

 Full employment (any unemployment is voluntary)
