MACROECONOMICS –

MBA Program

INTRODUCTION :
Macroeconomic Performance

1
 Computing Real GDP
Nominal and Real GDP data

 The formula for computing real GDP is:

nominal GDP in year t
Real GDP in year t 
price index

 The price index represents a price level

change as an index with a base of 100
100  percentage change
price index 
100

 View time trend data from

economagic.com. 2
GDP Versus GNP
 GDP is geographically focused:
Output produced within a nation’s
borders regardless of whose factors are
used (nation’s or foreign factors)
 Gross National Product (GNP):
Output produced by a nation’s factors of
production no matter where it takes
place
3
Three methods to measure GDP
 Value added
• Increase in market value of a product that
takes place at each stage of production
 Spending approach
• Expenditures by consumers, investment by
business, government and net exports
 Income approach
• Income earned by factors: wages, rent,
profits, and interest
4
 Computing GDP by VALUE ADDED

Value added: Increase in market value of a product at each

stage of production (does not count firm’s own labor)

5
GDP measured by SPENDING
 The value of GDP can be computed by
adding up expenditures
• Final goods & services – end users

 GDP = C + I + G + (X – M)
where:
C = Consumption expenditure X = exports
I = investment expenditure M = imports
G = government expenditure

6
GDP measured by INCOME

Value of Output Value of Income

Consumer spending Wages

Investment spending Rent

Product Factor
market market
Government spending Interest

Net exports Profits

7
 GDP and NATIONAL INCOME
 National income (NI):
• Income earned by factors of production
 NDP = GDP - depreciation
 NI = NDP + net foreign factor income
 Net foreign factor income
= income of U.S. citizens in foreign
countries – income of foreign workers
in U.S.
8
Nominal Vs Real

 Nominal GDP: Valued at current prices

 Real GDP: Valued at constant prices
 GDP Deflator: (Nominal/Real)*100

9
 WHAT DOESN’T GDP TELL US?
COUNTRY WATCH

 Not all activities are included.

• unreported income
• barter
• homemakers (baking, cleaning, repairs, upgrades)
 Quality of life
• value of leisure time ignored
• quality of products & cost of living
• health care and occupational safety
• environmental quality ignored (pollution/congestion)
• negative factors:
– crime, sickness, psychological disorders and
disease
• distribution of income & wealth
• Others: stability, security, infrastructure, freedom,
discrimination, climate, etc. 10