Macroeconomics: Lection 1

Riccardo Franceschin

ECON 202
27th September, 2021
Objectives

• How is the country’s economy performing?

• How can we measure the state of the economy?
• What are reasonable policy objectives that we should pursue?

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Main macroeconomic variables

• Gross Domestic Product

• Inflation rate
• Unemployment rate (or Employment rate)

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Aggregate Production: GDP

The GDP is the most important measure of aggregate production

It measures the overall domestic production of a country in a given period of time.

• GDP is a flow value! Not a stock (contrary on wealth or debt)
• Gross: it includes all new products, without considering depreciation
• Domestic: it includes all production within a country’s borders,
independently of who is producing (different from GNP)
• Product: it measures output

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Aggregate Production: GDP

• Turkey GDP around 750 billions $

• Russia and Italy GDP around 2 000 billions $
• Germany GDP around 4 000 billions $
• EU and China GDP around 15 000 billions $
• US GDP around 20 000 billions $
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How do we measure GDP?

There are 3 ways of measuring GDP

• GDP as the sum of the values of final goods and services produced in an
economy in a certain period (expenditure approach)
• GDP as the sum of the value added produced in an economy in a certain
period (product approach)
• GDP as the sum of the incomes in an economy in a certain period (income
approach)

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Economic Agents

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GDP as sum of final goods and services

We consider only products sells to consumers, not intermediates products!

Example: economy with 2 firms
GDP = 200
Firm 1 Firm 2
Revenues 1 100 Revenues 2 200
Salaries 1 80 Salaries 2 90
Input 1 (from 2) 0 Input 2 (from 1) 100
Profits 1 20 Profits 2 10
Table: Firms Accounts

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Income - Expenditure identity

Given the definition of GDP, we can express it as the sum of spending

Y = C + I + G + NX

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Income - Expenditure identity

Given the definition of GDP, we can express it as the sum of spending

Y = C + I + G + NX

Y=C+I+G+NX

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Income - Expenditure identity

Given the definition of GDP, we can express it as the sum of spending

Y = C + I + G + NX

Y=C+I+G+NX
Y=C+I+G+NX

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Expenditure Components

• Consumption: it’s the spending of domestic households on final goods

(durable and nondurable) and services. Around 2/3 of GDP in the US
• Investment: it’s the spending of firms on new equipments, buildings and
residential investments (new houses). Around 15 % of GDP in the US.
• Government Spending: the expenditure of government on goods and
services (not transfers!). Around 20% of GDP in the US
• Net Export: the amount of exported goods net of imported goods. Slightly
negative in the US.

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GDP as sum of value added

Value Added: the revenues minus the intermediate goods used to produce them

In the previous example Firm 1 has 100 V.A., while Firm 2 V.A.=200-100=100
GDP = 100+100 = 200
Firm 1 Firm 2
Revenues 1 100 Revenues 2 200
Salaries 1 80 Salaries 2 90
Input 1 (from 2) 0 Input 2 (from 1) 100
Profits 1 20 Profits 2 10
Table: Firms Accounts

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GDP as sum of income

GDP is by definition also the sum of all income in an economy: wages, profits and
taxes. The production is the creation of income for someone!

In our example: Salaries = 170 and Profits = 30

GDP = 170+30 = 200
Firm 1 Firm 2
Revenues 1 100 Revenues 2 200
Salaries 1 80 Salaries 2 90
Input 1 (from 2) 0 Input 2 (from 1) 100
Profits 1 20 Profits 2 10
Table: Firms Accounts
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How can we aggregate different products?

• We can use current market prices of different goods and services

• This creates the Nominal GDP: each new product is multiplied by its current
price to obtain its value

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Nominal vs Real GDP

We want to compare GDP over time and compute GDP growth.

However, GDP can growth for 2 different reasons
• Increase in the number of goods and services produced
• Increase in the prices of the same goods and services

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Nominal vs Real GDP

The Real GDP is the GDP obtained keeping prices fixed

Growth in the Real GDP is only due to growth in the number of products and
services, keeping prices constant.

Yt − Yt−1
gt =
Yt1

This is what you hear on the news: ”GDP has increased 0.5% this quarter”

Conventionally, we call a recession two subsequent quarters of negative growth

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Nominal vs Real GDP: example

Year Cars Price Nominal GDP Nominal growth Real GDP Real growth
2016 100 100 10 000 - 10 000 -
2017 105 110 11 550 15.5% 10 500 5.0%
2018 110 120 13 200 14.3% 11 000 4.8%
2019 115 130 14 950 13.3% 11 500 4.5%
2020 100 130 13 000 -13.0% 10 000 -13.0%

Table: Nominal vs Real GDP (base year 2016)

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