Macroeconomics

Main Concern of Macroeconomics

• Analyzing the overall economic performance and economic
activity of a country.

• Questions of interest:
1. How much the economy produce? (What is gross production
level?)
2. How many factors of production are employed?
3. What is the price trend of the overall produced goods?
 Main Concern of Macroeconomics
The indicators includes:
1- Aggregate Production (measured for example by GDP)
2- Employment Level
3- Inflation Rate
Analyzing the Aggregate Production at the
Country Level

Gross Domestic Product (GDP)

 Chapter One Main Points
1. Meaning of GDP.
2. Methods of Measuring Aggregate Production
- Production Approach
- Income Approach
- Expenditure Approach
3. Nominal Versus Real GDP
4. GDP per capita
5. Economic Growth Rate
6. GDP versus GNP
 1. Meaning of Gross
Domestic Product (GDP)
The total production in a
country is measured by
the gross domestic
product (GDP).

Gross Domestic Product (GDP):

“Is the market value of all final goods and services produced in
a country during a period of time usually one year.”
GDP definition has five parts:
A- Market Value:
To measure total production, we must add together
the production all products produced but we cannot
make a summation for the quantities of different
products together, so, we have to convert the unit
of measure to be in “values”. GDP values items at
their market values—the prices at which items are
traded in markets.

GDP is measured by using market values and not

quantities.
Value = Price x Quantity
B- All:
Which implies that we are not going to ignore any product from final products.

C- Final Goods and Services:

• A final good (or service) is an item that is bought by its final user during a
specified time period. While intermediate good used as a component of a
final good or service.

• If we were to add the value of intermediate goods and services produced to

the value of final goods and services, we would count the same thing many
times—a problem called double counting.

• For example: Buying steel “to manufacture a car”:

in this case, the value of the steel is not going to be counted separately, rather,
it is going to be embedded inside the value of the car.
D- Produced Within a Country:
Only goods and services that are produced within a
country count as part of that country’s GDP.

E- In a Given Time Period:

GDP measures the value of production in a given
time period—normally either a quarter of a year—
called the quarterly GDP data—or a year—called the
annual GDP data.
2. Methods of Measuring
Aggregate Production
(GDP)
GDP is measured by one of the Three approaches:
A. Production approach
B. Income approach
C. Expenditure approach.
Note
All of the three approaches would yield the same result for
the value of GDP…this would be revealed further through
the circular flow of income and expenditure later on.

Production Value = Expenditure (Spending) Value = Income

Value

The keyword here is “exchange” where you give up

something to receive another thing that is EQUAL in VALUE
First: Production Approach
The Production approach is concerned with calculating the total
production of the economy, so GDP is calculated as the market
value of all final goods and services produced in a country during a
period of time usually one year.
Problem:
▪ Suppose that an economy produces only four goods and
services: pens, pizzas, textbooks, and paper.
▪ Assume that all the paper in this economy is used in the
production of textbooks.
▪ Use the information in the following table to calculate the GDP
for year 2022.
Production and price statistics for 2022
Product Quantity Price per unit in US$
pens 100 50
Pizzas 80 10
Textbooks 20 100
Paper 2000 0.10
Solution
➢Since papers are assumed to be used as an intermediate good in the
production of the textbooks, therefore, the final goods and services that
are going to be included in the calculation of GDP are the pens, pizzas, and
textbooks.
Production and price statistics for 2022

Product Quantity Price per unit in Value in US$

US$
Pens 100 50 100*50=5000
Pizzas 80 10 80*10=800
Textbooks 20 100 20*100=2000

• GDP = the sum of the values of the three final goods and services
produced in year 2022 = 5000 + 800 + 2000 = US$ 7800
Second: Income Approach
GDP is “the total income received by all the factors of production in the
economy over a period of time usually one year.”
Factors of Production

Labor Wages

Capital Interest

Land Rent

Entrepreneur Profit
 GDP = Wages + Interest + Rent + Profit

➢Wages: are paid for households in exchange of labor services.

➢Interest: is paid for the use of capital.
➢Rent: is paid for land
➢Profit: is the income remained after the firm pays wages,
interest, and rent. It is the return to the entrepreneur for
organizing the other factors of production and for bearing the risk
of producing and selling goods and services.
Problem
If you are given the following information for the earnings of the
factors of production in the economy in year 2015:
Earnings of factors of Value US$
production
2000
Wages
1700
Interest
1500
Rent
3500
Profit
Required: Calculate GDP.
Solution
• GDP = Wages + Interest + Rent + Profit
• GDP = 2000 + 1700 + 1500 + 3500 = US$ 8700
Third: Expenditure Approach
GDP is the sum of spending by all sectors of the economy. Thus, it will consist
of: consumption expenditures, private investment, government
expenditures, and net exports.
Type of Expenditure Expenditure made Expenditure on:
by:
Consumption expenditures Households Sector Consumer goods (Durable and
(Consumers) non-durable)

Investment expenditures Business Sector Capital goods: such as buildings,

(Businessmen) machinery, and additions to
inventories.

Government expenditures Government Sector Consumer and capital goods

Net exports Foreign Sector Consumer and capital goods

Summing up the components of GDP:
GDP = Y = C + I + G + X – M
GDP = Y= C + I + G + NX
Where:
Y = GDP
C = Consumption expenditures
I = Investment expenditures
G = Government expenditures
NX = X – M = Net exports
3. Nominal Versus Real GDP
The Difference between Nominal GDP and Real GDP
To isolate the increase in production from the rise in prices, we distinguish
between real GDP and nominal GDP.
GDP

Nominal GDP Real GDP

• The value of final goods
and services evaluated at
current-year prices.
• The value of final goods and
services evaluated at base-year
prices.
• Or the value of final goods and
services adjusted for inflation.
 Points of
Nominal GDP Real GDP
Comparison
The aggregate market value of
Real GDP refers to the value of
the economic output produced
economic output produced in a
Meaning in a year within the boundaries
given period valued by the base
of the country is known as
year constant prices
Nominal GDP.
GDP without isolating the
What is it? Inflation adjusted GDP
effect of inflation.
Base year prices or constant
Expressed in Current year prices
prices.
Value Higher Generally, lower.
Economic Good indicator of economic
Cannot be analyzed easily.
Growth growth.
• Real GDP: The value of output (final products) at constant prices (constant prices
= prices that are prevailed at the base year).

Σ 𝑄 × 𝑃 (𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑝𝑟𝑖𝑐𝑒𝑠, 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑝𝑟𝑖𝑐𝑒𝑠)

The change in real GDP reflects only changes in output because prices are held
constant.
• Nominal GDP: the money (market) value of output at current prices.

Σ 𝑄 × 𝑃 (𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑖𝑐𝑒𝑠)

The change in nominal GDP may be caused by:

• Change in quantity only and price is constant (real change).
• Change in price and quantity is constant (monetary change).
• Change in both quantity and price (nominal change).
 EXAMPLE ON REAL VERSUS NOMINAL GDP
CALCULATIONS
2019 2020

Q P PQ Q P PQ
Cars 10 cars 20 000 200 000 LE 15 25 000 375000
Computers 5 computers 2000 10 000 LE 5 3000 15000
TOTAL 210 000 390 000
(Nominal) (Nominal)

2019 (Base Year) 2020

Q P PQ Q P PQ
Cars 10 20 000 200 000 LE 15 20 000 300 000
Computers 5 2000 10 000 LE 5 2000 10 000
TOTAL 210 000 310 000
(Nominal = (Real)
Real)
5. GDP per capita
GDP per Capita
GDP per Capita: a country's GDP divided by its total
population.

GDP per capita = (gross domestic product GDP) / (Population

of a country)
6. Economic Growth?
What is Economic Growth?
• Economic growth, is the increase in a country's real
level of national output.
• This can be caused by an increase in the quality or
quantity of resources & improvements in technology.
Measuring economic growth:
Economic Growth can be measured by an increase in a
country's gross domestic production.
𝐺𝐷𝑃2 − 𝐺𝐷𝑃1
Economic Growth Rate= X 100
𝐺𝐷𝑃1

It is the percentage change in the quantity of goods and

services produced per capita from one year to the next. It
equals the growth rate of GDP.
6. GDP versus GNP
Gross Domestic Product (GDP):
• It is the value of production that is located
inside the country during some period of
time, whether this production is produced by
citizens or foreigners.

Gross National Product (GNP):

• It is the value of production produced by
national factors of production during some
period of time whether this production took
place inside the country or outside it.
1) GNP > GDP
If national product outside the country > Foreign product inside the
country (net payment to foreigner is negative).

2) GNP = GDP:
If national product outside the country = foreign product inside the
country (net payment to foreigner is zero).

3) GNP < GDP:

If national product outside the country < foreign product inside the
country (net payment to foreigner is positive).
GNP = GDP + Net factor income from abroad

= GDP
+ Receipts of factor income from abroad
– payment of factor income to abroad
Note:
• GDP is superior to GNP as a measure of domestic economic activity.
It tells us how much is being produced within a nation's borders. Reflects
the level of employment
BUT it doesn't reflect how income is available to residents of a country.

• GNP is superior to GDP as a measure of the economic welfare of a

country's residents.
It tells us how much income is available to the residents of a country.

NOTE: “Resident”: is the one holding the nationality of a certain country.

6. Circular Flow of Income Model
Circular flow: A diagram showing the income received and payments made by
each sector of the economy.
Includes following types of “actors”:
▪ Households:
1. Own the factors of production, sell their
services to firms for income
2. buy and consume goods & services
▪ Firms:
1. buy the services of (hire) factors of
production, use them to produce goods and
services
2. sell goods & services
Includes two markets:
➢ the market for goods and services
➢ the market for “factors of production”

• The inside circle shows real flows (factors and commodities).

• The outside circle shows monetary flows (money income and
expenditure).
• The economy would be in equilibrium if real and monetary flows
from one sector to the other are equal to flows going from the other
sector.
7) GDP, Total Expenditures, and Total Income

GDP = Total Expenditure = Total Income

Gross domestic product can be measured in two ways:

1- By the total expenditure on goods and services, or
2- By the total income earned from producing goods and services.
Aggregate expenditure equals consumption expenditure plus investment
plus government expenditure plus net exports.
Aggregate income equals the total amount paid for the services of the
factors of production used to produce final goods and services—wages,
interest, rent, and profit.
Because firms pay incomes equal to what they receive from selling their
output, aggregate income equals aggregate expenditure
That is,
GDP = C+ I + G + X - M
(Aggregate Income or GDP) (Aggregate Expenditure)