CHAPTER I

INTRODUCTION & DATA IN MACROECONOMIC ANALYSIS

Macroeconomics is the study of the economy as a whole, including growth in
incomes, changes in prices, and the rate of unemployment. Macroeconomists
attempt both to explain economic events and to devise policies to improve
economic performance. while microeconomics is the study of how firms and
individuals make decisions and how these decision makers interact in the
marketplace. Maximize their level of utility, and firms make production
decision to maximize their profits.

Economists use many types of data to measure the performance of an economy.

Three macroeconomic variables are especially important:
• Inflation rate measures how fast prices are risisng
• Unemployment rate measures the fraction of the labor force that is
out of work.
• Gross domestic product (GDP) measure the value of economic
activity or economic peromance.

Economist try to address economic issues with a scientist’s objectivity. Like

any science, economics has its own set of tools—terminologies:

• Theories are simplified reality in order to reveal how exogenous

variables influence endogenous variables.
• Economic models illustrate often in mathematical term to explaine the
relationship among economics variables.
• Cateris paribus model holding the other variables constants.
• Endogenous variables are those variables that a model tries to
explain/variables that are the model explains.
• Exogenous variables are those variables that a model takes as given/
varibales form outside model.
• Cateris paribus an assumption to dispense irrelevant details and to
focus on underlying connection.
• Market clearing economists normally presume that the price of a
good or a service moves quickly to bring quantity supplied and
quantity demanded into balance (equilibrium).
• flexible prices describe the economy in the long run.
• sticky prices offer a better description of the economy in the short run.

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Measuring Nation’s income
Gross Domestic Product (GDP) is the market value of all final goods and
services produced within an economy in a given period of time.
For an overall of economy, income must be the same with the expenditures.
Every transaction that affects expenditure must affect income, and every
transaction that affects income must affect expenditure. GDP terminologies :
• Recessions real GDP growth is interrupted by periodes of declining
income mildly.
• depressions real GDP growth is interrupted by periodes of declining
income more severe.
• Deflation a decrease in the overall level of prices
• Inflation an increase in the overall level of prices.

Circular flow a figure to illustrates the flows between firms and households
in an economy that produces one good from one input.
Two types of quantity variables :
• stock is a quantity measured at a given point in time.
• flow is a quantity measured per unit of time.

Rules on how to calculate GDP

• GDP combines the value of these goods and services into a single
measure.
• Used goods is not included as part of GDP.
• Different treatment of inventories.
• an estimation should be conducted for goods and services that are not
available in the market.
• no imputation is made for the value of goods and services sold in the
underground economy.

The components of GDP

• The expenditures approach
Y = C + I + G + NX
Where: Y= GDP; C= Consumption; I= Income; G= Government
expenditure; NX= Net Export

• The income approach

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 Personal Income = National Income − Indirect Business Taxes
− Corporate Profits − Social Insurance Contributions − Net Interest +
Dividends + Government Transfers to Individuals
+ Personal Interest Income

Disposable Personal Income = Personal Income – (Personal Tax +

Nontax Payments.)

Real GDP vs Nominal GDP

• Real GDP is the value of goods and services measured using a

constant set of prices
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 =
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟
• Nominal GDP is the value of goods and services measured at current
prices.

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 = 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑥 𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟

Chain-weighted measures of real GDP an analysis used to update

periodically the prices used to compute real GDP it ensures that the prices used
to compute real GDP are never far out of date.

Measuring Cost of Living

Consumer Price Index (CPI) is a measure of the overall cost of the goods
and services bought by a typical consumer.

∑ Pn x Qo
CPI = x 100
∑ Po x Qo
• Inflation rate is the percentage change in the price index from the
preceding period
CPIt − CPIt−1
Inflation = x100
CPIt−1
Problems in computing the cost of living
• Substitution bias: the prices do not change proportional year by year,
then the CPI has ignored the possibility of consumer substitution

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 • Introduction of new goods: when there is a new goods on the market,
consumer will have more choice, so the CPI does not reflect the
change in the purchasing power of money.
• Unmeasured quality change: something that is difficult to measure.

GDP Deflator vs CPI

• GDP Deflator is the prices of all goods and services which is
produced in the country; comparing the prices of goods and
services which is produced in the current year toward the price
of base year.
Nominal GDP
GDP Deflator = x 100
Real GDP

• CPI is the prices of all goods and services which is consumed by

typical consumer in the country; comparing the prices on the basket
of fixedly goods and services the price of base year.

• Indexation is an automatic correction the value of money against

the effect of inflation were conducted by Act or by contract.
Economists call a price index with a fixed basket of goods a
Laspeyres index and a price index with a changing basket a Paasche
index.

The labor force is defined as the sum of the employed and unemployed.

Labor force = Number of Employed + Number of Unemployed

Labor Force
Labor Force Participation Rate = x 100
Adult Population

• Employed are those who at the time of the survey worked as paid
employees, worked in their own business, or worked as unpaid
workers in a family member’s business.
• Unemployed: This category includes those who were not employed,
were available for work, and had tried to find employment during the
previous four weeks.

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 • Not in the labor force: This category includes those who fit neither
of the first two categories, such as a full-time student, homemaker, or
retiree.
unemployment rate is defined as the percentage of the labor force that is
unemployed.
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 = 𝑥 100
𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒