Nature of Macroeconomics

• Macroeconomics is the study of aggregates or averages covering the entire economy, such
as total employment, national income, national output, total investment, total
consumption, total savings, aggregate supply, aggregate demand, and general price level,
wage level, and cost structure.
• Macroeconomics deals with economic affairs in the large, it concerns the overall
dimensions of economic life.
• It is concerned with the problems of unemployment, economic fluctuations, inflation or
deflation, international trade and economic growth.
 Definition of
'Macroeconomics'
• Macroeconomics is the branch of economics that studies the behavior and
performance of an economy as a whole. It focuses on the aggregate changes
in the economy such as unemployment, growth rate, gross domestic product
and inflation.
Concepts of Macro economics
A. Income and Output
• The national output is the total amount of all goods and services produced
in a country during a specific period. And when production units or
organizations sell everything they produce, they generate an equal amount
of income. Hence, you can measure output by calculating the total income
from the sale of all goods and services.
• By measuring GDP, economists can understand the market swings and
changes. They can identify what measures to take to improve the GDP of
the country. With technological advances, capital increase, and acquisition
of state-of-art equipment, production units and organizations can increase
national output and income.
B. Unemployment

• Economists measure the unemployment rate in an economy by calculating

the percentage of individuals without jobs. Unemployment categories
include classic unemployment, frictional unemployment, and structural
unemployment.
• Classical unemployment is when wages are too high for employers to
consider hiring more workers. Frictional unemployment occurs when the
time taken to search for an appropriate employee is too long. Structural
unemployment occurs when there is a mismatch between a worker’s skills
and the actual skill required for a job. Another important category of
unemployment is cyclical unemployment that occurs when an economy’s
growth is stagnant.
C. Inflation and Deflation
• The term inflation refers to an increase in the prices of goods and services
across the country.
• And the term deflation refers to a decrease in the prices of goods and
services.
• Economists measure inflation and deflation by studying price indexes.
• Inflation occurs when an economy grows too quickly.
• Deflation, on the other hand, occurs when an economy declines over a
period of time.
Definition of GNP, NNP and its Calculations
• Gross national product (GNP) is a broad measure of a nation's total
economic activity. GNP is the value of all finished goods and services
produced in a country in one year by its nationals.
• GNP include the manufacturing of tangible goods (cars, furniture and
agricultural products) and the provision of services (education, healthcare,
and business services)
• GNP does not include the services used to produce manufactured goods
because their value is included in the price of the finished product.
• GNP does include depreciation and indirect business taxes like sales tax
The formula for GNP is:

Consumption + Government Expenditures + Investments + Exports +

Foreign Production by U.S. Companies – Domestic Production by
Foreign Companies = Gross National Product
Net national product (NNP)
• is the market value of a nation's goods and services
minus depreciation (often referred to as capital consumption).
• NNP is a measure of how much a country can consume in a given
period. Note that NNP measures output regardless of where that
production takes place (in other words, it includes the value of goods
and services that American companies produce, supply or create
abroad)
The formula for NNP is:

NNP = Market Value of Finished Goods + Market Value of Finished

Services - Depreciation

Alternatively, NNP can be calculated as:

NNP = Gross National Product - Depreciation
NNP Example
Let's assume Country XYZ's companies, citizens and entities produce $1
trillion worth of goods and $3 trillion worth of services this year. The
assets used to produce those goods and services depreciated by $500
billion. Using the formula above, Country XYZ's NNP is:

NNP = $1 trillion + $3 trillion - $0.5 trillion = $3.5 trillion

Production possibilities frontier
• The production possibilities frontier is a graph that shows the
combinations of output that the economy can possibly produce given
the available factors of production and the
available production technology.

• PPF shows different Combinations of Productions of Goods that can

be produced for a given amount of resources.
The circular-flow diagram
• The circular-flow diagram is a visual model of the economy that shows
how Money flow through markets among households and firms.
• The circular flow diagram is a basic model used in economics to show
how an economy functions. Primarily, it looks at the way money,
goods, and services move throughout the economy. In the diagram,
there are two main characters, known as firms and households,
where households represent consumers and firms represent
producers.