College of Business Administration-Dahban Campus

Department of Finance- Jeddah-KSA

Econ 220: Saudi Economy

Course Supervisor : DR. Ibrahim M. S. Aboulola

Office Number :
Mobile: 0505- 644399
Telephone Number : +966-2-6951517
Email: Email : iaboulola@gmail.com
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Econ 220: Saudi Economy – Topic 1

Introduction to Macroeconomics:
GDP, GNP, Inflation Rate, and
Unemployment Rate
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 Macroeconomics

 Macroeconomics is the study of the behavior of large

collections of economic agents. It focuses on the
aggregate behavior of consumers, firms,
governments, the economic interactions among
nations and the effects of fiscal and monetary policy.
 Macroeconomics focus on three factor:
 Inflation
 Output ( Real GDP)
 Unemployment

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 National Accounting

 It means measuring the total quantity of

goods and services produced in an economy
in a given period of time.
 We can measure it by calculating:
 GDP
 GNP

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 What is GDP ?

 Gross domestic product (GDP) is the market

value of all the final goods and services
produced within a country in a given period of
time.
 “Total market value” refers to the quantity of
goods multiplied by their respective prices.
 “Final goods and services” refers to the goods and
services that are sold to the ultimate, or final,
purchasers.
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 How to measure the GDP ?
There are three approaches to measure the GDP:
 Product approach (or value added): where we
add the value of all goods and services
produced and then subtract the value of all
intermediate goods used in production.
 In other world the GDP is the sum of value
added to goods and services across all
productive units in the economy.
 total revenues - its cost of intermediate goods

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 How to measure the GDP ?
 Expenditure approach: which is the total spending on all final
goods and services produced in the economy in a given
period of time.
 Total Expenditure = total expenditure in consumption + investment
expenditure + government expenditure + net exports
 Income approach: where GDP is defined as the sum of all
income received by economic agents contributing to
production (Income includes the profits of firms).
 the total income of the economy = income of the consumers +
income on the interest on loans + profits after tax + the taxes paid
by the producers (income for the government)
 We do not include the taxes paid by consumers since they are
receiving back those taxes as wages
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 How to measure the GDP ?
The difference between nominal and real GDP:
 Nominal GDP measures these values using
current prices. Changes in nominal GDP can be
due to changes in prices and changes in
quantities of output produced.
 Real GDP measure these values using the prices
of a base year. Changes in real GDP can only be
due to changes in quantities, because real GDP
is constructed using constant base-year prices.

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 What is GNP ?
 Gross National Product (GNP) is the value of
output produced by domestic factors of
production, regardless of whether the
production takes place.
 Gross National Product (GNP) = GDP + Net Factor
Payments (NFP)
 Net factor payments = factor payments from
abroad – factor payments to abroad.

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 What is inflation ?
 It is the percentage increase in the
overall level of prices.
 Inflation can be measured by:
 GDP deflator
 Consumer Price Index CPI

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 GDP deflator
 GDP deflator identifies an index that measures
the overall price LEVEL in a given year.
 GDP deflator = 100 * Nominal GDP / Real GDP
 The GDP deflator is a weighted average of prices:
GDP deflator = Nominal GDP / Real GDP
= Price * Quantity / Real GDP
 The weight (Quantity / Real GDP) on each price
reflects that good’s relative importance in GDP.

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 Consumer Price Index CPI
 Consumer Price Index CPI is based on a fixed
basket of goods that are normally an important
part of household’s consumption.
CPI = Cost of basket in a period / Cost of basket in base period
= Price * quintity / Cost of basket in base period
 The CPI is a weighted average of prices.
 The weight on each price reflects that good’s
relative importance in the CPI’s basket.
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 CPI vs. GDP Deflator
 prices of capital goods
 included in GDP deflator (if produced domestically)
 excluded from CPI
 prices of imported consumer goods
 included in CPI
 excluded from GDP deflator
 the basket of goods
 CPI: fixed
 GDP deflator: changes every year
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 CPI vs. GDP Deflator
 In general the CPI index is the most common
way to measure inflation. This is because it is
based on the consumption of households and
therefore is a better measure of the cost of
living in an economy.

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 Unemployment Rate

 The unemployment rate is the percentage of the labor

force that is unemployed.
 Categories of the population:
 Employed: working at a paid job
 Unemployed: not employed but looking for a job
 Labor Force: the amount of labor available for producing
goods and services; all employed plus unemployed persons
 not in the labor force: not employed, not looking for work
(for example, full-time students)
 Unemployment rate = Unemployed / Labor Force
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 Types of Unemployment
 Cyclical unemployment is the result of
fluctuations in real GDP. Unemployment
rises when real GDP falls, and falls when
the economy improves.
 Frictional unemployment occurs naturally
in the economy. It refers to the time it
takes to find an appropriate job.

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 References
• Ramady M. (2005). “The Saudi Arabian
Economy”.Springer.
• Parkin M. (2012). “Macroeconomics”. Prentice.
Chapter Introduction to Macroeconomics