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Macroeconomics
N. Gregory Mankiw
2
Micro vs. Macro
Microeconomics:
The study of how individual households and
firms make decisions, interact with one another
in markets.
Macroeconomics:
The study of the economy as a whole.
We begin our study of macroeconomics with the
country’s total income and expenditure.
For
For the
the economy
economy as as aa whole,
whole,
income
income equals
equals expenditure
expenditure
because
because everyevery dollar
dollar aa buyer
buyer spends
spends
is
is aa dollar
dollar of
of income
income forfor the
the seller.
seller.
Households:
Households:
own
own the
the factors
factors of
of production,
production,
sell/rent
sell/rent them
them to
to firms
firms for
for income
income
buy
buy and
and consume
consume goodsgoods & & services
services
Firms Households
Firms:
Firms:
buy/hire
buy/hire factors
factors of
of production,
production,
use
use them
them to to produce
produce goods
goods
and
and services
services
MEASURING
sell
sell goods
goods & services
&INCOME
A NATION’S services 6
The Circular-Flow Diagram
Revenue (=GDP) Spending (=GDP)
Markets for
G&S Goods &
G&S
sold Services bought
Firms Households
Y
Y =
= C
C +
+ II +
+ G
G +
+ NX
NX
Note:
Note: “Investment”
“Investment” does
does not
not
mean
mean the
the purchase
purchase of
of financial
financial
assets
assets like
like stocks
stocks and
and bonds.
bonds.
MEASURING A NATION’S INCOME 17
Government Purchases (G)
is all spending on the g&s purchased by govt
at the federal, state, and local levels.
G excludes transfer payments, such as
Social Security or unemployment insurance
benefits.
They are not purchases of g&s.
Y
Y =
= C
C +
+ II +
+ G
G +
+ NX
NX
22
ACTIVE LEARNING 1
Answers
C. Jane spends $1200 on a computer to use in her
editing business. She got last year’s model on
sale for a great price from a local manufacturer.
Current GDP and investment do not change,
because the computer was built last year.
In each year,
nominal GDP is measured using the (then)
current prices.
real GDP is measured using constant prices from
the base year (2005 in this example).
Real GDP
billions
(base year
2005)
Nominal
GDP
29
The GDP Deflator
The GDP deflator is a measure of the overall
level of prices.
Definition:
nominal GDP
GDP
GDP deflator 100 xx
deflator == 100
real GDP
32
ACTIVE LEARNING 2
Answers
2007 (base yr) 2008 2009
P Q P Q P Q
Good A $30 900 $31 1,000 $36 1050
Good B $100 192 $102 200 $100 205
Indonesia
Japan
China
Life expectancy (years)
U.S.
Mexico Germany
Brazil
Pakistan
Russia
India
Bangladesh
Nigeria
Brazil
Adult Literacy
Indonesia
Nigeria
India
Pakistan
Bangladesh
Japan
U.S.
(% of population)
Internet Usage
Germany
Brazil
Indonesia
Mexico
Pakista
Russia
n
China
Nigeria India