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Principles of Economics 1
Macroeconomics Introduction
What is Macroeconomics?
Why do prices rise rapidly in some time periods while they are more
stable in others?
GDP includes all items produced in the economy & sold legally in markets
GDP is the market value of all final goods and services produced
within a country in a given time period.
`...within a country...'
Items are included in a nation's GDP if they are produced
domestically, regardless of the nationality of the producer.
consumption (C)
investment (I )
government purchases (G)
net exports (NX)
Y = C + I + G + NX
Consumption (C) :
Spending by households on goods (e.g., cars, appliances and food) and
services (e.g., haircuts and medical care), except the purchase of new housing.
Investment (I):
The purchase of goods (e.g., capital equipment, structures,
inventories and household purchases of new houses) that will be used in
the future to produce other goods and services.
Monetary Policy
mMonetary authorities controls the supply of money, often targeting an inflation
rate or interest rate to ensure price stability.
Real vs Nominal GDP
Analysing a nation's economic performance over time, useful to choose a base year
as a point of reference for prices.
Nominal GDP uses current prices to value the economy's production of goods and services
in that year. Changes reflect both changes in the quantities of goods and services and their
prices.
Real GDP uses constant (base-year) prices to value production of goods and services.
Changes in real GDP reflect only changes in the quantity of goods and services.
Nominal and Real GDP
Year Price of Beer Quantity of Beer Price of Quantity of
($/can) (cans) Hamburgers Hamburgers
($)
2018 1 100 2 50
2019 2 150 3 100
2020 3 200 4 150
2018 Nominal GDP = (1x100) + (2x50) = $200 Real GDP = (1x100) + (2x50) = $200
2019 Nominal GDP = (2x150) + (3x100) = $600 Real GDP = (1x 150) + (2x100) = $350
2020 Nominal GDP = (3x200) + (4x150) = $1200 Real GDP = (1x 200) + (2x150) = $500
Real GDP
Gross domestic product (GDP) represents the value of all goods and services produced in New Zealand. The growth in real
GDP is New Zealand's official measure of economic growth. Real GDP excludes the effects of changing prices (i.e.
inflation). Data is available from 1990.
GDP as a measure of economic well-being
• Leisure time
• Environmental quality