Business Economics (ECO 341) Fall: 2012 Semester Khurrum S. Mughal

Intro to Macro Economics Origin of Macroeconomics Intro to Macro Economics John Maynard Keynes (1883-1946) “The General Theory of Employment, Interest and Money” (1936) The economy is made up of four sectors sometimes called economic agents: Households who receive payments (income) for their services (eg labour and land) and use this money to buy the output of firms (ie consumption or household spending). Firms who use land labour and capital to produce goods and services for which they pay wages rent etc (income) and receive payment (expenditure) Government (also known as the public or state sector) and International eg consumers buying overseas products (M) and Foreigners buying UK products (X) Mrs Gordon's theory

Intro to Macro Economics So what is ‘the economy’? The economy is made up of four sectors sometimes called economic agents: Households who receive payments (income) for their services (eg labour and land) and use this money to buy the output of firms (ie consumption or household spending). Firms who use land labour and capital to produce goods and services for which they pay wages rent etc (income) and receive payment (expenditure) Government (also known as the public or state sector) and International eg consumers buying overseas products (M) and Foreigners buying your (X) Mrs Gordon's theory

Intro to Macro Economics What is macroeconomics? Macroeconomics considers the performance of the economy as a whole. We try to understand changes in The rate of economic growth The rate of inflation Unemployment Our trade performance with other countries Macroeconomics also includes an evaluation of the relative success or failure of government economic policies Mrs Gordon's theory

Intro to Macro Economics What is macroeconomics? Intro to Macro Economics Monetary Policy Fiscal Policy Output: Rapid & High growth, Unemployment Stability of Prices Mrs Gordon's theory

Intro to Macro Economics Tools of Macroeconomic Policies Fiscal Policy Government expenditures and taxation Used to affect long term economic growth Monetary Policy Conducted by central bank and determines short term interest rate. Mrs Gordon's theory

Intro to Macro Economics Key Concepts Gross Domestic Product (GDP) The monetary value of all goods and services produced within the country in a given time period Economic Growth The percentage rate of increase of real GDP Inflation The annual percentage rate of change of the general price level Unemployment Percentage of unemployed labour force. Mrs Gordon's theory

Measuring Economic Activity Most important concept in macroeconomics GDP is part of national income and national accounts Shows state of the economy – contraction or expansion? Level of economic activity is judged by GDP per Capita

Measuring GDP Two Approaches Flow of Product Approach or Expenditure Approach Earnings or Income or Cost Approach Approach

GDP – Expenditure Approach Defined as the total value of all goods and services produced within that territory during a given year GDP = C + I + G + (X-M) where C: Household spending I: Capital Investment spending G: Government spending X: Exports of Goods and Services M: Imports of Goods and Services Using market prices of different commodities

GDP – Income Approach GDP is the sum of the incomes earned through the production of goods and services. The main factor incomes are as follows: Compensation of Labor + Corporate Profits + Rent income from land + Depreciation + Net Production Taxes Excludes Transfer Payments and Shadow Economy

Measuring GDP

Double Counting Treatment of Intermediate goods that are used in production of other goods Value added is the increase in the value of a product at each successive stage of the production process.

Real Vs. Nominal GDP Nominal GDP values the production of goods and services at current prices. Real GDP values the production of goods and services at constant prices. An accurate view of the economy requires adjusting nominal to real GDP by using the GDP deflator.

Real Vs. Nominal GDP The GDP deflator measures the current level of prices relative to the level of prices in the base year. It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.

Real Vs. Nominal GDP of Pakistan

Concepts of National Income Gross Domestic Product (GDP) Net Domestic Product (NDP) Gross National Product (GNP) Net National Product (NNP) National Income (NI)

Disposable Income

GDP and Economic Well-Being GDP is not a perfect measure of the happiness or quality of life, however. Some things that contribute to well-being are not included in GDP. The value of leisure. The value of a clean environment. The value of almost all activity that takes place outside of markets.