BZHAR NASRADEEN MAJEED MACROECONOMICS Bzhar N. Majeed BZHAR NASRADEEN MAJEED

What is Macroeconomics Is the study of the behavior of the whole (aggregate) economies or economic systems instead of the behavior of individuals. It is concerned primarily with the forecasting of national income, through the analysis of major economic factors that show predictable patterns and trends. It is also covers role of fiscal and monetary policies in the economy. Bzhar N. Majeed

Gross Domestic Product GDP GDP is often considered the best measure of how well the economy is performing. Also, it is the most common measure of an economy’s total output. It defines nation’s economy in Geographical term. GDP: is the total market value of final goods and services produced within an economy in a given period of time (year). It is expressed as a rate of production, that is, as “X” amount of money per year. OR, An estimated value of the total worth of a country’s production and services, within its boundary, by its nationals and foreigners, calculated over the course on one year. GDP = C + I + G + (X – M) Bzhar N. Majeed

Gross Domestic Product GDP Total market value: the price that something could be sold for at particular time. It means we take the quantity of the produced goods, multiply them by their respective price, and then add up the totals. Market value of good A = quantity A * price A Final goods and services: it means those goods and services that are sold to ultimate, or final, purchasers, with no plans for further physical transformation or as an input in the production of other goods that would be resold. For example, two cars that were produced would be final goods if they were sold to households or to a business. Intermediate goods: goods used in the production process that are not final goods and services. They are not considered a final goods and services. For example, to produce the cars the automobile manufacturer bought steel that went into the body of the cars. Bzhar N. Majeed

Final good and intermediate good Value added: is an increase in the value of goods and services as a result of the production process. It is equal to the value of the firm’s output less the value of the intermediate goods that the firm purchases. Value added = value of production – value of intermediate goods. Question… Why the value of the intermediate good is not counted in GDP? Give an example? Answer… the value of intermediate good is already included in the market price of the final goods. By doing this, we will avoid double counting. Example: company A produce steel, company B produce car. Imagine, the steel would be bought in the market for ($1000) by company B. Then, the produced car by B would be sold in ($10,000). In this case, the steel is intermediate good and the car is the final good, because ($1,000) for steel is already counted in ($10,000) for the produced car. Bzhar N. Majeed

Rules for computing GDP To compute the total value of different goods and services, the national income accounts use market prices. Thus if: GDP = (Price of apples  Quantity of apples) + (Price of oranges  Quantity of oranges) = ($0.50  4) + ($1.00  3) GDP = $5.00 $0.50 $1.00 Bzhar N. Majeed

Rules for computing GDP The treatment of inventories depends on if the goods are stored or if they spoil (damage). If the goods are stored, their value is included in GDP. If they spoil, GDP remains unchanged. When the goods are finally sold out of inventory, they are considered used goods (and are not counted). Intermediate goods are not counted in GDP– only the value of final goods. Reason: the value of intermediate goods is already included in the market price. Value added of a firm equals the value of the firm’s output less the value of the intermediate goods the firm purchases. Bzhar N. Majeed

Rules for computing GDP Used goods are not included in the calculation of GDP. Some goods are not sold in the marketplace and therefore don’t have market prices. We must use their imputed value (estimated value) as an estimate of their value. For example, government services or your own agriculture at home. (imputed value is an estimated value where actual value is not known) Bzhar N. Majeed

GDP and economic welfare (happiness) Despite the fact that GDP is one of the best measure of economic growth for a country, it is not a complete measure of economic welfare. Inequality (wealth distribution): GDP does not describe whether or not the people are truly benefitting from economic growth. Bzhar N. Majeed

GDP and economic welfare (happiness) Household production: such as (childcare, care of the elderly). Non-monetary & black market: Some undeveloped economies rely on non-monetary economies, this means that trade is done through swapping goods. There is also the existence of black markets, which consists of trade of illegal goods or the ability to evade tax. Leisure: leisure time is not included in GDP because GDP is designed to be a measure of the production. Bzhar N. Majeed

Gross National Product GNP GNP: is an estimated value of the total worth of production and services, by citizens of a country, on its land or on foreign land in a given period of time (year). GNP defines nation’s economy or economic size in resident term. GNP = C + I + G + Net Exports+ Foreign production by the country’s companies – Domestic production by foreign companies inside the country Bzhar N. Majeed