1. Unit 1: Introduction to Macroeconomics
Objectives:
Explain the meaning of an economic aggregate
Assess the problems involved in aggregation
Define the terms national product, national expenditure, national income, consumption, saving and investment.

2. Micro vs macro economics
Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies.
This looks at economy-wide phenomena, such as gross national product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels.

3. Aggregates in the economy
Most important aggregates in the economy
The economy’s total output of goods and services
The total demand for and supply of this output
Total employment and unemployment
The general price level
The balance of payments
The rate of economic growth

4. Aggregate demand
Aggregate demand is the sum of the demands for goods and services by consumers, businesses, the government and foreign residents: Where AD is aggregate demand, C is the sum of all individual consumers’ demands for goods and services, I is the sum of all individual firms’ demand for investment goods, G is the governments’ demand for goods and services, X is the total demand for the country’s exports and M is the demand for imports.

5. Problems with aggregation
The problems of aggregation Difficulty in finding an appropriate unit of measurement. For example apples are measured in tones while clothes are measured in meters. How do you add tones to meters? The problem is overcome, at least partially, by using money as the unit of measurement. But there is another problem of distinguishing between nominal and real value. If the value of total output double from N$10 million to N$20, this does not necessarily mean that total output itself have double.

6. Problems with aggregation (Cont.)
Two possible reasons why it has doubled:
Increase in physical output
Increase in price level
In this case we need to estimate the real output
Real output is the quantity of goods and services produced in an economy. Real output can be obtained by adjusting the value of output measured in current prices by an appropriate price index.
Price index is used to measure changes in the price level by comparing the price of a basket of goods and services in the current year to the price of this basket in a selected base year.

7. Problems with aggregation (Cont.)
The problems of aggregation Another problem with aggregates is that they hide their constitute elements. An increase in the economy’s total output tell us nothing about who receives that output. It is possible for a country to have an increase in economic total output and at the same time some people will be worse off. An increase in economy’s total output cannot be necessarily be interpreted as an improvement in the country standard of living.

8. Total output Three ways of measuring the annual value of
total output in an economy are by calculating
its:
National product
This is found by adding up the value of all the final goods and services produced by firms during the year
National expenditure
This is found by adding up all the spending on the final goods and services produced by firms
National income
By adding up all incomes (wages, salaries, interest, rent and profits) of factor of production, those producing intermediate goods as well those producing final goods.

9. Problems with total output
The Black Economy
It refers to those unrecorded economic transactions conducted on a cash basis with a view to illegal evasion of tax. Official statistics tend to underestimate the actual volume of economic activity that occurs.
National Income and economic welfare
Two steps of how to convert national income into real output per capita.
National income must be deflated by an appropriate price index to convert it to real terms
The figure must then be divided by the population to convert it to per capita terms

10. Example of total output
Two years, 1995 and 1999, price increases by 20% between 1995 and 1999, National income in 1995 is N$12 m and in 1999 is N$24 m, the population in 1995 is 5000 and in 1999 is Real national income = money value of national income in that year times 100 divided by price index in that year
1995
1999
National Income
N$12m
N$24m
Price Index
100
120
Real national income (1995 prices)
N$20m
(= 24* (100/120))
Population
5000
7500
Real output per capita
2400
3200

11. Economic growth, welfare and development
What is the difference between:
Growth in total output?
Growth in total output and economic welfare?
Growth in total output and economic development?