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

2. Intro to Macro Economics
Origin of Macroeconomics
Intro to Macro Economics
John Maynard Keynes ( )
“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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. 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

11. 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

12. Measuring GDP

13. 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.

14. 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.

15. 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.

16. Real Vs. Nominal GDP of Pakistan

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

18. Disposable Income

19. 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.