3. Macroeconomic

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How to measure economic activity

Gross Domestic Product (GDP)

: the value of all final goods and services produced within an economy over a period of time, usually a year or a quarter.

Gross National Income (GNI): 

G D P+\text { factor income from abroad }- \text { factor income sent abroad. }

GDP or GNI per capita:  GDP or GNI  population of the country \frac{\text { GDP or GNI }}{\text { population of the country }} population of the country  GDP or GNI ​

Real GDP or GNI per capita at purchasing power parity (PPP): converts each country’s per capita income figure to a common currency.

3.1. Measuring economic activity and illustrating its variations

Aggregate demand

Aggregate demand(AD): total spending on domestic goods and services at average price levels per period of time.

AD = C + I + G + (X-M)

Why is the AD curve downward sloping?

Shifts of the AD curve

3.2 Variations in economic activity: aggregate demand and aggregate supply

Economic growth

Economic growth: increase of real GDP over time.

\text { Growth } 2_{2019 \rightarrow 2020}=\frac{r G D P_{20}-r G D P_{19}}{r C D P_{19}} \times 100

Growth rate = % change of real GDP between two periods.

Assume that real GDP in 2019 = $19,220 billion & real GDP in 2018 = $18,783 billion.

\text { Growth in } 2019=\frac{19220-18783}{18783} \times 100=2.33 \%

Growth over the short term

3.3 Macroeconomic objectives

Measuring economic inequality

Economic inequality:

unequal distribution of income and wealth.

Figure 3.4.1 Lorenz curve

The poorest 20% of people receives only 7% of national income.

Diagonal line: line of perfect income equality (i.e. poorest 20% earns 20% of income and the poorest 40% earns 40% of income).

As we move further to the right of the diagonal, the distribution of income becomes more and more unequal.

Gini coefficient: ratio of the area between the Lorenz curve and the diagonal over the area of the half-square.

3.4 Economics of inequality and poverty

Functions of money

Medium of exchange

Unit of account

Store of value

Standard of deferred payment

3.5 Demand management (demand-side policies): monetary policy

Fiscal policy: changes in the level of government expenditures (G) and taxes (T) to affect AD.

Government expenditures

Government revenues

Where government gets its revenue from:

Direct tax.

Indirect tax.

3.6 Demand management (demand-side policies): fiscal policy Fiscal policy

Supply-side policies: attempt to shift LRAS to the right and achieve long-run economic growth.

Goals of supply-side policies

Market-based policies

Product market related policies

Labour market related policies

3.7 Supply-side policies

Economic growth

Monetary policy

Supply-side policy

3.8 Macroeconomic policies - strengths, limitations and conflicts