Macroeconomic Quantities

• The nominal values of any economic statistic are based on actual prices. The real value is the same statistic adjusted for inflation.

  • If inflation is significant, we should pay attention to the real value more. Otherwise, nominal income becomes more crucial, especially in the case of deflation.
  • A price index is the normalized weighted average of price relatives for goods during an interval of time. Typically it is reported as a percentage

• The trade balance is the gap between the value of export and imports. A country has a trade surplus if it exports more than it import. The country has a trade deficit if it imports more than it exports.

• The trade balance is calculated using imports and exports

• The Gross Domestic Product - is the value of all final goods and services produced within a country in a given year.. It does not take into account who owns the means of production.

• GDP can be measured in a few ways

  • The total monetary value consumers purchase in the economy; In this case, GDP is equal to the following

  • The total monetary value producers make in the economy; We exclude intermediate goods from the count and only count final goods and services which are directly sold for consumption, investment, government, and trade.

  • The total national income

• A recession is a significant decline in real GDP. A depression is a lengthy and deep recession.

  • Recessions are associated with unemployment as firms cut costs and slow down production

• GDP Per Capita is a way of comparing the GDPs of two economies, accounting for the populations of each economy

  • GDP Per Capita only gives a rough idea on the differences in standards of living across countries. However, higher GDP per capita = better standards of living = higher income.
  • GDP per capita does not address issues of income inequality.

• GDP is limited as a measure of quality of life

  • It doesn’t capture unpaid work or leisure time
  • It doesn’t account for quality of living as a result of the government’s expenditures
  • It doesn’t account for innovation and its effects.
  • It doesn’t account for unforeseen disasters and could even see these as a “good” thing because of a spike in economic performance.
  • It doesn’t account for the actual social welfare of goods that are being sold.

• The Gross National Product is the total value of all the final products and services turned out by means of production owned by the country’s residents. We can count foreign assets for as long as they are owned by a national resident.

• Net National Product - the GNP less how much physical capital is worn out because of aging via depreciation.

• The potential GDP is the amount of real GDP an economy can produce by fully employing its existing levels of labor and capital in the context of the existing market.

• The standardized employment budget is the budget deficit or surplus if the economy were at potential GDP.

Inflation §

• Inflation - the general and ongoing rise in the level of prices in an economy across many industries.

  • Changes in the prices of goods for which people spend a larger share of their incomes will matter more than changes in the prices of goods for which people spend a smaller share of their incomes. It is for this reason we use a weighted average of the prices of the items consumers typically buy.

  • Instead of using nominal prices, we use price indices to report average changes in the relative price. It is obtained as follows (relative to a reference price like the price at a certain year)

    • Price indices make relative changes more apparent.

  • Inflation rate is calculated as follows where is price index.

• Inflation is caused by too many dollars chasing too few goods. If we are to avoid inflation, the amount of purchasing power in the economy must grow at roughly the same rate as the production of goods

• The Consumer Price Index is a measure of inflation based on the purchases of the average family of four.

• Caveat: The change in the buying cost of goods and service is not the same as the change in cost of living.

  • Substitution Bias - the rise in the price of a fixed basket of goods over time tends to overstate the rise in the cost of living because it does not take into account that a person can substitute goods
    • Generally, goods with generally rising prices become less important in the basket.
    • Conversely, goods with generally falling prices become more important in the basket.
  • Quality / New Goods Bias - the rise in the price of a fixed basket of goods over time tends to overstate the consumer’s true cost of living.
    • It could be the case that rising prices are due to new goods in the market which the old fixed basket does not include.

• Core Inflation Index - derived from the CPI, however it excludes volatile economic variables. This is the preferred gauge for making policy changes.

• If the basket of goods chosen for calculating inflation is not reflective of the demographic, use a new index

  • Producer Price Index - based on prices paid for supplies and inputs by producers
  • International Price Index - based on the prices of exported and imported merchandise
  • Employment Cost Index - based on wage inflation
  • GDP deflator - based on all the GDP components and is based on what the GDP would have been worth using the base year’s prices

• The velocity of money describes how quickly it circulates throughout the economy

  • The basic quantity equation of money is a rearrangement of the above equation.

Links §

• Shapiro, MacDonald and Greenlaw - Ch 19, 22