MACROECONOMICS

Economics
TOPIC 1:
INTRODUCTION TO MACROECONOMICS AND
MEASURING NATIONAL INCOME
Learning Objectives
 Discuss the Goals of Macroeconomists
 Define Gross Domestic Product (GDP)
 Define Gross National Product (GNP)
 Discuss two approaches of measuring GDP
 Distinguish between Nominal GDP and Real GDP
 Explain the limitations of using real GDP to measure standard of
living
 Measuring Economic Growth Rate
 Discuss the Business Cycle
 The Goal of Macroeconomists
The goal of macroeconomists is to explain what
influences the pace of:
- Economic growth
- Economic fluctuation
- Unemployment
- Inflation

LO1
 Gross Domestic Product (GDP)
Measure of the total market value of all final goods and services
produced within the borders of a country during a specific
period of time, typically a year.
Note:
- Final goods and services are purchased by the end-users.
- GDP exclude the value of intermediate goods: refers to product
that are purchased for further processing or manufacturing.
- GDP exclude second hand sales (i.e. Used car)

LO1
 Gross Domestic Product (GDP)
Measure of the total market value of all final goods and services
produced within the borders of a country during a specific
period of time, typically a year.
Note:
 Final goods and services are purchased by the end-users.
 GDP exclude the value of intermediate goods: refers to
product that are purchased for further processing or
manufacturing.
 GDP exclude second hand sales (i.e. Used car)

LO1
 Gross National Product (GNP)
GNP measures the total market value of all final goods
and services produced by domestic residents in a given
period of time, regardless where they are produced,
within the borders of the country or abroad.

GNP = GDP + Factor income from abroad – Factor income to

abroad
Two Approaches to GDP
Income approach
◦ Sum of total income that firms pay households for factors of
production they hire.

GDP = Total Income = Wages + rental income + interest income +

profit

Expenditure approach
◦ Sum of all the spending on final goods and services

GDP = Aggregate Expenditure =Consumption + Investment +

Government expenditure + (Export – Import)
Nominal vs. Real GDP
Nominal GDP
◦ Measures the market value of all final goods and services
using the current year price.
◦ Change in nominal GDP can be due to change in price and
output
Real GDP
◦ Measures the market value of final goods and services using
the base year price
◦ Change in real GDP reflects change in output only

◦ Real GDP = (Nominal GDP/Price Index)*100

 Limitations of using real GDP to measure
standard of living

 Household production are not included

 Does not consider leisure time
 Does not consider health and life expectancy
 The underground economy are not included
 Does not consider environment issues
 Does not consider the distribution of the output/income
 Does not consider political freedom and social justice

LO4
 Economic Growth
GDP growth rate
= (GDP current year - GDP previous year) X 100%
GDP previous year

LO1
 Factors contributing to Economic Growth
Factors contributing to economic growth:
◦ Technological advance – innovative techniques and new
managerial methods

◦ Quantity of capital

◦ Education and training – increase knowledge and skills of

workers
 The Business Cycle
Business cycle refers to alternating increases and decreases
in economic activity over time
Four Phases of the business cycle
◦ Peak
◦ Recession
◦ Trough
◦ Expansion
 The Business Cycle
Peak

Growth
Real GDP per Year

Peak
Trend

Trough

Recession Recovery

0
Time