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Macroeconomics

By Yeonwoo, Nil, Lou and Gui

GDP & GNI

Citations

Macro vs. Micro

Micro = specialized, specific markets

Macro = study of entire economy

Macro

What

is Macroeconomics

Micro

What do they involve?

Real Life Examples of Micro vs. Macro

MICROECONOMICS:

2019 U.A.E tax on fizzy drinks:

- 50% additional tax to reduce consumption

- Focused on strict market/product

- Carry various externalities

- Carry various elasticities

MACROECONOMICS:

2019 increase in Boeing sales in US caused GDP to grow 2.1% in 3rd quarter:

- 4th highest US export

- Effect of companies on nation's economy

- More employment, taxes, revenue

- Growing GDP

What are output gaps?

- Also known as GDP gaps

- Difference between ACTUAL output and POTENTIAL output

- Measured with ACTUAL - POTENTIAL

Positive & Negative Output gaps

Output is the quantity of goods produced in a given time frame by any type of firm.

Positive-Negative

Positive

- A positive occurs when actual output is GREATER than potential output.

- This will occur when economic growth is ABOVE the *long run trend rate* --> during economic BOOM.

- With a positive output gap, there will be inflationary pressures

*Long run trend rate is average sustainable rate of economic growth over a period of time.

Reasons for positive gap:

- Employees working overtime

- Capacity utilisation

- Increase in effeciency (PPC)

Negative

- Negative output occurs when actual output is LESS than potential output.

- When actual output is less than what the current economy could POTENTIALLY produce at FULL capacity.

- Occurs BELOW long run trend --> during economic RECESSION

Reasons for negative gap:

- Weak demand

- Increase in UNEMPLOYMENT

- Low economic growth

- May cause deflation

Real Life Examples

Negative:

Positive:

- Actual GDP in the U.S. was $20.66 trillion through third quarter of 2018

- Potential GDP for the U.S. in the third quarter of 2018 was $20.28 trillion

- THUS --> US had positive output gap of +1.8%

- In Q4 of 2018, Brazil's GDP has 10% (1.1x) increase

- As of Q1 2019, this GDP had grown 0.5x

- Brazil fell into small recession / negative output gap for few moths

- Due to political tension when President Bolsonaro replaced Temer

What is National Income

National Income

- National Income refers to the money value of all the goods and services produced in a country during a financial year.

- AKA --> Financial value of final outcome of all economic activities of the nation in a year.

- National income is broken down in 5 MAJOR Classes: Salaries, Gross Trading Profits, Capital Consumption Allowance, Income of Self-Employed, Imputed Income.

The 5 Major Classes

The 5 Major Classes

Salaries = Also called "regular" income; Main component of country's NI.

This includes gross salary and compensation before deduction of income tax and social security e.g. policemen, teachers, etc.

Gross Trading Profits = In­comes of privately and publicly owned producers who sell their goods and services in the market; Essentially businesses/companies

Capital Consumption Allowance (CCA) = The amount of money a country has to spend each year to maintain its current level of economic production. Used to calculate if country's capital stock is increasing --> affects living standards.

Income of Self-Employed = Incomes of self-employed such as farmers, doctors, lawyers, traders, etc. Also includes income from business with full liability

Imputed Income = The value of any benefits or services provided to an employee. Typically fringe benefits such as: Medical insurance, company car, employee discounts etc.

How to Measure NI

How to Measure National Income

Consumer spending = household/family spending

Investments = spending by firms

(X-M) = Foreigner spending on exports - local spending on imports --> NET EXPORTS

Net National Income- Why?

Throughout the course of a year a country's capital stock will lose some of its value`-depreciation of capital .

  • wear and tear as machinery is used
  • damage to capital equipment
  • technology might make machinery obsolete

Capital gets "used up" and the GDP does not take into account this depreciation of capital. The measure that does take this into account is called net national income (NNI) which is simply gross national income minus depreciation (capital consumption).

Even though NNI gives a more realistic view of the real economic activity of a country it is very difficult to account for depreciation.

Why is net national income measured?

National Income- Why?

- Can be used as a report card for countries: Economic growth is stated as one of the government's objectives. Economic growth is an increase in a country’s national income overtime. Therefore, people use the statistics to judge whether or not a government has been successful at achieving this.

- To develop gov policies for countries (depending on report card results they adjust or make new policies)

- Businesses use data to make forecasts about future demand

- Economists use data to develop models and forecasts of future

- To analyze the performance of a country overtime

- To evaluate the standard of living of a country- because rising incomes accounts as basis for the quality of life in a country

- To compare different countries

Why is national income measured?

Limitations

Unrecorded or under recorded economic activity:

National income accounts can only record economic activity that has been officially recorded.

Developing countries- much of this work goes unrecorded. I.e with food where farmers grow their own food

Although estimates of this value are made, it is likely that these GDP values are undervalued. This makes comparisons between countries quite difficult.

Hidden economy :

- Work goes unrecorded as it is illegal.

- Also includes work that is legal, but that people do illegally. I.e foreign workers who do not have appropriate work permits for things such as cleaning, building etc, their work will go unrecorded.

- Work that is unrecorded because people want to evade paying taxes.

I.e. high tax on cigarettes, gives incentive for consumers to buy them illegally to avoid paying the indirect tax.

- High taxes (both direct and indirect) + government health and safety regulations, gives employers the incentive to avoid ‘official’ economy and hire workers unofficially.

- May accept to do work and get payment by cash then can avoid claiming the income officially and avoid taxes.

- Statisticians try to estimate the extent of the hidden economy.

- Greece amounts to 21.5% of hidden economy in 2017

What are limitations to national income data ?

Limitations

Limitations pt.2

Inaccuracies

Data to collect national income comes from a wide variety of sources. I.e tax claims by households and firms, output data and sales data. Increased accuracy after a lag time as they are revised when additional data is included.

External costs

GDP figures does not take into account costs of resource depletion

GDP figures do not make deductions for the negative consequences of air and water pollution of traffic congestion- bc they are external costs.

These external costs are almost certain to compromise quality of life even though GDP increases

Other quality of life concerns

GDP could grow as people are working longer hours or taking less holidays

Even though they might earn a higher income, they do not get to enjoy a higher standard of living.

What is the business cycle?

The business cycle is the periodic fluctuations in economic activity measured by changes in real GDP.

The phases of the business cycle are known as boom, recession, trough, and recovery.

Recovery phase: economic expansion, with GDP increasing at rising rate. Driven by an increase in total/aggregate demand as households/businesses are encouraged to spend more. Firms increase output levels and take on more employees, reducing unemployment rates.

Boom: increasing aggregate demand leads to an increase in average prices. Inflationary pressure will build up and rate of growth of GDP will fall as the economy nears its potential output.

Recession: Begins with policies in place to slow down growth of economy, possibly causing a fall in total demand. These are periods of contraction. Unemployment rises, production slows down, sales start to drop because of a decline in demand, and incomes become stagnant or decline.

Trough

This period marks the end of the depression as contraction ends, leading an economy into the next step: recovery.

Business cycle and NI overtime

National Income overtime

Since national income is measured primarily with GDP, the effects business cycle highlights on GDP will be the same for national income.

The business cycle says that real GDP increases overtime, if nation's objective of economic growth is met. However, it goes through fluctuation phases where the real GDP would decrease/ increase overtime.

Overtime, National income would increase, as well as decrease, depending on which phase it is at.

Expansionary phase:

- National income is rising

- The economy has a steady flow in the money supply and investment is booming.

- Economic growth is achieved (and implications associated)

Contraction phase (when real GDP decreases over time):

- National income falls as GDP falls.

- Import spending may fall as people can afford fewer imported goods and

services.

- Fall in economic growth and unemployment rises

Relations to NI?

What are government objectives?

There are 4 macroeconomic objectives that the government should aim to achieve:

Government Objectives

If all of these objectives are met, that means the economy is stable.

Low Rate of Unemployment

1. Unemployment

Subtopic 1

A person is considered unemployed when they're part of the labor force and seeking work but cannot find a job.

It's quite hard to measure the unemployment rate as there are few inaccuracies, such as: discouraged workers, underemployment, and ethnic disparities.

Consequences:

There are costs for both the society and the government:

- Loss of GDP, tax revenue and individual incomes for the government

- Increased crime and stress level for individuals

- Personal costs for unemployed people (Loss of income and personal values)

Low and Stable Rate of Inflation

2. Inflation (and Deflation)

Subtopic 1

Inflation is defined as a sustained increase in the general price level of an economy. Deflation is defined as a negative rate of inflation (i.e. where prices are falling). Low AND stable inflation benefits by encouraging saving and investment as well as making exports relatively more competitive.

Consequences:

For high inflation:

1. Uncertainties in the future for businesses

2. More costs for low-income households

3. Decrease in saving values (Lower interest rates)

4. Damaging the export competitiveness (Lowers demand for exports)

For high deflation:

1. High rate of unemployment

2. Bankruptcies

To achieve low inflation as much as possible:

- Policies can be applied by banks to increase interest rates.

- 'Fiscal Policy': The government can moderate inflationary pressures by increasing income tax, reducing consumer spending

Stable Economic Growth

3. Economic Growth

Subtopic 1

Economic growth is defined as an increase in real output over time. It is measured by changes in real GDP.

Economic growth is caused by two main factors:

An increase in aggregate demand (AD)

An increase in aggregate supply (productive capacity)

The benefits for high and stable economic growths are:

1. Higher average incomes (Better standards for living)

2. Lower unemployment (Firms tend to employ more workers)

3. Benefits for the government; High tax revenues, less cost for unemployment

4. Encourages firms to invest (to meet future demand)

Equity in Distribution of Income

4. Distribution of Income

Subtopic 1

Incomes should be distributed 'fairly'

- There shouldn't be a few people earning a lot while too many people earn too little.

- The perfect equity distribution of income cannot be achieved in a capitalist system;

- This should not cause much problems as long as the low-income earners do not live in poverty.

Poverty:

- Poverty can be two different types:

- Absolute poverty refers to people earning below internationally defined levels of income.

- Relative poverty refers to a low level of income that is country-specific and relative to average earnings in that country.

- Low income, lack of capital, and unemployment leads to poverty.

- Poverty then brings many other consequences such as:

- Lower economic growth

- Lower living standards, including healthcare and education

Conflict Between Objectives

Inflation vs. Economic Growth & Unemployment

Subtopic 1

Increase in economic growth increases the chance of inflation to occur. (The AD increases faster than the AS).

- The economic growth decreases unemployment.

- As unemployment falls, an increase in wage can occur

- Leads to inflation; economic stability is not achieved

- Rapid economic growth can also increase commodity prices, also contributing to inflation.

As unemployment decreases, the wage increases due to labor shortages; inflation occurs.

Graph showing an increase in GDP (Increase in AD) but also an increase in inflation rate.

How does the economy flow?

In the cirfular flow of income model there are two sectors. Households are the people who buy the nation's output of goods and services and the owners of all of the economy's factors of production. They supply these factors of production to the firms and, in turn, they receive payment for their factors. The firms hire the factors of production from households and use these factors to produce the nations output of goods and services.

Circular Flow of Income

Why do economists measure gross national income as well as GDP?

Gross national product (GNP)/gross national income (GNI) is the total income that is earned by a country's factors of production regardless of where the assets are located.

GNI = GDP + net property income from abroad

For example, if an Indian multinational company (MNC) is operating in Canada and earning profits, then this income is included in the Canadian GDP and not in the Indian GDP. If the

production takes place on Canadian land then it is recorded on the Canadian GDP.

In the example above, the profits earned by the Indian MNC would be included in Canada's GDP but not Canada's GNI because Canada does not own the assets. Similarly, Canada's GDP would not include profits earned by a Canadian MNC operating in Brazil but its GNI would include such profits. Thus, GNI is equal to GDP plus income earned from assets abroad minus income paid to foreign assets operating domestically. The income earned by assets held in foreign countries is known as property income from abroad and the difference between income earned from assets abroad minus income paid to foreign assets operating domestically is known as net property income from abroad.

Why do economists measure gross national income as well as GDP?

Gross national product (GNP)/gross national income (GNI) is the total income that is earned by a country's factors of production regardless of where the assets are located.

GNI = GDP + net property income from abroad

For example, if an Indian multinational company (MNC) is operating in Canada and earning profits, then this income is included in the Canadian GDP and not in the Indian GDP. If the

production takes place on Canadian land then it is recorded on the Canadian GDP.

In the example above, the profits earned by the Indian MNC would be included in Canada's GDP but not Canada's GNI because Canada does not own the assets. Similarly, Canada's GDP would not include profits earned by a Canadian MNC operating in Brazil but its GNI would include such profits. Thus, GNI is equal to GDP plus income earned from assets abroad minus income paid to foreign assets operating domestically. The income earned by assets held in foreign countries is known as property income from abroad and the difference between income earned from assets abroad minus income paid to foreign assets operating domestically is known as net property income from abroad.

Why is it necessary to measure real GDP

Why is it necessary to measure real GDP, not just nominal GDP

Real GDP = Nominal GDP adjusted for inflation

If we were to compare the GDP of a country from one year to another we would have to take into account the fact that prices in the economy are likely to have risen. If prices of goods and services rise (inflation) then this will overstate the value of GDP. That is, GDP will rise, even if there hasn't actually been an increase in economic activity. In order to get a true picture of the change in economic activity we take the nominal GDP, which is the value at current prices, and adjust it for inflation to get the GDP at constant prices. This is done through the use of a GDP deflator and the value is known as real GDP. To compare GDP data over time it is necessary to use the real value so that price changes cannot distort the information.

For example, the United State’s nominal GDP growth was reported 4.003% in December of 2019. The rate of inflation in 2019 was 1.8%. Thus the US real GDP increased 2.1% in the fourth quarter of 2019.

Why is it necessary to measure GDP per capita, not just GDP?

GDP per capita gives an average measure of individual incomes in the economy. It is simply the GDP divided by the size of the population. While the total economic activity of a country is appropriately measured using the GDP figure, if one is to make any judgment about the progress of a country in comparison with other countries in terms of raising living standards then the GDP per capita figure is much more appropriate.

For example, the GDP of China is US$ 5,365 billion, significantly higher than that of Canada, with a GDP of US$ 1 ,5 56 billion. This says that the output of China is approximately three and a half times larger than that of Canada. However, when we take the population into account we find that China's GDP per capita is US$ 3,678, while the GDP per capita of Canada is US$ 45,658. Thus the output per person in Canada is almost twelve and a half times that of China's output per person.

How to interpret GDP data i.e. how to identify from the data

A common error is to interpret a fall in the growth of GDP as a fall in GDP, and therefore a recession. Consider the data for Luxembourg: From 2002 to 2003 the rate of growth of GDP fell from 3.5% to 2%. You must not think that this means that the actual output of GDP was less in 2003 than it was in 2002.

How to interpret GDP data i.e. how to identify from the data,

It means that GDP grew, but at a slower rate than it had the previous year. From 2003 to 2004 the rate of growth increased sharply to about 4.2% and then slowed slightly in the next year to 4%. If it had gone from 3.5% to -2% then this would indicate a recession. However, in all years the GDP of Luxembourg was rising. A recession is a significant decline in economic activity and is indicated by negative value for 6 months.

Citations

https://www.economicshelp.org/blog/6796/economics/difference-between-microeconomics-and-macroeconomics/

https://www.imf.org/external/pubs/ft/fandd/2013/09/basics.htm

https://www.khaleejtimes.com/news/general/new-tax-to-help-uae-residents-become-healthy-

https://www.bea.gov/data/gdp

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