Macroeconomics (from the Greek prefix makro- meaning "large and economics) is a branch of economics dealing with the

performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. This includes national, regional, and global economies. With microeconomics, macroeconomics is one of the two most general fields in economics. Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors asnational income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. Macroeconomic policy instruments refer to macroeconomic quantities that can be directly controlled by an economic policy maker. Instruments can be divided into two subsets: a) Monetary policy instruments and b) Fiscal policy instruments. Monetary policy is conducted by the central bank of a country or supranational region (Euro zone). Fiscal policy is conducted by the Executive and Legislative Branches of the Government and deals with managing a nations Budget. In formal terms, macroeconomics is the study of economic activity and prices in the overall economy of a nation or a region. Macroeconomic research draws heavily on microeconomics, which looks at the behavior of individual firms, households, or markets.1 Macroeconomists, and in turn macroeconomic models, focus in particular on three economic data series: real GDP, the unemployment rate, and the inflation rate. We look at each in turn. REAL GDP. Real Gross Domestic Product (GDP) measures the output of actual goods and services produced in an economy over a fixed period, usually a year. Real GDP grows unevenly over time and fluctuates around a trend. Fluctuations in real GDP are called a business cycle, which represents recurrent up and down movements in economic activity that differ in how regular they are. When economic activity declines and real GDP per person falls, there is a recession. When the decline in real GDP is severe, a recession is classified as a depression. UNEMPLOYMENT RATE. The unemployment rate measures the percentage of workers looking for work, but who do not have jobs, at a particular point in time. Notice that the unemployment rate always remains well above zero, indicating that even during good times, there is always some unemployment. INFLATION. Inflation or the inflation rate tells us how rapidly the overall level of prices is rising. The inflation rate is on average about zero, and sometimes is negative, a situation referred to as deflation. A changing price level complicates decision making for consumers, businesses, and government, and this uncertainty can hamper economic growth. What makes some countries more prone to inflation than others? Some countries have experienced super high inflation rates, which we refer to as hyperinflation. Zimbabwe is the most recent extreme example with its inflation rate soaring to over two million percent at an annual rate. Gross domestic product (GDP), the total value of goods and services produced in an economy, is the broadest measure of economic activity. There are several alternate definitions and approaches for measuring GDP. Our initial definition of GDP is in terms of goods and services produced. We will also define GDP in terms of expenditure and income: GDP is the total income of everyone in the economy, and is also the total amount of expenditure for goods and services in the economy.

National income accounting, an accounting system to measure economic activity and its components, shows the relationship among the expenditure, income, and production methods of measuring GDP. We express national income accounting in the fundamental identity of national income accounting: Total Production = Total Expenditure = Total Income (1) Equation 1 says that any of the three approachesproduction, expenditure, or incomeshould give the same answer when computing GDP. I. In the production approach, we define GDP as the current market value of all final goods and services newly produced in the economy during a fixed period of time. Production of goods and services typically occurs in stages. We classify goods and services into two types: intermediate goods and services are used up entirely in the stages of production, whereas final goods and services are the end goods in the production process. One important technique for calculating the value of all final goods and services produced in the economy is with value added, the value of a firms output minus the cost of the intermediate goods purchased by the firm. CAPITAL GOODS AND GDP. Capital good, is a good that is produced in the current period to be used in the production of other goods that is not used up in the stages of production. New capital goods is classified as final goods and thus is included in GDP. INVENTORY INVESTMENT AND GDP. Inventoriesfirms holdings of raw materials, unfinished goods, and unsold finished goodsare another type of good that are not used up in the current period. The change in inventories over a given period of time, say a year, is referred to as inventory investment is included in GDP: an increase in the level of inventories means that there has been an increase in economic activity. Newly Produced Goods and Services GDP should only include goods and services that are newly produced in the current period; it excludes those that were produced in previous periods. Fixed Period of Time a year, a quarter. II. Second technique for computing GDP: with the expenditure approach, GDP is the total spending on currently produced final goods and services in the economy. The national income accounts divide spending into four basic categories: consumption expenditure, investment, government purchases (spending), and net exports. The national income accounts add up these four categories of spending to determine GDP in the national income identity. Y = C + I + G + NX Consumption expenditure (also referred to as personal consumption expenditure and consumption) is the total spending for currently produced consumer goods and services. Investment is spending on currently produced capital goods that are used to produce goods and services over an extended period of time. We can break it down into three basic categories: 1. Fixed investment, also referred to as business fixed investment, is spending by businesses on equipment (machines, computers, furniture, and trucks) and structures (factories, stores, and warehouses).

2. Inventory investment is the change in inventories held by firms. If inventories are increasing, inventory investment is positive, but if they are decreasing, inventory investment is negative. 3. Residential investment is household purchases of new houses and apartments. (We do not include purchases of existing housing in GDP because they were produced in earlier periods.) Houses and apartments are capital goods for households because they produce a service (a roof over our heads) over an extended period of time. Government purchases is spending by the governmentwhether federal, state, or localon currently produced goods and services. Government purchases that appear in GDP includes purchases of goods (highways, military equipment, and computers) and services (rangers for national parks, police, health care, and education). Government purchases for short-lived goods and services like health care and police are government consumption, whereas spending for capital goods like buildings and computers represents government investment. Net exports are exports minus imports: that is, the value of currently produced goods and services exported, or sold to other countries, minus the value of goods and services imported, or purchased from abroad III. Income approach, involves adding up all the incomes received by households and firms in the economy, including profits and tax revenue to the government. Categories of Income 1. Compensation of employees includes both the wages and salaries of employees (excluding the selfemployed), and employee benefits, which include payments for health insurance and retirement benefits. 2. Other income includes income of the self-employed, income that individuals receive from renting their properties (which includes royalty income on books and music), and the net interest earned by individuals from businesses and foreign sources (interest income minus the interest that they pay). In addition, the other income category includes indirect business taxes like the sales tax because these taxes need to be added to net income of business to yield their total income. 3. Corporate profits is made up of the profits after (income) taxes of corporations. 4. Net factor income equals wages, profits, and rent (called factor income) paid to residents by foreigners minus factor income paid by residents to foreigners. When residents get more factor payments from abroad than they pay out, their overall income goes up. 5. Depreciation is the loss of value of capital from wear and tear or because capital has been scrapped because it is obsolete. To obtain the net income of businesses, depreciation was subtracted out, so in order to compute gross income, we have to add it back into GDP. If depreciation is not added back into GDP, then it is called net domestic product. Nominal Variables So far, all of the income, expenditure, and production variables are measured at current market (nominal) prices and are referred to as nominal variables. Market prices allow to sum up different goods and services to get a measure of GDP, which more accurately should be called nominal GDP. However, nominal variables, such as nominal GDP, have one huge disadvantage: they dont tell us what is

happening to economic activity over time if prices are changing. An increase in nominal GDP, could be rising because the quantity of goods and services are rising, or alternatively because the prices of goods and services are rising, or both. Real Variables A measure of an economic variable in terms of quantities of actual goods and services is called a real variable. Real GDP is the GDP measure that is adjusted for changes in the average level of prices in the economy, referred to as the price level. Real GDP tells us the total amount of output (actual goods and services) produced in an economy. The relationship between real GDP and nominal GDP is following: Real GDP = Nominal GDP / Price Level or Nominal GDP = Price Level * Real GDP Measuring Inflation GDP Deflator From previous equation the price level is the ratio of nominal GDP to real GDP: Price Level = Nominal GDP / Real GDP Nominal GDP divided by real GDP is known as the GDP deflator or the implicit price deflator for GDP. The name deflator comes from the fact that, this measure deflates nominal GDP to obtain real GDP. The GDP deflator is always calculated so that it equals 100 in the base year. We thus calculate the GDP deflator for a given year as follows:

For example, if nominal GDP in 2013 is $15 trillion and real GDP in 2005 dollars is $12 trillion, then the GDP deflator for 2013 is 125, which means that the price level as measured by the GDP deflator has risen 25% from 2005 to 2013.

Another widely used measure of the price level, particularly by the Federal Reserve of USA, is the personal consumption expenditure (PCE) deflator, which is calculated in the same way as the GDP deflator, but only for the personal consumption expenditure component of GDP. Because the PCE is based on the prices of consumer goods, it is closer to measuring what the consumer price index measures, which we will discuss next. Consumer Price Index The consumer price index (CPI) is a measure of the average prices of consumer goods and services, and is calculated monthly. In contrast, the GDP deflator is calculated quarterly or yearly. DETERMINING THE BASKET OF GOODS. National Bureau of Statistics determines what people actually buy with an expenditure survey and then compiles a basket of goods that the average urban consumer buys. Policy and Overstatements of the Cost of Living

The CPI is used in most labor contracts and in determining some government payments, such as Social Security benefits. Substantial measurement errors in the CPI could have important policy implications, particularly if increases in the CPI overstate increases in the cost of living. Consider three scenarios. 1. Suppose the government indexes payments to the CPI, so that payments automatically rise by the same percentage as the CPI. If increases in the CPI overstate increases in the cost of living, there could be substantial overpayments. 2. If the CPI inflation rate overstates the true inflation rate, policymakers may take steps to reduce CPI inflation more than is necessary, say, by overly tightening monetary policy by raising interest rates. 3. If the CPI overstates the increase in the cost of living, households real income will be understated. The CPI may indicate that families are doing worse than is really the case, which could lead to policy actions such as redistributing income through the tax system. Inflation Rate is defined as the percentage rate of change of the price level over a particular period. pt = inflation rate in period t Pt = price level at time t Pt1= price level at time t1 Measuring Unemployment The unemployment rate is one of the most closely followed economic statistics because it provides an indication of what is happening in the labor market and how well the economy is utilizing its resources in this case labor. The unemployment rate (or civilian unemployment rate) is the percentage of people in the civilian population (which excludes those in the military or in prison) who want to work but who do not have jobs and are thus unemployed. The survey classifies each adult (over age 16) in one of three categories. 1. Employed, if the person is working, either full time or part time, during the past week, or was temporarily away from his or her job because of illness, vacation, or the inability to get to work because of bad weather.2. Unemployed, if the person did not work during the past week, but had looked for a job over the previous four weeks, or was waiting to return to a job from which he or she had been laid off.3. Not in the labor force, if the person did not work during the past week and had not looked for a job over the previous four weeks. Those not in the labor force are of two types. Those who would like to work but have given up looking are discouraged workers. The other type is those who voluntarily have left the labor forcesuch as fulltime students, retirees, or people who have chosen to stay at home, either raising children or taking care of the house. The labor force (civilian) is as follows: Labor Force = Number of Employed + Number of Unemployed The unemployment rate is then calculated as follows:

Two other important statistics are the labor-force participation rate, the percentage of the adult civilian population in the labor force,

and the employment ratio, the percentage of the adult civilian population employed,

Measuring Interest Rates Interest rate is the cost of borrowing, or the price paid for the rental of funds.Interest Rates:Prime rate: The base rate on corporate bank loans to prime (credit-worthy) borrowers. It is a good indicator of the cost of business borrowing from banks. Federal funds rate: The interest rate charged on overnight loans between banks (referred to as federal funds because the loans are of deposits that are held at the Federal Reserve). The Federal Reserve targets this rate to conduct monetary policy. London Inter-Bank Offered Rate (LIBOR): The interest rate that banks in London offer each other for inter-bank loans. It is a good indicator of short-term interest rate developments in international markets. Treasury bill rate: The interest rate on U.S. Treasury bills (government bonds with maturities of less than one year). Interest rates on Treasury bills are a general indicator of short-term interest-rate movements. Ten-year Treasury bond rate: The interest rate on U.S. Treasury bonds with ten years to maturity. It is a general indicator of long-term interest rate movements. The real interest rate, which reflects the real cost of borrowing, is likely to be a better indicator of the incentives to borrow, invest, and lend than nominal interest rates. That is, real interest rates appear to be the best guide to how people will be affected by what is happening in credit markets, the markets where households and businesses get funds (credit) from each other. The real interest rate is the nominal interest rate minus the expected rate of inflation.It is a better measure of the incentives to borrow, invest, and lend than the nominal interest rate, and it is a more accurate indicator of the tightness of credit market conditions than the nominal interest rate.