Macroeconomics: study on national economy concerned with the allocation of nations

resources.
Objectives: Economic growth -> increase in national output. Employment -> Low
unemployment. Price stability -> Low and stable inflation. External stability -> balance of
payments. Income distribution-> equality.
Circular flow of income model: Two sectors, households and firms. Households: own factors of
production, buy goods and services, receive income (wages, rent, interest, profits). Firms, buy
factors of productions, produce goods and services.
Payments for factors of production: wages, rent, interest, profit.
Leakages and injections:
Savings: Households can save, saving: foregoing current consumption to allow for consumption
in the future. It is a leakage, it causes less income circulating, firms will sell less and will reduce
their output, they will use less factors of productions and pay less income.
Investments: injection into the flow of income. Firms borrow money from financial institutions,
will use the money to increase their stock and expand output.
Imports: leakage, income flows out, income does not return to firms.
Exports: injection, income not from households.
Taxes: leakage.3 rd sector, government.
Government spending: injection.
Transfer payment: payments to individuals, not a result of an increase in output. Ex: pensions,
child allowance.
FOUR SECTORS: households, firms, foreign sector, government sector.
Equilibrium: leakages = injections. Without a corresponding move in leakages or injections: +
leakages, - nat output. + Injections, + nat output.
National income: GDP (gross domestic product, total value of spending in the economy)
calculate with 3 different methods: output method, summing all of the value added by all the
firms in an economy (different sectors) minus the cost of input (avoid double count), income
method: value of all the incomes, expenditure method, summing up spending, C(consumption)
+ I (investment)+ G (government) + (X (exports) M (imports) ) .
National income = National output = National expenditure
GDP and GNP (gross national product): GDP does not consider who owns the company, GNP,
total income earned by a countrys factors of production, does not consider where they are
producing. GNP= GDP + net property income from abroad.
NNP (net national product) = GNP depreciation. Depreciation, the loss of some value of
countrys capital stock in a year.
Nominal GDP and real GDP. Real GDP = Nominal GDP adjusted for inflation. Prices of goods
and services rise, this will overstate GDP, it will rise even if it hasnt been an increase in
economy.
GDP per capita: total GDP divided by the size of population.
National income statistics: Report cards for a country, develop policies, develop models, make
forecasts about demand or future, analyse, evaluate standard of living, and compare countries.
Limitations of the data: inaccuracies (+ time + accurate), unrecorded or under-recorder
economic activity (hidden economy such as illegal work and unrecorded not considered),
external costs (GDP does not consider the loss of natural resources), other quality of life
concerns (GDP ignores for example, people working extra hours, taking fewer holidays),
composition of output (do goods benefit the consumers??)
Measuring economic development:
Economic growth is an increase in the real output of an economy over time. Economic
development is + complex, it is about increasing peoples freedoms, reducing poverty, public
provision of education, health care, maintenance of law and order, guarantee of civil liberties,
opportunity of civic participation.
HDI (human development index) takes into account three variables, life expectancy, adult
literacy rate, GDP per capita. Measures from 0 -1, 1= high development. It is used to compare
a countrys rank according to HDI and GDP per capita and draw conclusions.
HDI not sufficient as the only guide to a countrys development. There are other indexes:
GDI (gender related development index) takes into account inequalities in indicators as HDI for
men and women.
GEM (gender empowerment measure) measures the extent to which women are able to
actively participate in economic and political life.
HPI (human poverty index) looks at the proportion of people who are deprived of the
opportunity to reach a basic level in each area the HDI measures. It is a %, + % + poverty.
Lorenz curve: Graph, cumulative percentage of total population in quintiles (x) and cumulative
percentage of total income earned by quintiles (y).
Gini index: summarises information presented in Lorenz curve. It is a ratio of the area between
the line of equality and a countrys Lorenz curve and the total area under the line of equality.
Other indicators: mortality rate, children underweight, literacy, internet users, level of
education, access to a water source.
Economic growth generates many costs: environmental, social, commuting and of automobile
accidents.