INTRODUCTION

TO
MACROECONOMICS

Faculty Member:
Filda Citra Yusgiantoro, PhD.
 Session 1
Measuring a Nation’s Income

Faculty Member:
Filda Citra Yusgiantoro, PhD.
Microeconomics vs Macroeconomics
• Microeconomics
– Study of how households and firms
• Make decisions
• Interact in markets

• Macroeconomics
– Study of economy-wide phenomena
• Including inflation, unemployment, and economic
growth
 What is GDP?
• Gross Domestic Product (GDP)
– Measures total income of everyone in the economy.
– Also measures total expenditure on the economy’s
output of goods and services.

Income = Expenditure

– For the economy as a whole

– Because every dollar a buyer spends is a dollar of
income for the seller.
 The Circular-Flow Diagram
• The Circular-Flow Diagram
– Simple depiction of the macroeconomy

• Assumptions:
– Markets
• Goods and services
• Factors of production
– Households
• Spend all of their income
• Buy all goods and services
– Firms
• Pay wages, rent, profit to resource owners
 The Circular-Flow Diagram
Households:
 own the factors of production,
sell/rent them to firms for income
 buy and consume goods & services

Firms Households

Firms:
 buy/hire factors of production,
use them to produce goods
and services
 sell goods & services
 The Circular-Flow Diagram
Revenue (=GDP) Spending (=GDP)
Markets for
G&S Goods &
G&S
sold Services bought

Firms Households

Factors of Labor, land,

production Markets for capital
Factors of
Wages, rent, Production Income (=GDP)
profit (=GDP)
 What This Diagram Omits
• The government
– Collects taxes, buys goods and services
• The financial system
– Matches savers’ supply of funds with
borrowers’ demand for loans
• The foreign sector
– Trades goods and services, financial assets, and
currencies with the country’s residents
 Gross Domestic Product (GDP) Is…
• …the market value of all final goods & services
produced within a country in a given period of
time.

• Goods are valued at their market prices, so:

– All goods measured in the same units
(e.g., dollars in the U.S.)
– Things that don’t have a market value are excluded,
e.g., housework you do for yourself.
 Gross Domestic Product (GDP) Is…

• …the market value of all final goods & services

produced within a country in a given period of
time.
– GDP includes all items produced in the economy
and sold legally in markets
– GDP excludes most items produced and sold
illicitly. It also excludes most items that are
produced and consumed at home.
 Gross Domestic Product (GDP) Is…

• …the market value of all final goods & services

produced within a country in a given period of
time.
– Final goods: intended for the end user
– Intermediate goods: used as components
or ingredients in the production of other goods
– GDP only includes final goods—they already
embody the value of the intermediate goods
used in their production.
 Gross Domestic Product (GDP) Is…

• …the market value of all final goods & services

produced within a country in a given period of
time.
– GDP includes tangible goods
(ex: DVDs, mountain bikes, soft drinks)
– and intangible services
(ex: dry cleaning, concerts, cell phone service).
 Gross Domestic Product (GDP) Is…

• …the market value of all final goods & services

produced within a country in a given period of
time.

– GDP includes currently produced goods, not goods

produced in the past.
 Gross Domestic Product (GDP) Is…

• …the market value of all final goods & services

produced within a country in a given period of
time.
– GDP measures the value of production that occurs
within a country’s borders, whether done by its
own citizens or by foreigners located there.
 Gross Domestic Product (GDP) Is…
• …the market value of all final goods & services
produced within a country in a given period of
time.

– Usually a year or a quarter (3 months)

 GDP Does Not Value:
– The quality of the environment
– Leisure time
– Non-market activity, such as the child care
a parent provides at home
– An equitable distribution of income
 The Four Components of GDP
• Four components:
– Consumption (C)
– Investment (I)
– Government Purchases (G)
– Net Exports (NX)

• These components add up to GDP (denoted Y):

Y = C + I + G + NX
 Consumption (C)
• Consumption, C
– Spending by households on goods and services
• Goods: durable goods, nondurable goods
• Services: intangibles, spending on education
– Exception: purchases of new housing
 Investment (I)
• Investment, I
– Purchase of (capital) goods that will be used to
produce other goods and services in the future
• Business capital: business structures, equipment, and
intellectual property products
• Residential capital: landlord’s apartment building; a
homeowner’s personal residence
• Inventory accumulation

“Investment” does not mean the purchase of

financial assets like stocks and bonds.
 Government Purchases (G)
• Government purchases (G)
– All spending on the goods and services
purchased by the government
– By local, state, and federal governments

– Excludes transfer payments

• Such as Social Security or unemployment insurance
benefits.
• They are not purchases of goods and services.
 Net Exports (NX)
• Net exports, NX = Exports – Imports

– Exports:
• Foreign spending on the economy’s goods and services
– Imports:
• Spending on foreign goods by domestic residents
 Active Learning 1
GDP and its components
In each of the following cases, determine how much GDP
and each of its components is affected (if at all).
A. Debbie spends $300 to buy her husband dinner at the
finest restaurant in Boston.
B. Sarah spends $1200 on a new laptop to use in her
publishing business. The laptop was built in China.
C. Jane spends $800 on a computer to use in her editing
business. She got last year’s model on sale for a great
price from a local manufacturer.
D. General Motors builds $500 million worth of cars, but
consumers only buy $470 million worth of them.
 Active Learning 1
Answers

A. Debbie spends $300 to buy her husband dinner at

the finest restaurant in Boston.
Consumption and GDP rise by $300.

B. Sarah spends $1200 on a new laptop to use in her

publishing business. The laptop was built in China.
Investment rises by $1200, net exports fall by $1200,
GDP is unchanged.
 Active Learning 1
Answers
C. Jane spends $800 on a computer to use in her
editing business. She got last year’s model on sale
for a great price from a local manufacturer.
Current GDP and investment do not change,
because the computer was built last year.

D. General Motors builds $500 million worth of cars,

but consumers only buy $470 million of them.
Consumption rises by $470 million, inventory
investment rises by $30 million, and GDP rises by
$500 million.
 Nominal GDP vs Real GDP
• Total spending rises from one year to the next
– Economy — producing a larger output of goods and services
– And/or goods and services are being sold at higher prices

• Nominal GDP
– Valued at current prices
– Not corrected for inflation

• Real GDP
– Valued at constant prices
– Designate one year as base year
– Not affected by changes in prices
– Is corrected for inflation
 Example – Computing Nominal GDP
Compute nominal GDP in each year:
Increase:
2014: $10 x 400 + $2 x 1000 = $6,000
37.5%
2015: $11 x 500 + $2.50 x 1100 = $8,250
30.9%
2016: $12 x 600 + $3 x 1200 = $10,800

Pizza Latte
year P Q P Q
2014 $10 400 $2.00 1000
2015 $11 500 $2.50 1100
2016 $12 600 $3.00 1200
 Example – Computing Real GDP
Compute real GDP in each year, using 2014 as the
base year:
Pizza $10 Latte $2.00
year P Q P Q
2014 $10 400 $2.00 1000
2015 $11 500 $2.50 1100
2016 $12 600 $3.00 1200
Increase:
2014: $10 x 400 + $2 x 1000 = $6,000
20.0%
2015: $10 x 500 + $2 x 1100 = $7,200
16.7%
2016: $10 x 600 + $2 x 1200 = $8,400
Example – Computing Change in Nominal & Real GDP
• The change in nominal GDP reflects both
prices and quantities.
Nominal Real
year GDP GDP
2014 $6,000 $6,000
37.5% 20.0%
2015 $8,250 $7,200
30.9% 16.7%
2016 $10,800 $8,400

• The change in real GDP is the amount that

GDP would change if prices were constant
(i.e., if zero inflation).
• Hence, real GDP is corrected for inflation.
 The GDP Deflator
• GDP deflator
– Ratio of nominal GDP to real GDP times 100
– Is 100 for the base year
– Measures the current level of prices relative to the
level of prices in the base year
– Can be used to take inflation out of nominal GDP
(“deflate” nominal GDP)

GDP deflator = (Nominal GDP/Real GDP) X 100

 Inflation Rate
• Inflation rate
– Percentage change in some measure of the price
level from one period to the next.

Inflation in year 2 =
(GDP deflator in year 2 – GDP deflator in year 1)
/ GDP deflator in year 1 x 100
 Example – Computing GDP Deflator
• Compute the GDP deflator in each year:
Nominal Real GDP
year GDP GDP Deflator
2014 $6000 $6000 100.0
14.6%
2015 $8250 $7200 114.6
2016 $10,800 $8400 128.6 12.2%

2014: 100 x (6000/6000) = 100

2015: 100 x (8250/7200) = 114.6
2016: 100 x (10,800/8400) = 128.6
 Active Learning 2
Computing GDP
2014 (base year) 2015 2016
P Q P Q P Q
Good A $30 900 $31 1000 $36 1050
Good B $100 192 $102 200 $100 205

Use the above data to solve these problems:

A. Compute nominal GDP in 2014.
B. Compute real GDP in 2015.
C. Compute the GDP deflator in 2016.
 Active Learning 2
Computing GDP
2014 (base year) 2015 2016
P Q P Q P Q
Good A $30 900 $31 1000 $36 1050
Good B $100 192 $102 200 $100 205

A. Compute nominal GDP in 2014.

$30 x 900 + $100 x 192 = $46,200
B. Compute real GDP in 2015.
$30 x 1000 + $100 x 200 = $50,000
 Active Learning 2
Computing GDP
2014 (base year) 2015 2016
P Q P Q P Q
Good A $30 900 $31 1000 $36 1050
Good B $100 192 $102 200 $100 205

C. Compute the GDP deflator in 2016.

Nom GDP = $36 x 1050 + $100 x 205 = $58,300
Real GDP = $30 x 1050 + $100 x 205 = $52,000
GDP deflator = 100 x (Nom GDP)/(Real GDP)
= 100 x ($58,300)/($52,000) = 112.1
 Case Study
• The GDP data
– Real GDP grows over time
• The real GDP of the U.S. economy in 2015 was more
than four times its 1965 level
• Growth – average 3% per year since 1965
– Growth is not steady
• GDP growth interrupted by recessions
 Case Study

• Recession
– Two consecutive quarters of falling GDP
– Real GDP declines
– Lower income
– Rising unemployment
– Falling profits
– Increased bankruptcies
 Real GDP in the United States

This figure shows quarterly data on real GDP for the U.S. economy since 1965.
Recessions—periods of falling real GDP—are marked with the shaded vertical bars.
 GDP
GDP – “the single best measure of the economic
well-being of a society”
– Economy’s total income
– Economy’s total expenditure
– Larger GDP
• Good life, better healthcare
• Better educational systems
– Measure our ability to obtain many of the inputs into
a worthwhile life
 GDP
• GDP – not a perfect measure of well-being
– Doesn’t include
• Leisure
• Value of almost all activity that takes place outside
markets
• Quality of the environment
– Nothing about distribution of income
 International differences:
GDP & quality of life
• Rich countries — higher GDP per person
– Better
• Life expectancy
• Literacy
• Internet usage
• Poor countries — lower GDP per person
– Worse
• Life expectancy
• Literacy
• Internet usage
 International differences:
GDP & quality of life
• Low GDP per person
– More infants with low birth weight
– Higher rates of infant mortality
– Higher rates of maternal mortality
– Higher rates of child malnutrition
– Less common access to safe drinking water
– Fewer school-age children are actually in school

• Low GDP per person

– Fewer teachers per student
– Fewer televisions
– Fewer telephones
– Fewer paved roads
– Fewer households with electricity
 Table 3 GDP and the Quality of Life

The table shows GDP per person and three other measures of the quality of life
for twelve major countries.
 Other Incomes
• Gross National Product (GNP):
– includes income that Indonesian citizens earn
abroad.
– GNP excludes income that foreigners earn in
Indonesia.

• Net National Product (NNP):

– Total income of a nation’s residents (GNP) – losses
from depreciation (scuh as economy’s stock of
equipment and structures)
 Summary –
Measuring a Nation’s Income
• Gross Domestic Product (GDP) measures a country’s
total income and expenditure.
• The four spending components of GDP include:
Consumption, Investment, Government Purchases,
and Net Exports.
• Nominal GDP is measured using current prices.
• Real GDP is measured using the prices of a constant
base year and is corrected for inflation.
• GDP is the main indicator of a country’s economic
well-being, even though it is not perfect.
 Session 1
Measuring The Cost of Living
Faculty Member:
Filda Citra Yusgiantoro, PhD.
 CPI (Consumer Price Index)
• Consumer price index (CPI)
– Measure of the overall level of prices
– Measure of the overall cost of goods and services
– Bought by a typical consumer
– Computed and reported every month by the
Badan Pusat Statistik (BPS).
 How to calculate CPI?

1. Fix the basket

– Which prices are most important to the typical
consumer
– Different weight
2. Find the prices
– At each point in time
3. Compute the basket’s cost
– Same basket of goods
– Isolate the effects of price changes
 How to calculate CPI?

4. Chose a base year and compute the CPI

– Base year = benchmark
• Price of basket of goods and services in current year
• Divided by price of basket in base year
• Times 100
5. Compute the inflation rate
Inflation rate in year 2 =
(CPI in year 2 – CPI in year 1)/CPI in year 1 x 100
EXAMPLE: basket: {4 pizzas, 10 lattes}
price of price of
year cost of basket
pizza latte
2017 $10 $2.00 $10 x 4 + $2 x 10 = $60
2018 $11 $2.50 $11 x 4 + $2.5 x 10 = $69
2019 $12 $3.00 $12 x 4 + $3 x 10 = $78
Compute CPI in each year
(2017 base year) Inflation rate:
115 – 100
2017: 100 x ($60/$60) = 100 15% = x 100%
100
2018: 100 x ($69/$60) = 115 130 – 115
13% = x 100%
2019: 100 x ($78/$60) = 130 115
 Active Learning 1
Calculating the CPI
CPI basket:
price price of
{10 lbs beef, 20 lbs chicken} of beef chicken
2017 $4 $4
The CPI basket cost $120 in
2018 $5 $5
2017, the base year.
2019 $9 $6
A. Compute the CPI in 2018.

B. What was the CPI inflation rate from 2018–

2019?
 Active Learning 1
Answers
CPI basket: price price of
{10 lbs beef, 20 lbs chicken} of beef chicken
2017 $4 $4
The CPI basket cost $120 in
2018 $5 $5
2017, the base year.
2019 $9 $6
A. Compute the CPI in 2018.

Cost of CPI basket in 2018=($5x10)+($5x20)= $150

CPI in 2018 = 100 x ($150/$120) = 125

 Active Learning 1
Answers
CPI basket: price price of
{10 lbs beef, 20 lbs chicken} of beef chicken
2017 $4 $4
The CPI basket cost $120 in 2018 $5 $5
2017, the base year. 2019 $9 $6
B. What was the CPI inflation rate from 2018–2019?
Cost of CPI basket in 2018=($9 x10)+($6 x20)= $210
CPI in 2018 = 100 x ($210/$120) = 175
CPI inflation rate = (175 – 125)/125 = 40%
 Problems with the CPI

• Problems in measuring the cost of living

– Substitution bias
• Prices do not change proportionately
• Consumers substitute toward goods that have become
relatively less expensive
– Introduction of new goods
• More variety of goods
– Unmeasured quality change
• Changes in quality
 GDP deflator versus CPI

• GDP deflator
– Ratio of nominal GDP to real GDP
– Reflects prices of all goods &
services produced domestically
• CPI
“The price may seem a
– Reflects prices of goods & little high, but you have
services bought by consumers to remember that’s in
today’s dollars.”
 GDP deflator versus CPI

• GDP deflator
– Compares the price of currently produced goods
and services
• To the price of the same goods and services in the base
year
• CPI
– Compares price of a fixed basket of goods and
services
• To the price of the basket in the base year
 Figure 2Two Measures of Inflation

This figure shows the inflation rate—the percentage change in the level of prices
—as measured by the GDP deflator and the CPI using annual data since 1965.
Notice that the two measures of inflation generally move together.
 Differences between
CPI and GDP Deflator
• The basket:
– CPI uses fixed basket
– GDP deflator uses basket of currently produced
goods & services
– This matters if different prices are changing by
different amounts.
 Active Learning 3
CPI vs. GDP deflator
In each scenario, determine the effects on the CPI
and the GDP deflator.
A. Anomali Cafe raises the price of Cappuccinos.
B. A local manufacturer raises the price of the
industrial tractors it produces.
C. Armani raises the price of the Italian jeans it
sells in Indonesia.
 Active Learning 3
Answers
A. Anomali Cafe raises the price of Cappuccinos.
The CPI and GDP deflator both rise.
B. The local manufacturer raises the price of the
industrial tractors it produces.
The GDP deflator rises, the CPI does not.
C. Armani raises the price of the Italian jeans it
sells in Indonesia.
The CPI rises, the GDP deflator does not.
 Correcting Variables for Inflation
1. Comparing dollar figures from different times
– Inflation makes it harder to compare dollar amounts
from different times.
Amount in today’s dollars
= Amount in year T dollars x
(Price level today/Price level in year T)

• The cost of living varies

– Not only over time
– But also over geography
• Regional price parities
– Measure variation in the cost of living from state to state.
Correcting Variables for Inflation
Example: the minimum wage
– $1.25 in Dec 1963
– $7.25 in Dec 2019

CPI = 30.9 in year 1963, CPI = 234.6 in 2019

Did minimum wage have more purchasing power

in Dec 1963 or Dec 2019?
 Correcting Variables for Inflation
Amount in today’s dollars
= Amount in year T dollars x
(Price level today/Price level in year T)

- “year T” is 1963, “today” is 2019

- Min wage was $1.25 in year T
- CPI = 30.9 in year T, CPI = 234.6 today

The minimum wage in 1963 was:

$1.25 x (234.6/30.9) = $9.49 in 2019 dollars
 Active Learning 4
Comparing tuition increases
Tuition and Fees at U.S. Colleges and Universities
1990 2019
Private non-profit 4-year $9,340 $32,405

Public 4-year $1,908 $9,410

Public 2-year $906 $3,435

CPI 130.7 237.7
• Express the 1990 tuition figures in 2019 dollars, then
compute the percentage increase in real terms for all
three types of schools.
• Which type experienced the largest increase in real
tuition costs?
 Active Learning 4
Answers
1990 2019 % change
CPI 130.7 237.7 ?
Private non-profit 4-year
$9,340 $32,405
(current $)
Private non-profit 4-year
? $32,405 ?
(in 2019 $)
Public 4-year (current $) $1,908 $9,410

Public 4-year (in 2019 $) ? $9,410 ?

Public 2-year (current $) $906 $3,435

Public 2-year (in 2019 $) ? $3,435 ?

 Active Learning 4
Answers
1990 2019 % change
CPI 130.7 237.7 81.9%
Private non-profit 4-year
$9,340 $32,405
(current $)
Private non-profit 4-year
$16,986 $32,405 90.8%
(in 2019 $)
Public 4-year (current $) $1,908 $9,410

Public 4-year (in 2019 $) $3,470 $9,410 171.2%

Public 2-year (current $) $906 $3,435

Public 2-year (in 2019 $) $1,648 $3,435 108.4%

 Correcting Variables for Inflation
2. Indexation
– Automatic correction by law or contract
– Of a dollar amount
– For the effects of inflation
– COLA: Cost-of-living allowance
 Correcting Variables for Inflation
3. Real vs. Nominal Interest Rates
• Nominal interest rate
– Interest rate as usually reported
– Without a correction for the effects of inflation
• Real interest rate
– Interest rate corrected for the effects of inflation
= Nominal interest rate – Inflation rate
 Real vs. Nominal Interest Rates
Example:
– Deposit $1,000 for one year.
– Nominal interest rate is 9%.
– During that year, inflation is 3.5%.

Real interest rate

= Nominal interest rate – Inflation rate
= 9.0% – 3.5%
= 5.5%
The purchasing power of the $1000 deposit has grown 5.5%.
 Interest rates in the U.S. economy

• Nominal interest rate

– Always exceeds the real interest rate
– U.S. economy has experienced rising consumer prices
in every year
• Inflation is variable
– Real and nominal interest rates do not always move
together
• Periods of deflation
– Real interest rate exceeds the nominal interest rate
 Figure 4Real and Nominal Interest Rates

This figure shows nominal and real interest rates using annual data since 1965. The nominal interest rate is the rate
on a three-month Treasury bill. The real interest rate is the nominal interest rate minus the inflation rate as
measured by the CPI. Notice that nominal and real interest rates often do not move together.
Summary – Measuring the Cost of Living
• The Consumer Price Index (CPI) is a measure of the
cost of living.
• The CPI tracks the cost of the typical consumer’s
“basket” of goods & services.
• The CPI is used to make COLA (Cost of Living
Adjustments) and to correct economic variables for
the effects of inflation.
• The real interest rate is corrected for inflation
and is computed by subtracting the inflation rate
from the nominal interest rate.
Group Assignment:

1. Find GDP Indonesia in the last 5 years. Analyze the trend.

2. Go to www.bps.go.id. Find “Indeks Harga Konsumen dan
Inflasi Bulanan Indonesia”. Analyze the trend on CPI (IHK)
and Inflation Rate from 2005 to 2018.

Submit before the next session starts to: fildacitra@yahoo.com.

Email Subject: CLASS [NAME]_GROUP [NUMBER]_SESSION1

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