This is a compact summary of Macroeconomics: A European Perspective by Blanchard the 2018 edition. ISBN 9781787265417. The entire book is summarized in plain English with the same layout. All important calculations are present. Our study group used this summary throughout the course, making underst...
Summary Macroeconomics
This summary starts at chapter 2 as chapter 1 is only
introduction. All important calculations are present.
CHAPTER 2: A TOUR OF THE
BOOK 2.1: AGGREGATE OUTPUT
Before the Second World War there was no system to measure aggregate (total) activity, after the
war a System of National Accounts (SNA) was put together. The measure of aggregate output in the
system of national accounts is the gross domestic product (GDP). There are three definitions of GDP:
1. GDP is the value of the final goods and services produced in the economy during a
given period.
Only the final goods are counted, the intermediate goods (goods used in the production of another
good) are excluded to avoid double counting. GDP van be constructed by adding up the production
of all final goods.
2. GDP is the sum of value added in the economy during a given period.
Value added of a firm is the value of its production minus the value of the intermediate goods used
in production. Both definition 1 and 2 are looking at GDP from the production side.
3. GDP is the sum of incomes in the economy during a given period.
This definition looks at GDP from the income side. Revenue paid to workers is labour income, the
rest of the revenue is for the firm and is called capital/profit income.
Nominal GDP is the sum of the quantities of final goods produced times their current prices. Nominal
GDP increases over time for two reasons: production of goods increases and prices of goods
increase. Real GDP is the sum of the quantities of final goods times constant prices. Real GDP must
be defined as a weighted average of the output of all final goods.
Nominal GDP ↔ GDP at current prices → €Yt
Real GDP ↔ GDP in terms of goods, GDP at constant prices, GDP adjusted for inflation → Yt
Real GDP per capita is the ratio of real GDP to the population of a country, it is the average standard
of living of the country. Economists focus on the rate of growth of the real GDP (GDP growth). A
positive GDP growth is an expansion, a negative GDP growth a recession.
Y t −Y t −1
GDP growth=
Y t −1
2.2 : OTHER MAJOR MACROECONOMIC VARIABLES
Employment is the number of people who have a job, unemployment is the number of people who
do not have a job but are looking for one. The labour force is the sum of employment and
unemployment.
L=N +U
Labour force=employment +unemployment
Unemployment rate is the ratio of the number of people who are unemployed to the number of
people in the labour force.
U
u=
L
unemployment
Unemployment rate=
labour force
Only those who are looking for a job are counted as unemployed, those who are not looking are
counted as not in the labour force. Employed who give up looking for a job and therefore are
no longer counted as unemployed are called discouraged workers. A higher unemployment
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