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Macro Economics summary
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Macro Economics summary
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Week 1 (H 1, 2 en 3)Chapter 1 & 2:
The values of endogenous variables are determined in the model and depends on other variables in
the model.
The values of exogenous variables are determined outside the model: the model takes their values &
behavior as given. If production changes no effect on exogenous variable.
› Gross domestic product (GDP) There are 3 ways to measure GDP:
1. GDP is the value of the final goods and services produced in the economy during a
given period.
2. GDP is the sum of value added in the economy during a given period.
3. GDP is the sum of incomes in the economy during a given period.
A final good is a good that is destined for final consumption (unlike intermediate goods).
Value added = the value of a firm’s production minus the value of the intermediate goods it uses in
production.
Nominal GDP: sum of quantities of final goods produced times their current price.
Real GDP: sum of quantities of final goods produced times constant price.
GDP will refer to real GDP, and Yt will denote real GDP in year t. for example, $Yt. for nominal GDP in
year t.
GDP growth = expansion
Negative GDP growth = recession
Employment: number of people who have a job.
Unemployment: number of people who do not have a job but are looking for one.
Labour force = employment + unemployment L = N + U
Unemployment rate = unemployment / labour force u = U / L
Not in the labour force: who do not have a job and are not looking for a job.
Discouraged workers: people who give up looking for a job because of a high unemployment.
Unemployment important because of:
Because of its direct effects on the welfare of the unemployed.
Because it provides a signal that the economy may not be using some of its resources
efficiently.
Inflation: increase of price level. Deflation: decline in price level.
Measure Inflation: GDP deflator = nominal GDP / real GDP P = €Y / Y
Nominal GDP = amount times current prices
Real GDP = amount times prices of other years.
GDP deflator gives the average price of output.
CPI measures the average price of consumption. because some of the goods in GDP are sold to
firms and not to consumers and some of the goods bought by consumers are not produced
domestically but are imported from abroad.
,The consumper price index (CPI) measures the average price of consumption, or equivalently, the
cost of living. 2 reasons why the deflator and the CPI are different:
Some of the goods are sold to firms, to the government or to foreigners.
Some of the goods are not produced domestically but are imported from abroad.
Okun’s law: if output growth is high unemployment will decrease.
When unemployment becomes very low economy is likely to overheat and this will lead to
upward pressure in inflation phillips curve.
Short run: few years demand determines aggreate output. Economy can be stimulated using fiscal
policy.
Medium run: decade (10 years)
Long run: half century (halve eeuw)
Closed economy: no trade with other countries.
Chapter 3:
Y = C + I + G + NX
Y = income
C = consumption
I = investment
G = government expenditures
NX = export – import
If export is greater than import trade surplus
If import is greater than export trade deficit
Inventory investment = production – sales
If production exceeds sales positive inventory investment
If sales exceeds production negative inventory investment
Z = demand for goods
Z = C + I + G + X - IM
In the closed economy Z = C + I + G
Disposable income(Yd): income that remains after transfers from government and paying taxes.
Yd = Y – T
T = taxes paid - government transfers received
C = C0 + C1 . Yd
C0 = parameter if income = 0 so C0 is what you consume even when you don’t have any income.
C1 = marginal propensity to consume (slope)
1 - C1 = propensity to save
C = C0 + C1(Y – T)
A bar above a letter means it is given and it not a variable.
, Z = C0 + C1(Y – T) + I + G
Equilibrium condition: Y = Z
Y = production Z = demand
Y = C0 + C1(Y – T) + I + G
Y = C0 + C1Y – C1T + I + G
Y – C1Y = C0 + I + G – C1T
Y(1 – C1) = C0 + I + G – C1T
Y = (C0 + I + G – C1T) / (1 - C1)
Y = (1 / (1 - C1)) . (C0 + I + G – C1T)
(C0 + I + G – C1T) this part does not depend on output autonomous spending
Multiplier: (1 / (1 - C1))
Multiplier effect: if G increase by for example with 100, how much do the Y increase?
Delta Y / delta G
If there is no change 1 / (last step of equation to determine Y)
Increase in consumption for 1 mil increase demand for 1 mil because of higher level of demand,
production also increases by 1 mil so income will also increase by 1 mil, because income =
production because of increase in income, demand increase this leads again to an increase in
production equilibrium point.
S=Y–C-T
S = private saving
Public saving = taxes – government spending
Total save = private saving + public saving
So for equilibrium: production = demand and investment = saving
IS relation production = demand
Midterm remarks:
Fixed investment: every fixed investment doesn’t matter for private or business purpose.
Marginal propensity to consume = change in consumption by a one-unit change in disposable
income.
Inventory investment = difference between production and sales in a given year.
Deposits are NOT an asset on banks’ balance sheets.
Flow variable: variable in terms of time like income or mortgage.
Paradox of saving: states that increase in private saving will not lead to increase of total savings.
Value added = revenue minus cost of intermediate goods
Autonomous consumption = C0 consumption occurs when income is zero.
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