Macroeconomics: National Income and Economic Indicators
Macroeconomics
Macroeconomics studies the economy’s overall function, providing a simplified view while addressing economic activity within specific countries or regions. It focuses on the economic system’s behavior, reflected in variables like total output, employment, investment, and consumption.
Macroeconomic Policy
Macroeconomic policy encompasses government measures influencing the economy’s progress. Its ultimate goals typically include managing inflation, unemployment, and growth.
Key Macroeconomic Indicators
Inflation
Inflation is the percentage increase in the general price level over a specific period.
Unemployment Rate
The unemployment rate is the percentage of the economically active population who are unemployed and seeking work.
Growth Rate
The growth rate is the percentage increase in the total goods and services produced by an economy (Gross National Product or GNP) over a period.
National Income (or National Product)
National income is the total value of all final goods and services produced, excluding intermediate goods used in production.
Final Goods
Final goods are purchased for final use and not as intermediate inputs for further production.
Value Added
Value added is a company’s sales value minus the value of raw materials and intermediate goods used in production.
Nominal vs. Real Terms
Nominal terms (current prices): Values are expressed without adjusting for price changes.
Real terms (constant prices): Values are adjusted for price changes, typically using a base year’s prices.
Price Indices
Price indices are weighted averages of prices for each period, reflecting the importance of each good or service in total output.
Investment
Gross investment: The total amount of production increasing capital stock and inventories.
Net investment: Gross investment minus depreciation, representing the actual increase in capital stock.
Domestic vs. National Product
Domestic product: The value of final goods and services produced within a country.
National product: Includes only production by residents of a country, regardless of location.
Other Key Concepts
Gross Domestic Product (GDP): Measures the output of factors of production by domestic residents, regardless of ownership.
National income: The total income received by owners of productive factors (labor, capital, natural resources).
Personal income: National income minus non-individual income (e.g., corporate earnings, taxes) plus government transfers (e.g., pensions, benefits).
Personal disposable income: Income available for households to spend.
Household consumption expenditure: Spending on goods and services excluding home ownership.
Personal saving: The portion of disposable income used to increase wealth.
Components of national output and expenditure: Private consumption, public spending, investment, and net exports (exports minus imports).
Depreciation
Depreciation is the decline in an asset’s value due to age or technological progress. Fixed assets depreciate gradually, while working capital goods are typically consumed in a single use.
Chapter 15: National Income Balance and Determination
Key Concepts for Income Determination
- Consumption Function: Defines planned consumption (C) for each level of disposable income (Y).
- Marginal Propensity to Consume (MPC): The rate at which consumption increases with a one-unit income increase.
- Average Propensity to Consume (APC): Total consumption divided by total income at a specific income level.
- Marginal Propensity to Save (MPS): The proportion saved from an additional unit of income.
- Investment Demand: Unplanned increases in companies’ physical capital (factories, machines) and inventories.
- Aggregate Demand: Total planned spending on domestic goods and services.
- Production Equilibrium: Occurs when output equals aggregate demand at the current price level. Inventories remain at desired levels.
- Effective Investment: Investment recorded in national accounts, including unplanned inventory changes.
- Income Equilibrium: Planned investment equals actual investment and saving.
- Investment Multiplier: The factor by which income increases due to a one-unit investment increase.
- Multiplier Size: Depends on the MPC (slope of the consumption function). A steeper slope means a larger multiplier.
- Potential Output (or Full Employment Income): Output level with full resource utilization.
- Output Gap: The difference between potential and actual output, often expressed as a percentage of potential output.