Understanding Macroeconomic Concepts: GDP, Unemployment, and Fiscal Policy
Macroeconomic Concepts
GDP and GNP
Nominal GDP
Nominal GDP is the monetary value of all final goods and services produced within a country’s borders at current market prices.
Real GDP
Real GDP eliminates price fluctuations by valuing output at constant prices, providing a more accurate measure of economic growth.
GNP
GNP measures the total output produced by a country’s residents, regardless of location, using their labor and capital.
Calculating CPI
- Measure the price of each good or service in each year the CPI is calculated.
- Select a base year and calculate the percentage of average family expenditure on each good or service in that year. These percentages are used as weights in subsequent periods.
- Estimate CPI as a weighted average of price ratios for each product, comparing the current year’s price to the base year’s price.
Unemployment
Unemployment Rate
The unemployment rate measures the percentage of the labor force that is actively seeking employment but unable to find it.
Types of Unemployment
- Cyclical Unemployment: Occurs during economic downturns when there is insufficient demand to employ all available resources.
- Seasonal Unemployment: Caused by changes in labor demand at different times of the year.
- Frictional Unemployment: Associated with the normal functioning of the labor market, such as people transitioning between jobs.
- Structural Unemployment: Due to imbalances between the skills of the workforce and the skills required by employers.
Impact of Unemployment
Economic Effects
- Fall in Actual Production: Unemployment represents a poor allocation of resources.
- Fall in Demand: Unemployed individuals experience a decrease in income, leading to reduced consumption.
- Increase in Public Deficit: Governments face higher costs associated with unemployment benefits and social programs.
Social Effects
- Negative Psychological Effects: Unemployment can negatively impact self-esteem and social standing.
- Discriminatory Effects: Unemployment does not affect all individuals equally, with certain groups experiencing higher rates.
Economic Schools of Thought on Unemployment
Classical View
Classical economists believe unemployment is voluntary and would disappear if workers accepted lower wages.
Keynesian View
Keynesian economists attribute unemployment to insufficient aggregate demand and advocate for expansionary policies to increase employment.
Demand-Side Policies
Demand-side policies, such as monetary and fiscal policies, aim to stimulate aggregate demand in the short term. Increasing spending leads to increased production and reduced unemployment, but can also lead to higher prices.
Supply-Side Policies
Supply-side policies aim to increase aggregate supply by improving productivity, reducing the natural rate of unemployment, and promoting competition.
Economic Cycle
The economic cycle consists of phases of expansion, crisis, peaks, and troughs. A recession is a period of declining economic activity, while a depression is a prolonged and severe recession.
Fiscal Policies
Expansionary Fiscal Policy
Expansionary fiscal policy involves increasing government spending or cutting taxes to stimulate economic activity. This can lead to increased GDP, employment, and prices.
Restrictive Fiscal Policy
Restrictive fiscal policy involves raising taxes or cutting government spending to slow down economic activity. This can lead to decreased GDP, employment, and prices.
Financing Public Deficit
- Raising taxes, which has limitations due to the potential negative impact on economic activity.
- Issuing public debt.
Classification of Expenses
- Classification by Program: Reflects the purpose of expenditure and budget objectives.
- Organic Classification: Indicates who is responsible for the expenditure.
- Economic Classification: Shows how the money is being spent.
Ordinary and Extraordinary Revenue
- Ordinary Revenue: Regularly collected throughout the fiscal year, primarily from direct and indirect taxes.
- Extraordinary Revenue: One-time revenue sources, such as public debt, sale of public assets, and extraordinary taxes on capital.
Income Distribution
Income distribution refers to how income is divided among owners of production factors (wages, rent, interest, and profits). It is influenced by wage differences and the distribution of wealth.
Diversity of Interest Rates
Interest rates vary based on factors such as risk, collateral, and loan duration.