6355 Lecture Notes - Lecture 10: Aggregate Demand, Output Gap, Business Cycle
5 Jun 2018
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Microeconomics is the study of how households and firms make choices, how they interact in
markets, and how the government attempts to influence their choices.
Macroeconomics is the study of the national economy and global economy as a whole.
Main objects of explanation are:
ā¢ Growth overtime, aggregate output
ā¢ General level of prices
ā¢ Unemployment
ā¢ Interest rates
ā¢ Foreign exchange rates
ā¢ Balance of payments position
GDP is the market value of all final goods and service produced in a country during a period of time
GDP is measures using market values
It includes on the market value of final goods and services
A final good or service is a new good or service which is the end product of the production process
that is purchased by the final user.
Intermediate good or service is a good or service that is an input into another good or service.
Value Added Approach: measures GDP by adding up the value added to products at each stage of
their production up until final consumption
Value added equals the value of a firm's production minus the value of the intermediate goods it
uses in production.
The value added of all industries in the economy gives GDP at market value
Expenditure Approach: measures GDP at market prices by collecting data on all final expenditure on
goods and service, adding the contribution by exports and subtracting the value of imports.
Measures final goods and services newly produced, and excludes second-hand products.
Components of GDP:
ā¢ Consumption: spending by households
ā¢ Investments: spending by firms
ā¢ Government purchases: spending by governments
ā¢ Net exports: the value of exports minus the value of imports.
GDP = C + I + G + NX
Income Approach: the sum of all the income generated in the production of goods and services; or
wages, salaries and supplements plus rent, interest, profit and dividends.
Nominal GDP is total production valued at current prices.
Real GDP is total production valued at constant base year prices
Nominal GDP is affected by changes in prices and thus could be misleading when comparing GDP
over time.
Real GDP is not affected by changes in prices. Thus, it is a better measure of the economy's
production of goods and services.
Limitations of GDP as a measure of output and well-being include:
1. Non-market economic activities are not included
2. Health, life expectancy, education levels
3. Economic equality and social justice
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Document Summary
Microeconomics is the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. Macroeconomics is the study of the national economy and global economy as a whole. Main objects of explanation are: growth overtime, aggregate output, general level of prices, unemployment, balance of payments position. Gdp is the market value of all final goods and service produced in a country during a period of time. It includes on the market value of final goods and services. A final good or service is a new good or service which is the end product of the production process that is purchased by the final user. Intermediate good or service is a good or service that is an input into another good or service. Value added approach: measures gdp by adding up the value added to products at each stage of their production up until final consumption.
