Macroeconomic Measures¶
In macro, production = income
Adjustment¶
| Aspect | Technique | Value | |
|---|---|---|---|
| Location | PPP Purchasing power parity | Price corrected for location | Big Mac Index |
| Time | Nominal | Absolute price at a time | |
| Relative | Price corrected for time, ie prices of base year | CPI: Basket of goods | |
| Population | per capita | GDP per capita |
Aggregate Output¶
Why is it in currency? - To make everything into a single unit of measurement
| GDP | GNP | |
|---|---|---|
| Full Form | Gross Domestic Product | Gross National Product |
| Meaning | 1. Total value of final goods and services produced within the borders of a country (regardless of nationality); final* is to ensure independence from ownership structure 2. Sum of value added within the borders of a country (regardless of nationality) 3. Sum of incomes (and profits) within the borders of a country (regardless of nationality) | 1. Total value of final goods and services produced by nationals/citizens of a country (regardless of location); final* is to ensure independence from ownership structure 2. Sum of value added by nationals/citizens of a country (regardless of location) 3. Sum of incomes (and profits) of citizens of a country (regardless of location) |
| Calculation | Add + Private Consumption + Investment + Govt expenditures + Exports Subtract - Imports | |
| Why? | Easy to measure | |
| Limitations | Includes govt expenditure to good/bad requirements: crime, natural disasters Does not include informal activities |
Types¶
| Potential output | Actual output | |
|---|---|---|
| Meaning | Ideal output an economy can produce by using all its resources | What an economy actually produces |
Employment¶
| Term | Meaning |
|---|---|
| Employment \(E\) | Number of people with a job |
| Unemployment \(U\) | Number of people seeking jobs but cannot get Does not include discouraged workers and uninterested people |
| Discouraged workers | Number of people who give up looking for a job |
| Labor Force \(L\) | \(E + U\) |
| Unemployment rate \(u\) | Proportion of people seeking jobs but cannot get \(\dfrac{U}{L}\) |
| Participation Rate | \(\dfrac{\text{Labor Force}}{\text{Total population of working age}}\) |
Unemployment Rate¶
| Natural Rate | Actual Rate | |
|---|---|---|
| Meaning | Unemployment rate which exists regardless of whatever we do | The current rate of unemployment |
| it fluctuates a lot However, if you take the average of 20yrs or so, the average actual rate tends to the natural rate | ||
| Factors | 1. resources 2. technology 3. production capacity/no of factories 4. population/size of the country |
Inflation¶
Sustained rise in the general level of price
Inflation rate: Rate at which prices of commodities increase
\[ \pi_t = \dfrac{P_t - P_{t-1}}{P_{t-1}} \]
| +ve Inflation | Deflation (-ve inflation) | |
|---|---|---|
| Meaning | increase in prices of commodities | decrease in prices of commodities |
| Comment | Happens when economy is growing | More dangerous than high inflation |
Usually targeted inflation - developed countries: 2-3% - developing countries: 5-8%
Why is small inflation good? Incentivizes spending
Indicators¶
| Measure | |
|---|---|
| CPI Consumer Price Index | Cost of living |
| Core CPI | CPI excluding volatile commodities: energy and food |
| GDP Deflator | \(\dfrac{\text{Nominal GDP}}{\text{Real GDP}}\) |
Types¶
| Prices increase due to | |||
|---|---|---|---|
| Cost-Push inflation | increase in the cost for supply | - cost of production - prices of raw materials - oil prices (transportation) | for the name, think suppliers push the product to the consumers |
| Demand-pull inflation | increase in demand | for the name, think consumers pull the product from the sellers | |
| Structural inflation | suppliers are not able to keep up with the demand due to lack of infrastructure; ie, demand increases and producers want to increase output, but aren't able to do so |
Inflation Models¶
Taylor Rule¶
Inflation rate something
\[ I_t = \beta_1 + \beta_2 (\pi_t - \pi_t^*) + e_t \]
Money Supply¶
\[ I_t = \beta_1 + \beta_2 M_t + e_t \]
Inflation-Welfare Cost Relation¶
| Optimal Inflation Rate | |
|---|---|
| Developed Countries | 2% |
| Developing Countries | 4-6% |
Inflation, Unemployment, Output¶
\[ \text{Output} \propto \text{Inflation} \propto \dfrac{1}{\text{Unmployment}} \]
2024-12-26