Macroeconomics

Measuring national income and introduction to development

• The circular flow of income is a simplified model of the economy that shows the flow of money through the economy.
• Gross domestic product (GDP) is the total money value of all final goods and services produced in an economy in one year.
• Gross national product (GNP) is the total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends, and profit).
• Net national product (NNP) is GNP minus depreciation (capital consumption).
• Nominal GDP is GDP, not adjusted for inflation.
• Real GDP is GDP, adjusted for inflation.
• Per capita GDP is the total money value of all final goods and services produced in an economy in one year per head of the population.
• The Human Development Index (HDI) is a composite index that brings together measurements of life expectancy at birth, literacy rate, school enrollment rate, and GDP per capita to measure relative development.

Macroeconomic models

• Aggregate demand (AD) is the total spending in an economy consisting of consumption, investment, government expenditure and net exports.
• Consumption is spending by households on consumer goods and services over a period of time.
• Investment is the addition to the capital stock of the economy in the form of factories, offices, machinery and equipment which is used to produce goods and services, A fast food retailer, for example, builds a new outlet.
• An inflationary gap is the situation where total spending (AD) is greater than the full employment level of output, thus causing inflation.
• A deflationary gap is the situation where total spending (AD) is less than the full employment level of output, thus causing unemployment.
• The business cycle (trade cycle) shows fluctuations in the level of economic activity in an economy over time and suggests that the changes are cyclical. There are four stages: depression (slump), recover, boom, and recession.

• Demand-side policies are any government policies designed to influence AD in the economy, thus affecting the average price level and real national output.
• Fiscal policy is a policy using changes in government spending and/or direct taxation to achieve economic objectives. example
• Monetary policy is a policy using changes in the money supply or interest rates to achieve economic objectives. exmaple
• Aggregate supply (AS) is the total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods.
• Short-run aggregate supply (SRAS) is AS that varies with the level of demand for goods and services and that is shifted by changes in the costs of factors of production.
• Long-run aggregate supply (LRAS) is AS that is dependent upon the resources in the economy and that can only be increase by improvements in the quantity and/or quality of factors of production.
• Supply-side policies are government policies designed to shift the LRAS curve to the right, thus increasing potential output in the economy.
• The multiplier is the ratio of a change in the level of national income to an initial change in one or more of the injections into the circular flow of income (that is investment, government spending, or export revenue).
• The accelerator is the relationship between the level of induced investment and the rate of change of national income.
• Crowding out is a situation where the government spends more (government expenditure) than it receives in revenue (mainly taxation), and needs to borrow money, forcing up interest rates and “crowding out” private investment and private consumption.