1 Paul Redmond Economics – DT366 Year 1 Spring 2014 Paul Redmond This part of the course deals with macroeconomics. Notes: On Webcourses and my website Book: Economics, Mankiw and Taylor

2 Paul Redmond Microeconomics Examines how individual firms and households make decisions and interact with one another in markets. Macroeconomics Studies the economy as a whole. Macroeconomics looks at issues such as, National income – why is income high in some countries and low in others? Prices – why do prices rise rapidly in some periods and decline in others? Changes in unemployment.

3 Paul Redmond When assessing the performance of the economy, macroeconomists look at different measures and statistics such as; Gross Domestic Product (GDP) Gross National Product (GNP) Unemployment rate Inflation Interest rate Macroeconomic Data

4 Paul Redmond A Business Cycle

5 Paul Redmond GDP is the market value of all final goods and services produced within a country in a given period. GDP measures two things at once; 1.The total income of everyone in the economy. 2.The total expenditure on the economy’s output of goods and services. How can GDP measure both income and expenditure? Because for an economy as a whole, income = expenditure. For each transaction you have two parties; a buyer and a seller. Gross Domestic Product (GDP)

6 Paul Redmond GDP in the US since 1970 Source: Principles of Economics by Case, Fair and Oster

7 Paul Redmond The Circular-Flow Diagram Firms Markets for goods and services Households Markets for factors of production Spending (=GDP) Income (=GDP)Wages, rent & profit (=GDP) Revenue (=GDP) Labour, land & capital Goods & services bought Goods & services sold Factors of production = Flow of money= Flow of inputs & outputs

8 Paul Redmond GDP is the market value of all final goods and services produced within a country in a given period. “All final goods” However GDP can’t measure goods produced & sold illicitly (i.e. drugs). Also excludes most items that are produced and consumed at home. Final goods v intermediate goods Avoid double counting. Exception: when an intermediate good is produced and not used, it is taken to be “final” temporarily. It is added as investment. Goods and services Tangible and intangible goods Includes goods and services currently produced. The Measurement of GDP

9 Paul Redmond Measures value of production within a country. If an American company produces within Ireland, its production is included in GDP. If an Irish company produces in America, its production is not included in Irish GDP. Gross National Product (GNP) GNP is the total income earned by a country’s residents. GDP defines production based on geographical location whereas GNP defines production based on ownership. An American company producing in Ireland is included in GDP but not in GNP. The Measurement of GDP

10 Paul Redmond GDP v GNP in Ireland GDP (€million)162,284158,097162,600163,938 GNP(€million)133,919131,812130,662132,649

11 Paul Redmond GDP (Y) is divided into four components; consumption (C), investment (I), government spending (G) and net exports (NX) Y = C + I + G + NX Consumption Spending by households on goods and services Investment Purchase of goods to be used in the future Inventory Government Spending Spending by government on goods and services Transfer payments not included Net Exports Exports minus imports The Components of GDP

12 Paul Redmond The Components of GDP

13 Paul Redmond If GDP in 2013 is higher than GDP in 2012, then one of two things must have happened 1.The economy produced more output of goods and services and / or 2.The price of goods and services increased When looking at the performance of the economy over time, we want a measure of output that is not affected by changes in price. This measure is called Real GDP. In calculating real GDP, we ask the following question, What would be the value of the goods and services produced this year if we value these goods and services at last years prices? Real Versus Nominal GDP

14 Paul Redmond Consider an economy which produces only 2 goods, hot dogs & burgers. Real and Nominal GDP – A Numerical Example YearPrice of Hot Dogs (€) Quantity of Hot Dogs Price of Hamburgers Quantity of Burgers Calculating Nominal GDP 2009(100 hot dogs x €1)+(50 burgers x €2)=€ (150 hot dogs x €2)+(100 burgers x €3)=€ (200 hot dogs x €3)+(150 burgers x €4)=€1200 Calculating Real GDP (base year 2009) 2009(100 hot dogs x €1)+(50 burgers x €2)=€ (150 hot dogs x €1)+(100 burgers x €2)=€ (200 hot dogs x €1)+(150 burgers x €2)=€500

15 Paul Redmond We can also calculate the GDP Deflator. This measures the current level of prices relative to prices in the past (in our base year). GDP Deflator = Real and Nominal GDP – A Numerical Example Calculating the GDP Deflator 2009(€200/€200)x100= (€600/€350)x100= (€1200/€500)x100=240 (€200/€200)x100=100

16 Paul Redmond GDP and Life Expectancy

17 Paul Redmond GDP and Education