Macroeconomic Analysis - Part I

1. 7. Macroeconomic Analysis
PART I

2. Outline
 What is GDP?
 How to measure GDP?
 Nominal versus Real GDP
 Measuring Economic Growth
 Measuring Unemployment
 Measuring Inflation
 Business Cycles
 Macroeconomic Policies

3. Introduction
Economics
Microeconomics
- The study of choices made by
individuals, firms, and
government.
- Certain market or sector
Macroeconomics
- The study of the economy as
a whole.
- All markets & sectors

4. Introduction
Low
Unemployment
Relatively Stable
Prices
(Low Inflation)
Sustained
Growth

5. What is GDP?
 Gross Domestic Product (GDP) is the market value of all final goods
and services produced in a country in a given time period.
 This definition has four parts:
1- Market value
2- Final goods and services
3- Produced within a country
4- In a given time period

6. What is GDP?
1- Market value
GDP is valued at market prices and calculated as the sum of quantities
of all goods and services multiplied by their prices.
Example: If an economy produces only apples and oranges, then:
𝐺𝐷𝑃 = (𝑄𝐴𝑝𝑝𝑙𝑒𝑠 × 𝑃𝐴𝑝𝑝𝑙𝑒𝑠) +(𝑄𝑂𝑟𝑎𝑛𝑔𝑒𝑠 × 𝑃𝑂𝑟𝑎𝑛𝑔𝑒𝑠)

7. What is GDP?
2- Final Goods and Services
 A final good or service is an item bought by its final user during a
specified time period.
 An intermediate good is an item that is produced by one firm, bought
by another firm, and used as a component of a final good or service.
 GDP excludes the value of intermediate goods and services to avoid
the double counting problem.

8. What is GDP?
3- Produced Within a Country
 GDP is domestic production as it includes all production that takes
place inside the country regardless of the nationality of the producer.
 On the other hand, Gross National Product (GNP) is the value of
goods and services produced anywhere in the world by the residents of
a nation.
4- In a Given Time Period
 GDP usually measures production for a year (annually) or a quarter of
a year (quarterly).

9. How to Measure GDP?
 GDP measures the value of production, which also equals total
expenditure on final goods and total income.
 Total expenditure on final goods and services equals GDP, and thus:
GDP = C + I + G + X – M
C = Consumption Expenditure
I = Investment
G = Government Expenditure on Goods and Services
X – M = Exports – Imports = Net Exports

10. How to Measure GDP?
Consumption Expenditure (C)
 It is the total payment for consumer goods and services.
 Goods and services consumed should be produced in the year for
which GDP is measured.
Gross Private Domestic Investment (I)
 It includes the purchases of new capital equipment and the additions to
inventories.
 Purchases of new houses are included in investment expenditure.

11. How to Measure GDP?
Government Expenditure on Goods and Services (G)
 It includes expenditure on goods and services by the government.
 Government transfer payments such as unemployment benefits, Social
security payments, and subsidies are not included in GDP, as these
payments are not made in exchange for goods and services.
Net Exports (X – M)
 Expenditure on exports are included in GDP because exports
represent part of the country’s production that is sold to other countries,
whereas Expenditure on imports are not included in GDP.

12. Nominal versus Real GDP
 Nominal GDP is the value of goods and services produced during a
given year valued at the prices that prevailed in that same year
(current-year prices).
 Real GDP is the value of final goods and services produced in a given
year when valued at a reference base-year prices.
 Real GDP takes into account the changes in the price level that affect
the value of total production.

13. Nominal versus Real GDP
Example
In 2019:
Q oranges = 1000 P oranges = L.E. 5
Q Apples = 500 P Apples = L.E. 10
In 2020:
Q oranges = 1000 P oranges = L.E. 10
Q Apples = 500 P Apples = L.E. 20

14. Nominal versus Real GDP
Nominal GDP 2019 = (1000 x 5) + (500 x 10) = L.E. 10,000
Nominal GDP 2020 = (1000 x 10) + (500 x 20) = L.E. 20,000
Solution for this problem is to use the prices of 2019 (reference base
year) for calculating real GDP in both years.
Real GDP 2019 = (1000 x 5) + (500 x 10) = L.E. 10,000
In base year: Real GDP = Nominal GDP
Real GDP 2020 = (1000 x 5) + (500 x 10) = L.E. 10,000

15. Measuring Economic Growth
 Now, we can calculate the economic growth rate using this formula:
𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐺𝑟𝑤𝑜𝑡ℎ 𝑅𝑎𝑡𝑒 𝑇ℎ𝑖𝑠 𝑌𝑒𝑎𝑟 =
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑇ℎ𝑖𝑠 𝑌𝑒𝑎𝑟 − 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝐿𝑎𝑠𝑡 𝑌𝑒𝑎𝑟
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝐿𝑎𝑠𝑡 𝑌𝑒𝑎𝑟
× 100
Example
Given that:
Real GDP in 2019 = $300 billion and Real GDP in 2020 = $320 billion
𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐺𝑟𝑤𝑜𝑡ℎ 𝑅𝑎𝑡𝑒 2020 =
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 2020 − 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 2019
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 2019
× 100 =
20
300
100 = 6.7%

16. Measuring Unemployment
 The population is divided into two groups in any country:
1- The working-age population: the number of people aged 16 years and
older who are not in jail, hospital, or some other institution
2- People too young to work (under 16 years of age) or in institutional
care

17. Measuring Unemployment
 The working-age population is divided into two groups:
1- People in the labor force: All those who are able to work, willing to
work, and searching for a work
2- People not in the labor force: Examples include house wives,
retired people, and full-time students.
 The labor force is the sum of employed and unemployed people.

18. Measuring Unemployment
The unemployment rate
 The unemployment rate is the percentage of the labor force that is
unemployed.
 The unemployment rate is
(Number of people unemployed ÷ labor force) x 100.

19. Measuring Unemployment
Example
Given that:
Population = 80 m., Working-age population = 60 m.,
Labor force = 40 m., and Employed = 35 m.
Calculate:
Unemployment rate

20. Measuring Unemployment
Solution
Unemployment rate = (Unemployed / Labor Force) x 100
Unemployed = Labor force – Employed = 40 – 35 = 5 millions
Unemployment rate = (5 / 40) x 100 = 12.5%