EMBA Macro Session 1

7/31/2019 EMBA Macro Session 1

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Ace Institute of Management

Executive MBA Program

Session 1

InstructorSandeep Basnyat

[email protected]

9841 892281
mailto:[email protected]:[email protected]


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Course Structure

Macroeconomic Theory + Individual Presentations Theory: Provide foundations for understanding

Individual Presentations: Everyday Newspaper/Magazine articles provide real life issues (will beprovided)

Class Test I: multiple choice

Assignment I: Economic analysis

Research paper: At the end (topic of your choicebut should be approved before)


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How does the entire economy works


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Three statistics that economists and

policymakers use:

Gross Domestic Product (GDP)is the

monetary value of all final goods and

services produced within an economy in a

given period of time-best single measure of

economic well being of a society

Inflation rate measures changes in level of

prices.

The unemployment rate tells us the

fraction of workers who are unemployed.

IMPORTANT STATISTICS FOR MACROECONOMISTS


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Two waysof viewing GDP

Total income of everyone in the economy

Total expenditureon the economys

output of goods and services

Households Firms

Income $

Labor

Goods/ Services

Expenditure $

For the economy as a whole, income must equal expenditure.

GDP measures theflowof dollars in the economy.

Gross Domestic Product (GDP)


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Firms Households

Government

Financial

Markets

Market for goodsand Services

Market for Factors

of ProductionFactor Payment

Income (Y)

Taxes (T)

Private

Savings (S)

Consumption (C)

expenditure

Firms Revenue

Government Purchase (G)

Investment (I)

Simple Circular flow of income model (Closed economy)

Public

Savings (S)

Goods/

Services

Loans

S + T = I + G

Total Leakages = Total Injections


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If:

$0.50 $1.00

GDP = (Price ofapples Quantity ofapples)

+ (Price oforanges Quantity oforanges)

= ($0.50 4) + ($1.00 3)GDP = $5.00


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Governmentpurchases of goods

and services

Y = C + I + G + NX

Total demandfor domestic

output (GDP)

Consumption

spending by

households

Investment

spending by

businesses and

households

Net exports

or net foreign

demand

This is the called the national income accounts identity.


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Calculating GDPComponents of U.S. GDP, 2004: The Expenditure Approach

BILLIONS OFDOLLARS

PERCENTAGEOF GDP

Personal consumption expenditures (C) 8,214.3 70.0Durable goods 987.8 8.4Nondurable goods 2,368.3 20.2Services 4,858.2 41.4

Gross private domestic investment (l) 1,928.1 16.4Nonresidential 1,198.8 10.2

Residential 673.8 5.7Change in business inventories 55.4 0.5

Government consumption and grossinvestment (G)

2,215.9 18.9

Federal 827.6 7.1State and local 1,388.3 11.8

Net exports (EX

IM) -624.0 - 5.3Exports (EX) 1,173.8 10.0Imports (IM) 1,797.8 15.3

Gross domestic product (GDP) 11,734.3 100.0Note: Numbers may not add exactly because of rounding.Source: U.S. Department of Commerce, Bureau of Economic Analysis.
http://upload.wikimedia.org/wikipedia/en/f/f6/GDP_Categories_-_United_States.png


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http://upload.wikimedia.org/wikipedia/en/f/f6/GDP_Categories_-_United_States.png


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Practice Problem-1.1

Consumption : 8746.2

Investment : 2103.1

Government Purchase : 2363.4Net Export : - 726.9

Calculate GDP from the above data

Answer: 12485.8


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Measuring GDP from Income side

Sum of income of all factors of production gives theGDP from income side (Gross Domestic Income)

GDI or GDP (I) = Compensation of employees+ Proprietors Income

+ Rental Income

+ Corporate Profit

+ Net Interest


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Calculating GDP

U.S. National Income, 1980 (Shapiro: Table 2-1, Pg.27; Adjusted)

BILLIONS OFDOLLARS

Gross Domestic Products (GDP) 2341.3

Compensation of employees 1804.4Proprietors income 130.6

Corporate profits 183.8Net interest 190.6Rental income 31.9


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Practice Problem-2

Compensation of the employees : 5299.8Corporate Profits : 856.0

Proprietors Income : 663.5Net Interest : 507.0Rental Income : 143.4

Calculate GDP from the above data

Answer: 7469.7


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World Top 10 GDP in Millions of US Dollars in Market Price

(Source: IMF 2010)

11. India 1,430,020 107. Nepal - 15,108 162. Bhutan - 1,397


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1) Used goods.

2) Intermediate goods (use value added method)


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Other Exclusions from Expenditures Expenditure on purchase of goods and services during

specified time period.

Previous expenditure reflects the change in ownership only.

Avoid neither good nor a service

Does not reflect production such as bonds/ stocks

Avoid expenditure by governments for which it doesnot receive a good or service in return

Eg.: Transfer payments such as Social security,,unemployment compensation etc.

All expenditure on goods/services sold illegally


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Other derivations from GDP

Gross National Product (GNP)

Net National Product (NNP)

National Income (NI)

Personal Income (PI) Personal Disposable Income (DI)


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National Income Accounting contd..

GDP + Income earned from domestic national abroadIncome paid to foreign national at home = GNP

GNP is the monetary value of final goods and services

produced by the nationals (income earned by the nationals

on foreign countries minus income earned by foreigners athome)

GNP Depreciation (Capital Consumption) = NNP

Depreciation is the net capital consumption during the

accounting year

NNP Indirect Business Tax = NI (National Income)


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National Income Accounting

(Narrowing to personalized Income)

National Income (NI) Corporate Profit and Tax

Social Insurance contribution

Net Interest+ Dividends

+ Government Transfer to Individuals

+ Personal Interest Income= PI (Personal Income)


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National Income Accounting

(Narrowing to personalized Income)

Personal Income Personal tax (Income Tax)

Non-tax payments (such as parking tickets)

= DI (Disposable Income)

Disposable income is the final income that a consumerspends on the purchase of goods and services

DI Personal Consumption Expenditure = Saving

Or, DI Saving = Personal Consumption Expenditure

(Note: PCE is the one we add in GDP)


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Real vs. nominal GDP

GDP is the value of all final goods and services

produced.

Nominal GDP measures these values using

current prices.

Real GDPmeasure these values using the

prices of a base year.

(Indicates how much prices have increased

over time- Inflation)


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Practice problem, part 1

Compute nominal GDP in each year. (Multiply Ps &Qs from same year)

Compute real GDP in each year using 2006 as thebase year. (Multiply each years Qs by 2006 Ps)

2006 2007 2008

P Q P Q P Q

good A $30 900 $31 1,000 $36 1,050

good B $100 192 $102 200 $100 205


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Answers to practice problem, part 1

nominal GDP multiply Ps & Qs from same year

2006: $46,200 = $30 900 + $100 192

2007: $51,400

2008: $58,300

real GDP multiplyeach years Qs by 2006 Ps

2006: $46,2002007: $50,000

2008: $52,000 = $30 1050 + $100 205


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GDP Deflator

The inflation rateis the percentage increase in

the overall level of prices.

One measure of the price level is

the GDP deflator, defined as

Nominal GDPGDP deflator = 100

Real GDP


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Practice problem, part 2

Use your previous answers to computethe GDP deflator in each year.

Use GDP deflator to compute the inflation rate from

2006 to 2007, and from 2007 to 2008.

Nom. GDP Real GDP GDPdeflator

Inflationrate

2006 $46,200 $46,200 n.a.

2007 51,400 50,000

2008 58,300 52,000


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Answers to practice problem, part 2

NominalGDP

Real GDP GDPdeflator

Inflationrate

2006 $46,200 $46,200 100.0 n.a.

2007 51,400 50,000 102.8 2.8%

2008 58,300 52,000 112.1 9.3%


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Thank You

Documents

EMBA Macro Session 1