Macroeconomics The subdivision of the discipline of economics that studies and strives to explain the functioning of the economy

as a whole -- the total output of the economy, the overall level of employment or unemployment, movements in the average level of prices (inflation or deflation), total savings and investment, total consumption and so on. The focus of much of macroeconomic theory is analysis of the ways in which conscious government policies (and the unintended secondary consequences of these policies) can influence the overall "economic health" of the country for good and for ill. Macroeconomics is the study of the behavior of the entire economy: it analyzes long-run growth as well as the cyclical movements in total output, unemployment and inflation, the money supply and the budget deficit, and international trade and finance. This contrasts with microeconomics, which studies the behavior of individual markets, prices, and outputs. Four objective of macroeconomics Full Employment - lowest rate of unemployment attainable without accelerating inflation Price Stability - keeping inflation down (monetary policy, fiscal policy) Economic Growth - Self explanatory External policy - Current account, exchange rate etc Gross Domestic Product (GDP) An estimate of the total money value of all the final goods and services produced in a given one-year period using the factors of production located within a particular country's borders. Nominal GDP is the sum value of all produced goods and services at current prices. This is the GDP that is explained in the sections above. Nominal GDP is more useful than real GDP when comparing sheer output, rather than the value of output, over time. Real GDP is the sum value of all produced goods and services at constant prices. The prices used in the computation of real GDP are gleaned from a specified base year. By keeping the prices constant in the computation of real GDP, it is possible to compare the economic growth from one year to the next in terms of production of goods and services rather than the market value of these goods and services. In this way, real GDP frees year-to-year comparisons of output from the effects of changes in the price level. Potential GDP is a measure of the real value of the services and goods that can be produced when a country's factors of production are fully employed. Gross National Product (GNP) A measure of the incomes of residents of a country, including income they receive from abroad but subtracting similar payments made to those abroad. Fiscal policy That part of government policy which is concerned with raising revenue through taxation and with deciding on the amounts and purposes of government spending. Fiscal policy (government spending and taxation) helps determine the allocation of resources between private and collective goods, affects people's incomes and consumption, and provides incentives for investment and other economic decisions. Monetary policy That part of the government's economic policy which tries to control the size of the total stock of money (and other highly liquid financial assets that are close substitutes for money) available in the national economy in order to achieve policy objectives that are often partly contradictory. Monetary policy (particularly central-bank regulation of the money supply to influence interest rates and credit conditions) affects sectors in the economy that are interest-sensitive. The most affected sectors are housing, business investment, and net exports. International economics International economics is concerned with the effects upon economic activity of international differences in productive resources and consumer preferences and the institutions that affect them. It seeks to explain the

patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and migration. GDP The national income and product accounts contain the major measures of income and product for a country. The gross domestic product (GDP) is the most comprehensive measure of a nation's production of goods and services. It comprises the dollar value of consumption (C), gross private domestic investment (I), government purchases (G), and net exports (X) produced within a nation during a given year. Recall the formula: GDP = C + I + G + X The flow-of-product approach: The GDP flow of product approach is calculated by summing up consumption and investments and government and net exports. GDP= C+ I+ G+ Net exports Where net exports = exports imports The flow-of-cost approach: It uses factor earnings and carefully computes value added to eliminate double counting of intermediate products. And after summing up all (before-tax) wage, interest, rent, depreciation, and profit income, it adds to this total all indirect tax costs of business. GDP does not include transfer items such as interest on government bonds or welfare payments. Problem of double counting: In economics, double counting is a human error made by counting a transaction multiple times. Double counting often comes into play when estimating a country's gross domestic product (GDP). It is difficult to accurately add up all the goods and services produced in a country without counting some sales multiple times. In economics, the difference between the sale price and the production cost of a product is the value added per unit. Solution Value added approach. Components of GDP by expenditure: GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X M). Y = C + I + G + (X - M) Here is a description of each GDP component: C (consumption) is normally the largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy. These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. An example includes food, rent, jewelry, gasoline, and medical expenses but does not include the purchase of new housing. I (investment) include business investment in equipments for example and do not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products. G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits. X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.

M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic. Note that C, G, and I are expenditures on final goods and services; expenditures on intermediate goods and services do not count. GDP does not capture the non-paid sector: volunteer work, the informal sector (and black market), raising children, and household duties. GDP can grown by monetizing work that previously was done for free, but this does not necessarily increase wellbeing. Externalities and environmental degradation are excluded from GDP calculation.
From GDP to Disposable income:

Inflation occurs when the general level of prices is rising (and deflation occurs when it is falling). We measure the overall price level and rate of inflation using price indexes. Consumer Price Index (CPI) The consumer price index or CPI is a more direct measure than per capita GDP of the standard of living in a country. It is based on the overall cost of a fixed basket of goods and services bought by a typical consumer, relative to price of the same basket in some base year. By including a broad range of thousands of goods and services with the fixed basket, the CPI can obtain an accurate estimate of the cost of living. It is important to remember that the CPI is not a dollar value like GDP, but instead an index number or percentages change from the base year. Producer Price Indexes (PPI) The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output.

Consumption and Saving Disposable income is an important determinant of consumption and saving. The consumption function is the schedule relating total consumption to total disposable income. Because each dollar of disposable income is either saved or consumed, the saving function is the other side or mirror image of the consumption function. a. The consumption (or saving) function relates the level of consumption (or saving) to the level of disposable income. b. The marginal propensity to consume (MPC) is the amount of extra consumption generated by an extra dollar of disposable income. c. The marginal propensity to save (MPS) is the extra saving generated by an extra dollar of disposable income. d. Graphically, the MPC and the MPS are the slopes of the consumption and saving schedules, respectively. e. MPS / 1 - MPC. Adding together individual consumption functions gives us the national consumption function. In simplest form, it shows total consumption expenditures as a function of disposable income. Other variables, such as permanent income or the life-cycle effect, wealth, and age also have a significant impact on consumption patterns. The personal saving rate has declined sharply in the last two decades. To explain this decline, economists point to social security and government health programs, changes in capital markets, and the rapid rise in personal wealth due to the stock-market boom of the 1990s. Declining saving hurts the economy because personal saving is a major component of

national saving and investment. While people feel richer because of the booming stock market, the nation's true wealth increases only when its productive tangible and intangible assets increase. B. Investment The second major component of spending is gross private domestic investment in housing, plant, software, and equipment. Firms invest to earn profits. The major economic forces that determine investment are therefore the revenues produced by investment (primarily influenced by the state of the business cycle), the cost of investment (determined by interest rates and tax policy), and the state of expectations about the future. Because the determinants of investment depend on highly unpredictable future events, investment is the most volatile component of aggregate spending. An important relationship is the investment demand schedule, which connects the level of investment spending to the interest rate. Because the profitability of investment varies inversely with the interest rate, which affects the cost of capital, we can derive a downward-sloping investment demand curve. As the interest rate declines, more investment projects become profitable, showing why the investment demand schedule slopes downward.