ADVANCED MACROECONOMICS

Key Macro Variables

 PRODUCTION AND INCOME
 Gross Domestic Product
 Value of the final goods and services produced in the economy
during a given period
 Sum of the value-added in the economy during a given period
 Sum of the incomes of an economy during a given period
 Nominal GDP: sum of the quantities of final goods and services
multiplied by their current prices
 Real GDP: sum of the quantities of final goods and services
multiplied by their constant prices
 PRODUCTION AND INCOME
 Real GDP per capita: ratio of real GDP to the population of a
country; gives the average standard of living of a country
 GDP growth: used to assess the performance of an economy
 Expansion: periods of positive GDP growth
 Recession: periods of negative GDP growth
 Note: a recession occurs when the economy goes through two
consecutive quarters of negative growth
 UNEMPLOYMENT
 Employment: Number of people who have jobs
 Unemployment: Number of people who do not have a job but are
looking for a job
 Basic equation: L = N + U
 Unemployment rate u = U/L
 Relevance of unemployment rate: give a signal that the economy
may not be using some of its resources efficiently
 INFLATION
 Inflation: sustained rise in the general price level
 Delfation: sustained decline in the general price level
 GDP deflator: the ratio of nominal GDP to real GDP in a given year
(t)
P = Y /YR
t t t

Y = YR P
t t t

 Relevance of inflation:
 During inflation, not all prices and wages rise at the same
rate. Thus, inflation affects distribution of income.
 Inflation creates distortions in the economy that leads to
undertainty
 THE DEMAND FOR GOODS
 Z = C + I + G + X – IM, the total demand for goods
 C = C (YD), the Keynesian consumption function
 C = c0 + c1 YD, in linear form, where YD = Y – T
 Determination of equilibrium output:
Z = c0 + c1 (Y – T) + I + G, total demand
Y = c0 + c1 (Y – T) + I + G at equilibrium
Y = 1/(1-c1) [ c0 + I + G – c1 T] equilibrium condition