MACROECONOMICS

LECTURES

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National Income Accounts

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❖ National income (NI):
• National income is the sum of the incomes that all individuals in the economy
earned in the forms of wages, interests, rents and profits. It excludes government
transfer payments.
• Gross Domestic Product (GDP):
• GDP is the sum of the money values of all final goods and services produced in
the domestic economy and sold on organized markets during a specified period of
time, generally 1 year.
• Gross National Product (GNP):
• GNP is the total value of all final goods and services produced within a nation in
a particular year, plus income earned by its citizens (including income of
immigrants) minus income of foreign citizens located that country.
• GNP = GDP + Factor payment from abroad – Factor payments to abroad.
• GNP =GDP + Net factor income from abroad.
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• Net National Product (NNP):
• NNP is the total market value of all final goods and services produced by resident
country during a year minus depreciation.
• NNP = GNP – Depreciation or capital consumption allowance (CCA).

• Per Capita GDP:

• A measure of the total output of a country that takes the GDP and divides it by the
number of people in the country.
𝑇𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡
• 𝑃𝑒𝑟 𝐶𝑎𝑝𝑖𝑡𝑎 𝐺𝐷𝑃 =
𝑇𝑜𝑡𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛

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❖ Rules of computing GDP:
• GDP:

𝐺𝐷𝑃 = 𝑃𝑟𝑖𝑐𝑒 𝑋 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

= 𝑃. 𝑄
Or, 𝐺𝐷𝑃 = σ𝑛𝑖=1 𝑃𝑖 . 𝑄𝑖
= 𝑃1 . 𝑄1 + 𝑃2 . 𝑄2 + ⋯ + 𝑃𝑛 𝑄𝑛

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❖ Example:

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❖ Nominal GDP:
• Nominal GDP measures the value of output during a given year using the prices
prevailing during that year.
• Over time the general level of prices rise due to inflation, leading to an increase in
nominal GDP even if the volume of goods and services produced is unchanged.
• Suppose, in 2018 nominal GDP measure the value of goods produced in 2018 at
the market prices prevailing in 2018 is nominal GDP measure the value of goods
produced in 2015 at the market prices prevailing in 2015.
• Nominal GDP change from year to year for two reasons,
• First, physical output of goods changes and second market prices changes.

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❖ Real GDP:

• Real GDP is Evaluated at the market prices of some base year.

• A better measure of well-being would count the economy's output of goods and
services and would not be influenced by the change in prices. That’s why
economists use real GDP which is the value of goods and services measured using
a constant set of price.
• Real GDP shows what would have happened to expenditure on output if quantities
had changed but prices had not.

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❖ Example:

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•

𝑃𝑟𝑖𝑐𝑒 𝑎𝑡 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟

• 𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 = X 100
𝑃𝑟𝑖𝑐𝑒 𝑎𝑡 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑟

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GDP Deflator:

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 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
• 𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = 𝑋 100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃

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❖ Numerical Example:
• # Price and production of bread in 2018 and 2015 is given. Calculate,
• (I) Nominal GDP (ii) Real GDP (iii) GDP Deflator.
•→
Year Price Production Nominal Real GDP GDP Price index
(Per unit) (per unit) GDP Deflator
(P) (Q) (P.Q) =
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
𝑿𝟏𝟎𝟎
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷

2018 6 22 132 220 60% 60%

2015 (Base 10 24 240 240 100% 100%

year)

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• 1. GDP as the sum of final goods and services (Expenditure Method):
• GDP is measured by adding up the final demands of all consumers, business
firms, government and foreigners. Using the symbols Y, C, I and (X-M). We have,
•
• 𝑌 = 𝐴𝐷 = 𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝑀 = 𝐺𝐷𝑃
• 2. GDP as the sum of all factor payments ( income Method):
• We can count up the GDP in another way by adding up all incomes in the
economy. That is,
• 𝐺𝐷𝑃 = 𝑅𝑒𝑛𝑡𝑠 + 𝑊𝑎𝑔𝑒𝑠 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑠 + 𝑃𝑟𝑜𝑓𝑖𝑡𝑠
• 3. GDP as the sum of values added:
• The value added by a firm is its revenue from selling a product minus the amount
paid for goods and services purchased from other firms.
• GDP can be measured as the sum of the values added by all firms.
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❖The major problems of macroeconomics are,

1) Unemployment 2) Inflation

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❖ Unemployment:
• Generally, unemployment or joblessness occurs when people are without work
and actively seeking work.
• Broadly unemployment defined as labor force participants being available and
willing to work but unable to find jobs. In other words, the available human
resources for production are not being used or underutilized.

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❖Unemployment rate:
Unemployment rate is a measure of the prevalence of unemployment in an
economy is calculated as a percentage. Basically, dividing the number of
unemployed people by the number in total labor force then multiplying it by 100.

𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑤𝑜𝑟𝑘𝑒𝑟
Unemployment Rate = x 100
𝑇𝑜𝑡𝑎𝑙 𝑙𝑎𝑏𝑜𝑟 𝑓𝑜𝑟𝑐𝑒

Such as, according to World Bank report, unemployment rate in Bangladesh

increased to 5.30% in 2020 from 4.20% in 2019.

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For an example:
• If there are 4 million jobless Americans and 44 million Americans employed,
simply divide 4 by 44 and we will wind up with a decimal of 0.09. Multiplying
with 100 it becomes 9%.

4 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
• Unemployment rate in America = x 100
44 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
• = 9%
• In this example, (100 – 9)% = 91%
• It refers that, 91% people who can work have a job or are employed.

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❖ Types of Unemployment:

Unemployment

Voluntary Involuntary

Frictional Structural Cyclical Classical Seasonal

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1) Voluntary Unemployment:
• Voluntary unemployment includes worker who reject low wage jobs. That means, people
are voluntarily unemployed.
• For an example, frictional unemployment is the voluntary unemployment.
•
Frictional Unemployment:
• Frictional unemployment is the time period between jobs when a worker is searching for
it, or, transitioning from one job to another. It occurs when people are out of work for a
short period due to search for any better job. Sometimes it is called search
unemployment and can be voluntary based on the circumstances of the unemployed
individual.
• Frictional unemployment always present in economy. So, the level of involuntary
unemployment is the unemployment rate minus the rate of frictional unemployment.
• Fictional unemployment exists because jobs and worker both are heterogeneous and
mismatch can result between the characteristics of supply and demand. Such a,
mismatch can be related to skills, payment, work time, location, seasonal industries,
attitude, taste, etc. 22
• 2) Involuntary Unemployment:
Involuntary unemployment occurs when people are not willingly
unemployed. It includes workers fired due to an economic crisis, industrial
decline, company bankruptcy or organizational restructuring.
Involuntary unemployment are 4 types.

a) Structural Unemployment:
• Structural unemployment occurs when a labor market is unable to provide jobs for
everyone who wants one because, there is a mismatch between the skills of the
unemployed workers and the skills needed for the available jobs.
• The crucial difference between frictional and structural unemployment is that,
unlike frictionally unemployed workers , structurally unemployed workers cannot
realistically be considered ‘between job’. Instead, their skills and experience may
be unmarketable in the changing (technological improvement) economy in which
they live. Thus they are unemployed for a longer period.
• Structural unemployment may also be rise by persistent cyclical unemployment. 23
,M
b) Cyclical Unemployment:
• Cyclical or Keynesian unemployment, also known as deficit-demand
unemployment, occurs when there is not enough aggregate demand in the
economy to provide jobs for everyone who wants to work. Cyclical
unemployment rises when the level of economic activity declines, as it does in a
recession.
• Demand for most goods and services falls, less production is needed and
consequently fewer workers are needed, wages are sticky and do not fall to meet
the equilibrium level and mass unemployment result. With cyclical unemployment
number of unemployed workers exceeds number of job vacancies.
• Thus, when macroeconomists speak of maintaining “full-employment”, they mean
limiting unemployment to its frictional and structural components, which means
roughly, producing at potential GDP. Cyclical unemployment occurs during Great
Depression of the 1930s.
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 c) Classical Unemployment:
• Classical or real wage unemployment occurs when real wages for jobs are set
above the market-clearing level, causing the number of job seekers to exceed the
number of vacancies.
• Many economist argued that unemployment increases the more the government
intervenes into the economy to try to improve the conditions of those without job.
• For an example, Minimum Wage

Wages
Laws raise the cost of laborers with
Supply for
few skills to above the market Minimum wage labor
equilibrium, resulting in people E
w
who wish to work at the going rate
but cannot as wage is greater than Demand
for labor
their value and workers becoming O
Unemployment Employment
unemployed.
Figure: Labor Market
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 d) Seasonal Unemployment:

• When workers are employed in a particular season but unemployed in another

season, then they called seasonal unemployment.
• For an example, in agricultural sector most of the labor in rural areas are seasonal
worker.

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❖ Two major concepts of Employment:
* Full Employment:
• Full employment is an economic situation in which everyone who is willing and
able to work can find a job. It embodies the highest amount of skilled and
unskilled labor that can be employed within an economy at any given time and at
a fair wage rate.
• At a full employment the measured unemployment rate is still positive.
• Full employment is a theoretical goal for economic policymakers to aim for rather
than an actually observed state of the economy. In practical terms, economists can
define various levels of full employment that are associated with low but non-zero
rates of unemployment.
• That’s why “true full employment is an ideal and probably unachievable”.
Situation in which anyone who is willing and able to work can find a job, and
unemployment is zero is not possible in practice.
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 * Natural Unemployment :

• Natural unemployment is the minimum unemployment rate resulting from real or

voluntary economic forces.

• It represents the number of people unemployed due to the structure of the labor
force, including those replaced by technology or those who lack the skills
necessary to get hired. That means, this unemployment caused by structural
factors e.g. mismatched skills. Natural rate of unemployment therefore, includes
frictional and structural unemployment.

• According to USA economic history, natural rate of unemployment is in between

around 4% to 6% unemployment. That is, except this (4-6)% remaining
unemployment is supposed to be in full employment.
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• Non-accelerating Inflation Rate of Unemployment(NAIRU):
• A very similar concept to the natural rate of unemployment is the NAIRU.

• This is the rate of unemployment consistent with a stable rate of inflation. If we

try to reduce unemployment by increasing aggregate demand, then you will get a
higher rate of inflation, and the fall in unemployment will prove temporary.

• Thus, the natural or equilibrium rate is the lowest level of unemployment at which
inflation remains stable.

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❖ Inflation:

Inflation is a persistent rise in the general price level rather

than a once for all rise in it.

Disinflation: Disinflation refers to a fall in

inflation rate. It means prices are increasing at
a slower rate.

Deflation: Deflation is fall in prices. It refers

to a negative inflation rate.

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❖ Types and Causes of Inflation:

Demand-pull Inflation
Main Types

Cost-push inflation

Inflation Creeping Inflation

Walking/Moderate Inflation
Types By Rate of
Increase
Galloping Inflation

Hyperinflation
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❑ Main Types: (1) Demand-pull Inflation:

• When AD for all purposes consumption, investment and government expenditure

exceeds the supply of goods or AS at current prices then, there is a rise in prices,
it is called demand pull inflation.

➢This may happen when economy is at a full/nearly full employment level, people
have income and they spend more which increase demand.
➢From business side, they will increase investment and spend. This spending
pressure will lead to the rise in price level.

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Graphical Explanation:
• In the figure, initially the AS curve is upward. But, AD5 AS
when full employment level of aggregate supply OYF is Price
reached, AS curve takes a vertical shape. Because, at P5
AD4
full employment level supply of output can not be
AD3
increased.
P4 AD2
• At equilibrium level E1, equilibrium is less then full
AD1
employment level, AD is AD1, price is P1, national P3
income is Y1.
P2
• Due to increase in demand AD1 rises to AD2 .
P1
Price and income also increases to P2 and Y2.
• At AD3 and P3 price level the economy and the
O Y2 YF National
national income reached into full employment level YF Y1
Income/
. Output

• Now, if AD increases beyond the AD3 , only price will Figure: Demand-pull Inflation.
increase keeping the output level same at the full
employment level. 33
• Here, increase in AD end up with a high price level which is an
inflation.
• Therefore, it is called demand-pull inflation.

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❑ (ii) Cost-push Inflation:

• Cost-push inflation occurs when there is an increase in costs due increase the costs
of inputs specially energy prices, raw materials, borrowing, wages and even
attempts to increase profit irrespective of any increase in aggregate demand.

➢ In this case, as price of factors of production increase, the seller’s cost increase
and this will be passed to the consumers.

➢Also known as supply-shocks inflation that is, shortage to the availability of

supply of goods and services.

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Graphical Explanation:

• The figure depicts the cost-push inflation. AS2

P
• Here, suppose, the initial equilibrium is in the point E1
AS1
where, AD1 and AS1 curves intersects.
• As costs of production increase, production goes down
and supply also decrease. E2
• The AS curve shifts to the left to AS2 keeping the AD P2
same, cause there is no change in AD. P1 E1
• This results a higher price of output. Price increase
from P1 to P2 and output or national income decrease AD
from .
• Eventually cost-push inflation can lower economic O
Y2 Y1 National
growth and living standard though often it is Income/Output
temporary.
Figure: Cost-push inflation.
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 ❖ Business Cycle:
• A business cycle is the periodic growth and decline of a nation's economy,
measured mainly by its GDP. It is sometimes called a "trade cycle" or "economic
cycle," refers to a series of stages in the economy as it expands and contracts.

❑ Phases of Business Cycle:

Understanding the different phases of a business cycle can help individuals make
lifestyle decisions, investors make financial decisions, and governments make
appropriate policy decisions.
A business cycle follow a wave like pattern overtime. There are 4 stages of a
Business Cycle.

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• 1. Expansion:
• Expansion, considered the "normal" or at least, the most desirable state of the
economy, is an up period. During an expansion, businesses and companies are
steadily growing their production and profits, unemployment remains low, and the
stock market is performing well. Consumers are buying and investing, and with
this increasing demand for goods and services, prices begin to rise too.
• 2. Peak:
• Once these numbers start to increase outside of their traditional bands, though,
then the economy is considered to be growing out of control. The peak marks the
climax of all this feverish activity. It occurs when the expansion has reached its
end and indicates that production and prices have reached their limit. This is the
turning point: With no room for growth left, there's nowhere to go but down. A
contraction is forthcoming.
•

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• 3. Contraction (Recession):
• The recession is the stage that follows the peak phase. The demand for goods and
services starts declining rapidly and steadily in this phase. Producers do not notice
the decrease in demand instantly and go on producing, which creates a situation of
excess supply in the market. Prices tend to fall. All positive economic indicators
such as income, output, wages, etc., consequently start to fall.
• 4. Trough (Depression):
• The growth in the economy continues to decline, and as this falls below the steady
growth line, the stage is called a depression. In the depression stage, the
economy’s growth rate becomes negative. There is further decline until the prices
of factors, as well as the demand and supply of goods and services, contract
to reach their lowest point. The economy eventually reaches the trough. There is
extensive depletion of national income and expenditure.
• After the trough, the economy moves to the stage of recovery and expansion. In
this phase, there is a turnaround in the economy, and it begins to recover from the
negative growth rate. Demand starts to pick up due to low prices and,
consequently, supply begins to increase.
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 ❖ Economic Growth:

• Economic growth means an increase in real GDP which means an increase in the
value of national output/national expenditure compared from one period of time to
another.
• Economic growth is an important macro-economic objective because it enables
increased living standards, improved tax revenues and helps to create new jobs.

• It can be measured in nominal or real (adjusted for inflation)terms. Traditionally,

aggregate economic growth is measured in terms of gross national product
(GNP)or gross domestic product (GDP), although alternative metrics are
sometimes used.
• It leads to an increase in incomes, inspiring consumers buy more, which means a
higher material quality of life or standard of living.
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