2.1 Macroeconomic Goals

2.1 Macroeconomic Goals

1. General Goals

   • Satisfactory and Sustainable Real Growth
     • Total output and income increase at an annual rate acceptably
     • Developed = 3 - 5%
     • Undeveloped= 6 - 8%
     • Should be sustainable
       • No heavy environmental costs
   • Price Stability
     • Prices should not increase through time too fast
     • Inflation Rate = 1.5% - 3%
   • High levels of employment
     • Whoever who is looking for a job can find one
     • 5%
   • Long-Run Equilibrium in the Balance of Payments
     • More on this in the International Trade section
   • Equitable Distribution of Income

2. Circular Flow of Income

   • Components
     • Firms
     • Households
     • Governments
       • Government Expenditures
       • Taxes
     • International Trade
   • Types of Models
     • I = S
       • INJECTION:  I = Investment
       • LEAKAGES: S = Savings
       • No government and foreign sectors
       • Only Firms and Households
     • I + G = S + T
       • INJECTIONS: I = Investment G = Government Expenditures
       • WITHDRAWALS: S = Savings T = Taxes
       • Government, Firms and Households
       • No foreign Sectors
     • X + I + G = M + S + T
       • INJECTIONS: X = Export Revenues I = Investments G = Government Expenditures
       • LEAKAGES: M = Imports S = Savings T = Taxes
       • All components present

3. Measures of Economic Activity

   • GDP
     • Methods to Calculate GDP
       • Output Method
         • Add all domestically produced final goods and services
           • Gives us the share of total output accounted for by each of the three sectors of an economy as well as the output of different industries
           • Primary Sector + Secondary Sector + Tertiary Sector
           • Industry 1 + Industry 2 + Industry 3 + ... + Industry n
       • Expenditure Method
         • Add all expenditures made on domestically produced final goods and services
           • Monitor the level of investment spending through time or the proportion of government expenditures in total economic activity
           • Adding all component's spendings (based on circular flow of income
             • i.e.  Household Spendings + Firm Spendings + Government Spendings + Foreign Net Spendings
           • C + I + G + (X - M)
             • C = Consumption I = Investment G = Government Expenditure (X - M ) = Net Exports
       • Income Method
         • Add all incomes generated in the domestic production process
           • Provides information about the proportion of total income earned by labor in contrast to owners of capital
           • Wages + Profits + Interests + Rents
     • Real GDP VS Nominal GDP
       • Real GDP
         • A measure of output after having isolated (or adjusted for) the effect of inflation.  This reflects on the VOLUME OF PRODUCTION, not value
       • Nominal GDP
         • A measure of output of a certain period valued at the prices prevailing in that same period
       • GDP Deflator
         • Measure the AVERAGE level of prices of all goods and services included in the GDP of a country
     • Problems with GDP Measurements
       • Existence of Black Markets
       • Workers under-reporting income (to avoid high tax pays)
       • Illegal Practices
       • Self-Repair not included
       • Unreliable estimation
   • GNI
     • Focusing on the nationality of workers disregarding their geographic location
   • PPP
     • Purchasing Power Parity (PPP) - More valuable, per capital based, figure used to compare countries (since it incorporates the cost of living)
   • Problems with using GDP and GNI
     • No indication of income distribution
     • No indication of environmental degration
     • No indication of non-marketed subsistence production
     • Does not reveal composition of output
     • Does not include the value of leisure
     • Fails to include human capital
   • The Trade/ Business Cycle

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