2.1 Macroeconomic Goals

1. Total output and income increase at an annual rate acceptably
2. Developed = 3 - 5%
3. Undeveloped= 6 - 8%
4. Should be sustainable
   1. No heavy environmental costs

1. Prices should not increase through time too fast
2. Inflation Rate = 1.5% - 3%

Annotations:

• Whoever who is looking for a job can find one

1. 5%

Annotations:

• More on this in the International Trade section

1. Firms
2. Households
3. Governments
   1. Government Expenditures
   2. Taxes
4. International Trade

1. I = S

   Annotations:

   • INJECTION:  I = Investment
   • LEAKAGES: S = Savings
   1. No government and foreign sectors
   2. Only Firms and Households
2. I + G = S + T

   Annotations:

   • INJECTIONS: I = Investment G = Government Expenditures
   • WITHDRAWALS: S = Savings T = Taxes
   1. Government, Firms and Households
   2. No foreign Sectors
3. X + I + G = M + S + T

   Annotations:

   • INJECTIONS: X = Export Revenues I = Investments G = Government Expenditures
   • LEAKAGES: M = Imports S = Savings T = Taxes
   1. All components present

1. Methods to Calculate GDP
   1. Output Method
      1. Add all domestically produced final goods and services

         Annotations:

         • 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
         1. Primary Sector + Secondary Sector + Tertiary Sector
         2. Industry 1 + Industry 2 + Industry 3 + ... + Industry n
   2. Expenditure Method
      1. Add all expenditures made on domestically produced final goods and services

         Annotations:

         • Monitor the level of investment spending through time or the proportion of government expenditures in total economic activity
         1. Adding all component's spendings (based on circular flow of income

            Annotations:

            • i.e.  Household Spendings + Firm Spendings + Government Spendings + Foreign Net Spendings
         2. C + I + G + (X - M)

            Annotations:

            • C = Consumption I = Investment G = Government Expenditure (X - M ) = Net Exports
   3. Income Method
      1. Add all incomes generated in the domestic production process

         Annotations:

         • Provides information about the proportion of total income earned by labor in contrast to owners of capital
         1. Wages + Profits + Interests + Rents
2. Real GDP VS Nominal GDP
   1. Real GDP

      Annotations:

      • A measure of output after having isolated (or adjusted for) the effect of inflation.  This reflects on the VOLUME OF PRODUCTION, not value
   2. Nominal GDP

      Annotations:

      • A measure of output of a certain period valued at the prices prevailing in that same period
   3. GDP Deflator
      1. Measure the AVERAGE level of prices of all goods and services included in the GDP of a country
3. Problems with GDP Measurements
   1. Existence of Black Markets
   2. Workers under-reporting income (to avoid high tax pays)
   3. Illegal Practices
   4. Self-Repair not included
   5. Unreliable estimation

1. Focusing on the nationality of workers disregarding their geographic location

Annotations:

• Purchasing Power Parity (PPP) - More valuable, per capital based, figure used to compare countries (since it incorporates the cost of living)

1. No indication of income distribution
2. No indication of environmental degration
3. No indication of non-marketed subsistence production
4. Does not reveal composition of output
5. Does not include the value of leisure
6. Fails to include human capital