INTRODUCTION to MACROECONOMICS MACRO. GOALS

MACRO. GOALS

P3

• Broadly classified into Internal & Externalgoals.

Internal External1. Sustained

Economic Growth2. Domestic Price

Stability or Lowinflation

3. Full employment

Balance of Payments (trade)equilibrium

INTRODUCTION to MACROECONOMICS

The Ultimate Goal Improving SOL

over time.

STANDARD OF LIVING

Material well-being Non-material well-beingquantity and quality of

goods and services available to the residents

for consumption

‘intangibles’ or quality of life

Commonly measured by real GDP per capita

11.3

Level of well-being or welfare enjoyed by the average person or resident of a country

includes pollution, stress level,

work hours, etc

11.1 National Income Accounting

NATIONAL INCOME ACCOUNTING

- a bookkeeping system that a government uses tomeasure the level of national income in a country in agiven period of time

11.3

11.1 Measurements of National Income

11.3

(1) To indicate Overall SOL of people in a country

- Typically, we like to compare SOL over time andacross space

(2) To track Economic Performance of a country

- To measure rate of economic growth

- To measure the contribution of different sectors of theeconomy→ So as to formulate policies toachieve the 4 macroeconomic goals

Video: BBC NewsWhat is GDP and why does it matter?

2 common measures of NI:

GDP and GNI

11.4

What’s the difference?Gross Domestic Product (GDP)

• market value of all final goods and services newly produced• within the geographical boundary of an economy• in a given period of time (usually one year).

Gross National Income (GNI)• market value of all final goods and services newly produced

• anywhere in the world from resources belonging to residentsof a country

• in a given period of time (usually one year).

Gross Domestic Product (GDP):A matter of WHERE the output is produced

Singapore

S’poreans

Japanese

BritishIndians

M’sians

Thais

Germans

Americans

SG’s GDP = Market value of all final output newly produced by residents and foreigners within the geographical boundary of Singapore

10.7

Gross National Product (GNP):A matter of WHO owns the output.

Thai People

S’poreans

M’sians

MALAYSIA

BritishJapanese

JAPAN

S’poreans

S’poreans S’poreans

Does the following person contribute to Singapore’s GDP or GNP?

Neil Humpreys, a British expat working in S’pore.

SG’s GDP

SG’s GNP

Isabella Josephine KarinaLau, a Singapore Airlinestewardess who is stationed inthe United States

GDP

GNP

Does the following person contribute to Singapore’s GDP or GNP?

If a Japanese Toyota car is made in India, should its market value be recorded as part of Japan’s GDP or GNP?

•Japan’s GNP because Toyota is Japanese-owned.

•Can be recorded as India’s GDP since thecar is produced within India.

TRY IT!

11.4

Converting from GDP to GNI

GNI = GDP + NFIA

NFIA = FIFA – FIPANet Factor Income from Abroad (NFIA) =

Factor Income from Abroad (FIFA) - Factor Income Paid Abroad (FIPA)

Factor incomes are in the form of wages, rentals, interest and profit (i.e. WRIP).

11.5

Factor Incomes earned by the nationals working or investing

overseas

Factor Incomes earned by non-nationals working or investing

within the country

Converting from GDP to GNI

GNI = GDP + NFIANFIA = FIFA - FIPA

SG’s GDP

S’poreans

FIFAForeigners

FIPA

SG’s GNI

11.5

(a) Which countries are likely to have abigger GNI than GDP?

•Countries with relatively larger foreigninvestments undertaken by their residentsabroad relative to investments made byforeigners in the country. Such countries are saidto have a large external wing.

•Countries with a large proportion of thepopulation working abroad e.g. The Philippines.The remittances of Filipinos abroad constitute asubstantial proportion of Philippines’ GNP.

10.9

11.5

(b) Why is it said that a country like Singaporeshould focus on growing its economy via GNIrather than GDP?

•Singapore is a small economy with verylimited natural resources

•Hence to overcome the constraints of the lackof natural resources to grow our economy, ourlocal firms and people are encouraged to investabroad.

•The income earned from abroad (FIFA)increases our GNI.

•In other words, Singapore should focus ongrowing its external wing to increase its GNI.

10.9

11.5

11.1.2 Real vs Nominal NI

Value NI (Y) = General Price Level (P) x Quantity (Q)

11.5

Nominal NI rises when GPL↑ or Q↑ (or both↑)

• Using constant / base year prices allow us to measurereal NI; and

• Measuring at current / prevailing prices results innominal NI.

Always assume that data shows nominal NI unless otherwise stated!IMPORTANT

Real NI rises ONLY when Q↑

Real GDP

11.6

Real GDP = Nominal GDP with the effects of inflation removed

Real GDP is GDP measured at constant or base year prices. E.g. GDP at 2010 prices (prices held constant)

Any increase in real GNP = increase in physical quantity of output

Nominal GDP

11.6

Nominal GDP = GDP with the effects of inflation NOT removed

GDP measured at current or prevailing market prices.

Any increase in nominal GDP≠ increase in physical quantity of output

since it could be due to increase in GPL

11.6

Real GDP = Nominal GDP with the effects of inflation removed

Real GDP = Nominal GDPGDP deflator × 100

GDP deflator – Price index based on the prices of goods andservices measured in the GDP.

In practice, the Consumer Price Index (CPI) is often used as aproxy deflator.

o CPI is >100 if prices have risen compared to thebase year.

o CPI is <100 if prices have fallen compared to thebase year.

Converting Nominal to Real GDPNumerical example:Nominal GDP for SG = $200m ( 2013)Prices ↑12% àGDP deflator = 100 + 12 = 112


= 200112× 100

= $178.6m

11.6

Converting Nominal to Real GDPNumerical example:Nominal GDP for SG = $200m ( 2013)Prices ↓4% àGDP deflator = 100 - 4 = 96


= 20096 × 100

= $208.3m

11.6

11.6

APPLICATION (Useful for CSQ)

Growth in Real NI (% change)

≈ Growth in Nominal NI (% change) – Inflation rate (%)

E.g. If your data gives you nominal GDP growth is 10%, whileinflation rate was 4%, you can conclude that there must have beenreal GDP growth of approx. 6%.

Overall Economy

2009 2010 2011 2012 2013 2014

GDP at 2010 Market Prices

$m 279,729.3 322,361.1 341,886.1 350,446.0 363,941.9 380,585

GDP at Current Market Prices

$m 279,858.0 322,361.1 344,712.4 358,542.6

372,813.9 390,089

Source: Singapore Department of Statistics

REAL ECONOMIC GROWTH OF SINGAPORE

GDP at 2010 market prices refers to the total value of final outputnewly produced within the geographical boundary of a country(Singapore) in any year valued in the prices ruling in 2010, which is thebase year. It is therefore the real GDP, which indicates changes in realphysical output. The effects of inflation have been removed.

11.7

(a) (i) Explain what is meant by ‘GDP at 2010 market prices’.

Overall Economy

2009 2010 2011 2012 2013 2014


$m 279,729.3 322,361.1 341,886.1 350,446.0 363,941.9 380,585


$m 279,858.0 322,361.1 344,712.4 358,542.6

372,813.9 390,089


GDP at 2010 Market Prices (i.e. real GDP) was lower than GDP at CurrentMarket Prices (i.e. nominal GDP) from 2011 to 2013 because there was asustained increase in the general price level, or inflation in Singapore.Since real GDP only measures changes in physical output and ignoresprice changes while nominal GDP measures both, nominal GDP isnaturally higher when there is inflation.

11.7

(a) (ii) Why is Singapore’s GDP at 2010 prices consistentlylower than her GDP at current market prices?

Overall Economy

2009 2010 2011 2012 2013 2014


$m 279,729.3 322,361.1 341,886.1 350,446.0 363,941.9 380,585


$m 279,858.0 322,361.1 344,712.4 358,542.6

372,813.9 390,089


However, it is important to note that for 2009, the lower GDP at 2010Market Prices indicates a lower general price level in 2010 ascompared to 2009. In other words, the price level has fallen from 2009to 2010, not increased.

11.7

(a) (ii) Why is Singapore’s GDP at 2010 prices consistentlylower than her GDP at current market prices?

Overall Economy

2009 2010 2011 2012 2013 2014


$m 279,729.3 322,361.1 341,886.1 350,446.0 363,941.9 380,585


$m 279,858.0 322,361.1 344,712.4 358,542.6

372,813.9 390,089


It is possible if there is a sustained fall in the general price level.

11.7

(b) Is it possible for GDP at current market prices to be lowerthan GDP at 2010 market prices?

11.1.3 Real NI per capita

11.7

Real NI per head•key indicator of SOL•allows us to consider the quantity of goods andservices available for consumption for theaverage person in a country

•per capita à per person/ head

Real GNI per capita = 𝐑𝐞𝐚𝐥𝐆𝐍𝐈Population

11.1.4 General Difficulties in Measuring NI10.13

Domestic Helper Stay-at-home Mum

11.8

The Housewife and the Maid

I am not part of GDP

I am part of your household

and GDP

11.1.4 General Difficulties in Measuring NI10.13

Legal Gambling Illegal Gambling

11.8

Illegal Gambling not part of GDPIllegal Gambling during Chinese

New Year

Legal Gambling

10.12 11.1.4 General Difficulties in Measuring NI

11.8

Video: Korea’s Underground Economy

General Difficulties in measuring NIa) Omissions in Measurement of NI

NI covers only the production of goods & services which aremarketed.

However, some countries conduct significant amounts of non-marketed activities which are not exchanged for money e.g.housewives’ services, illegal activities and unreported activitiese.g. private tuition, freelance jobs.

These will not be recorded in their NI statistics and hence theiractual SOL may be significantly understated.

11.8

b) Danger of double countingDue to difficulty in distinguishing between• final and intermediate products• earned and transfer incomes

General Difficulties in measuring NI11.8

c) Difficulty in obtaining reliable & completeinformation

• Recall (BBC Video): compiled from thousands ofsurveys completed by UK businesses and by thegovernment

• These sources of data are not designed to measurenational income

• E.g. income tax does not cover people with lowincome & some people may under-report income toevade/ lower taxes payable

11.8

General Difficulties in measuring NI

Note: Do not confuse the problems of computing the NIwith the problems of using/interpreting the statistics.

STANDARD OF LIVING

Material well-being Non-material well-beingquantity and quality of

goods and services available to the residents

for consumption

‘intangibles’ or quality of life

Commonly measured by real GDP per capita

11.3

Level of well-being or welfare enjoyed by the average person or resident of a country

includes pollution, stress level,

work hours, etc

Comparison of SOL over TIME

10.14 11.2 Comparison of SOL over Time & Space

11.9

Comparison of SOL over SPACE

“How does the SOL of Singapore today

compare against the SOL of

Singapore in the1950s?”

“How does the SOL of Singapore compare against the SOL of the

USA?

There are two basic questions commonly asked:

LIMITATIONS OF USING NATIONAL INCOME STATISTICS (assuming Nominal GDP is given) TO COMPARE STANDARD OF LIVING

OVER TIME OVER SPACEMATERIAL aspects MATERIAL aspects

a) Changes in general price level a) Different currencies involvedb) Changes in population b) Differences in populationc) Changes in composition of NI c) Differences in composition of NId) Changes in the distribution of NI d) Differences in the distribution of

NIe) Different sizes of the non-monetised sector

f) Differences in the availability andreliability of data

NON-MATERIAL aspects NON-MATERIAL aspectse) Negative Externalities g) Negative Externalitiesf) Disamenities h) Disamenities

11.9

NOTE THE LANGUAGE!Changes vs Differences

• Use of NI statistics tends to beproblematic – often we may overstate orunderstate SOL.

• Hence, there should be carefulconsideration of the limitations of usingNI statistics.

10.14

Are NI statistics a good indication of the welfare of people within the country?

11.2 Comparison of SOL over Time & Space

11.9

a) Changes in general price level (i.e. inflation)

• Recall: Published figures are usually nominal NI

• Real increase in NI = Real increase in nationaloutput

• Hence, SOL improvement

• So real GDP or GNP must be used to compare SOLover time.

11.2.1 LIMITATIONS OF USING NISTATISTICS TO COMPARE SOLOVER TIME

MATERIAL ASPECTS

11.10

b) Changes in population

• Recall: “SOL refers to…welfare enjoyed by…anaverage person”

• If population grows faster than real GDP, theaverage person will be worse off.

• So, real GDP per capita must be used tocompare SOL over time.

11.2.1 LIMITATIONS OF USING NI STATISTICS TO COMPARE SOL OVER TIME

MATERIAL ASPECTS

11.10

NOTE! Be savvy when reading the NI data

It is very important to scrutinise the NI data givenin answering ‘A’ level questions.

If the data given is real GDP per capita, there is noneed to highlight that this data is limited as it doesnot consider (a) changes in general price level and (b)changes in population, as clearly, the data hasalready considered both.

Cambridge examiners penalised students severely when they do notstudy the data carefully and answer the questions blindly byregurgitating the notes (sometimes in the exact sequence).

11.11

c) Changes in composition of NI

(1) Production ≠ Consumption• Recall: “Material SOL refers to quality and

quantity of goods and services…forconsumption”

• But not all goods are consumer goods! (Recallscarcity and consumer vs. capital goods)


MATERIAL ASPECTS

11.11

North Korea spends about a third of its GDPon defence (Source: Reuters, Jan 2011)

While there is significant starvation among the population

If an increase in GDP is due to more defence / military goods being produced (at the expense of consumer goods), then material SOL has not improved.


(1) Production ≠ Consumption

(2) Current vs. Future SOL• Capital/ Investment goods (raw materials, machines,

tools, etc.) are part of current NI calculations, but do notcontribute to current SOL.

• But will raise future SOL – as more consumer goods canbe produced in the future, shorter working hours etc.

11.2.1 LIMITATIONS OF USING NI STATISTICS TO COMPARE SOL OVER TIMEMATERIAL ASPECTS

11.11


(1) Production ≠ Consumption

(2) Current vs. Future SOL

(3) Consumer Goods for Domestic vs. Foreign Markets• A rise in NI due to increase in export revenue alone has no

impact on SOL as domestic consumers do not enjoy moregoods for consumption.

• A fall in NI due to increase in import expenditure mayactually improve SOL of domestic consumers.


MATERIAL ASPECTS

11.12

d) Changes in distribution of NI• Real GDP per capita measures the average income

per person• RECALL: SOL is about the welfare of the average

person in an economy!

• If income inequality worsens as NI increases, SOLmay not have improved for the average/medianperson.


MATERIAL ASPECTS

11.12

Not the same!

Income inequality in Singapore

Gini coefficient for Singapore (2005-2015)

To understandincome distribution,we can consider theGini Coefficient.

(between 0: perfectincome equality and1: perfect incomeinequality)

11.13

e) Changes inNegative Externalities• Increased production often

leads to negativeexternalities such aspollution, congestion andenvironmental damage.

• These externalities are notreflected in NI statistics,thus SOL may beoverstated.


NON-MATERIAL ASPECTS

11.13

In 2015, Beijing’s PSI hit a high of 895!

f) Changes inDisamenities• Increase in NI may also

be accompanied byincreased stress levels,longer working hoursetc.

• Again, SOL may beoverstated.


NON-MATERIAL ASPECTS

11.13

In Japan, there is a term called‘Karoshi (過死)’which literally means ’death byoverwork’

What does it mean to be poor?

World’s 10 most expensive cities to live in

https://www.cnbc.com/video/3000609321

Documents

INTRODUCTION to MACROECONOMICS MACRO. GOALS