For example: the decision by a firm to buy or not a particular machine used in its production process is a microeconomic problem. The effect of a decrease in the interest rate on the saving decisions of Kenya households is a macroeconomic problem. Therefore, the objective of macroeconomics is to explain some features of an economy as a whole, and toward his end, macroeconomics collects data on many aggregate variables and try to create theoretical models that can explain the behavior of such variables.

In macroeconomics, 3 aggregate variables are normally very important to describe the economic situation in a given economy/country: GAP (Gross Domestic Product: the value of goods and services produced in a country in a given period of time), the Inflation Rate (the percentage change of the general level of prices from one period to another) and the Unemployment Rate (how many people in the labor force are unemployed in a given period of time, in percentage). We shall now explore some of these important macro variables in more detail.

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National Income National Income refers to the monetary value of the flow of final goods and services arising from the productive activities of a nation in any one period. National Income is measured using Gross Domestic Product (GAP). GAP measures the total income of everybody in the economy in a given period and the expenditure of everybody on the economy’s output of goods and services. GAP measure the income and expenditure simultaneously because the two are really the same. For an economy as a whole, Income must be equal to expenditure. I = E

To further explain this, consider a worker w ho renders a service and is paid an income: The worker receives an income while the recipient of the service incurs an expenditure. In aggregate therefore, income is equal to expenditure. The Circular Flow of Income diagram is used to further illustrate the equality of Income and Expenditure. The Circular Flow of Income This diagram describes all the transactions between households and firms in a Macroeconomics Lecture 1 By magma produced by firms are bought by households and that households spend all their income.

When households buy goods and services from firms, this flow is through the arrests for goods and services. Firms in turn spend the money from sales to pay workers’ wages, rents and profits to owners. Money therefore continuously flows from households to firms and then back to households. This is of course oversimplifies because households do not spend all their income and there is also the government that apart from receiving taxes also buys some goods and services. Regardless of whether a household, government or firm buys goods, every transaction has a buyer and a seller.

Therefore, for an economy as a whole, expenditure and income are always the same. See the circular flow diagram on up. 97, chapter 10, Manama. Measurement of Gross Domestic Product Gross Domestic Product is the market value of all final goods and services produced within a country in a given period of time. Components of GAP GAP is measured by considering all the various forms of expenditure. GAP (Y) is divided into 4 components:- Consumption O, Investment (l), Government Spending (G) and Net exports (NIX).

The GAP measurement formula is there an identity of the form: Y=C+I+G+ NIX Consumption O Consumption is the spending by households on goods and services. These are both consumption goods like food and clothing and durable goods like electronics, automobile etc. It also includes services like medical services, education etc. Investment (l) This is the purchase of goods that will be used in future to produce more goods and services. It is the sum of purchases of capital equipment, inventories and structures.

The purchase of a new home by a household is considered part of investment. Note that the word investment is used differently from what you may know of it: stocks, bonds etc. Government Purchases (G) This includes spending on goods and services by county and national government. It includes salaries paid to civil servants as well as spending on infrastructure and public utilities. Net Exports This refers to exports (foreign purchase of domestically produced goods) minus imports (local purchase of foreign goods).

Exercise: The US aggregate data for 2009 is a presented in the table below: USED Billions Consumption 10,093 Investment 1 ,623 Government Purchases 2,933 Net exports US Population 370 million I) compute the US GAP 2009. (14259) it) What is the contribution of consumption to GAP in the US in the period? Iii) Compute the GAP per capital GAP per capita is the GAP per person. Real Versus Nominal GAP GAP is the measure of total expenditure on goods and services in all markets in an economy. If GAP increases from one period to the next, then it means that either the output is larger or the prices the goods are sold at is higher.

To separate the two effects economists use a measure called Real GAP. Real GAP shows the increase in a country output of goods and services. Nominal GAP is the production of goods and services measured at current prices. Real GAP is the production of goods and services measured at constant base year prices. Since real GAP is not affected by changes in prices, changes in real GAP reflects only changes in amounts being produced. It is therefore a measure of the economy’s production of goods and revise.