Introduction
In the second half of this course, you will be exposed to models of the macroeconomy---the study of the aggregated actions of households, firms, government, and other economic actors in society. We'll look at the national accounts, how fluctuations in the economy are measured, look at some of these measurements, and talk a little about economic growth through the story of Ireland. That's the topic for this lecture. The important thing to remember from this lecture is: growth matters.
What is the macroeconomy?
The economy can be thought of as a productive engine. It takes raw materials like land, and physical capital, and combined with
labour (physical labour and skilled labour) and a little enterprising entrepreneurship, produces goods and services. These goods and services add to the stock of goods and services already produced in years past, and the economy is said to grow by the amount produced in the economy.
Definition 1 The macroeconomy is a machine for producing goods and services.
How do we measure the macroeconomy?
When we discuss the macroeconomy, we need to talk about aggregated variables. Aggregated variables are the sums of individual variables. For example, total private consumption in an economy over a period of time, $C$, is the sum of all the goods and services consumed in the economy by households in a given period, say, a year.
We also talk about the relationships between those aggregated variables. We don't really know these relationships, so we invent a story about them. These stories are called models.
Definition 2 Macroeconomic models are stories about how one or more aggregate variable affects another.
Growth rates
We can calculate the growth rate of the economy by calculating the gross domestic product of the economy from year to year and getting their relationship.
Definition 3 The gross domestic product (GDP) is the sum of all final goods and services produced in the economy in a given year.
The GDP growth of an economy can be measured by
GDP Growth = GDP_(t)-GDP_(t-1)/GDP_(t-1) * 100
So, for example, if GDP in 2006 was 105, and GDP in 2005 was 100, the growth rate of GDP would be ((GDP_{2006}-GDP_{2005})/GDP_{2005}-1)*100=((105-100)/100-1)*100=5\%.
Next Time
Before the next lecture, visit www.gapminder.org to look at the data on growth rates all over the world, and look at www.stephenkinsella.net for links to Ireland's national accounts. Finally, read Barro, chapter 3.
Lecture notes, slides, and links are all at the link below.
Slides
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Links
Gapminder
CSO