Chapter 1. Introduction to Macroeconomics
Recommended Reading : 【Macroeconomics】 Macroeconomics Table of Contents
1. Overview
2. The Circular Flow of National Economy: Production, Income, and Expenditure
4. The Financial Flow of National Economy
5. The Five Major National Account Statistics
1. Overview
⑴ Microeconomics and Macroeconomics
① Microeconomics : Deals with the optimization decisions of individual economic agents under given conditions
② Macroeconomics : Differs from microeconomics in that it deals with aggregate variables
⑵ Flow and Stock
① Flow : Measured over a period of time (e.g., demand, income, consumption, investment, etc.)
② Stock : Measured at a specific point in time (e.g., wealth, money supply)
⑶ Nominal Variables and Real Variables
① Nominal GDP and Real GDP (see GDP below)
② Real Exchange Rate
○ p : Domestic price
○ pf : Foreign price
○ e : Nominal exchange rate
2. The Circular Flow of National Economy: Production, Income, and Expenditure
⑴ Household Sector
① Y : Income
② T : Taxes
③ C : Consumption
④ SP : Private savings
⑵ Corporate Sector
⑶ Government Sector
① Transfer Payments : Payments made by the government to households without any return
② T : Taxes
③ G : Government spending
○ Disaster relief income is considered government spending, not transfer payments, as it involves purchasing goods
④ SG : Government savings
○ Balanced Budget : When government savings (T - G) = 0
○ Budget Deficit : When government savings (T - G) < 0
○ Budget Surplus : When government savings (T - G) > 0
⑷ Foreign Sector
① X : Exports
② Q : Imports
③ NX : Net exports
⑸ Aggregate Demand for Goods : Represents the flow moving to the goods market
① C : Consumption
② I : Investment
③ G : Government spending
④ X - Q : Net exports, Current Account Balance
⑤ Imports Q have a characteristic of partially offsetting aggregate demand
⑥ Tip. Unsold goods produced by companies are considered inventory investment and included in corporate investment
⑦ Tip. Among consumption, investment, and government spending, investment is the most volatile
⑧ (Note) The above equation, considering inventory investment, is an identity that always holds
⑹ Equilibrium National Income
① Sp + T + Q : The sum of leakages in the circular flow of national income
○ Imports Q fulfill domestic demand and thus count as a leakage
② I + G + X : The sum of injections in the circular flow of national income
○ Exports X increase domestic demand and thus count as an injection
③ Injections > Leakages : National income increases
④ Injections = Leakages : National income remains constant
⑤ Injections < Leakages : National income decreases
⑺ Law of Three Equivalent Aspects : Holds true in a closed economy
① National Income by Production (GDE, gross domestic expenditure) : The purchase amount spent by households on the goods market
② National Income by Distribution (GDI, gross domestic income) : The factor income obtained by households from the factor market
③ National Income by Expenditure (GDP, gross domestic product) : The sales revenue obtained by firms from the goods market
④ Law of Three Equivalent Aspects of National Income : Production national income = Distribution national income = Expenditure national income ( ∵ Balance of funds)
3. National Income Statistics
⑴ Gross Domestic Product (GDP)
① Principle of Territoriality
○ Excludes production by nationals abroad
○ Includes production by foreigners domestically
② Production
○ Underground Economy : Private loans, real estate speculation, smuggling, drugs, tax evasion. Not included in GDP
○ Transfer Transactions : Inheritance, gifts. Not included in GDP
○ Capital Gains : Stock price fluctuations, real estate price fluctuations. Not included in GDP
○ Government Transfer Payments : Unemployment benefits, disaster compensation, subsidies, etc. Not included in GDP
○ Leisure, housework, etc. Not included in GDP
○ Exception : Imputed rent, self-consumed agricultural products, defense, and law enforcement services
○ The purchase price of new homes is included in GDP. The purchase price of second-hand homes is not included in GDP
○ In-kind income is included in GDP. Lottery winnings are not included in GDP
○ Corporate bonds and bank interest are included in GDP. Government bond interest is not included in GDP
③ Final Goods
○ Intermediate goods are excluded to avoid double counting
④ Although transfer payments are not directly included in GDP, they are indirectly included through consumption
○ Reason transfer payments are not included in GDP : They are not goods with market value and have no reciprocal obligation
○ The contribution to GDP varies depending on consumer behavior
⑤ Nominal GDP and Real GDP
○ Nominal GDP : Variable expressed in monetary terms
○ Expressed in the price of the comparison year
○ Disadvantage : Affected by inflation
○ Real GDP : Variable expressed in terms of the quantity of goods
○ Expressed in the price of the base year
○ In the base year, nominal variables and real variables are always the same
○ Advantage : Not affected by inflation
○ GDP Deflator
○ Value obtained by dividing nominal GDP by real GDP
○ The most comprehensive price index calculated retrospectively from GDP statistics (Paasche method)
⑥ Actual GDP and Potential GDP
○ Actual GDP : The market value of all final goods actually produced by an economy
○ Potential GDP : The market value of final goods that can be produced when all production resources in a country are normally employed
○ Potential GDP = Full Employment Output = Natural Output
○ (Note) Potential GDP is not the maximum GDP
○ GDP Gap = Potential GDP - Actual GDP
○ GDP Gap > 0 : Unemployment exists. There is a need to increase aggregate demand
○ GDP Gap < 0 : The economy is overheated. There is a need to restrain aggregate demand
⑦ GDP Level by Country
○ South Korea : 2,000 trillion won per year
⑵ Distribution GDP (GDI) : A measure of purchasing power
① GDI = (Wages + Interest + Rent + Profits) + Indirect Taxes + Fixed Capital Consumption
② A method of estimating national income by summing factor incomes, which are rewards for production factors involved in producing final goods
③ Nominal GDP = Nominal GDI
④ Real GDP < Real GDI (Improvement in terms of trade)
⑤ Real GDP > Real GDI (Deterioration in terms of trade)
⑥ (Note) Terms of trade seem to have a trend similar to capital balance
○ If the exchange rate rises, the export price falls, leading to a deterioration in terms of trade
○ If the import price falls, terms of trade improve
⑦ (Reference) Real GDP does not reflect changes in terms of trade : Real GDI = Real GDP + Real trade profit/loss due to changes in terms of trade
⑶ Expenditure GDP (GDE)
① GDE = Private Consumption Expenditure (C) + Gross Domestic Investment (I) + Government Spending (G) + Net Exports (X-M)
⑷ Gross National Product (GNP)
① GNP is less preferred than GDP due to foreign labor and other factors
⑸ Gross National Income (GNI)
① The income earned by nationals over a period of time by providing production factors both domestically and abroad
② An income indicator used to measure the standard of living and welfare level of citizens
③ Comparison with GDI
○ GDI follows the principle of territoriality, while GNI follows the principle of nationality
○ To calculate GNI from GDI, net factor income from abroad must be added
⑹ (Differentiation Concept) National Wealth
① The total wealth a country possesses : The sum of the physical assets and net foreign assets held by an economy
② Domestic financial assets are not included as they offset each other within the country, resulting in a net wealth of zero
③ (Reference) Comparison with National Income
○ National wealth is a stock concept. National income is a flow concept
○ National wealth is the source of national income generation
○ National income is the source of consumption, savings, and investment, created by the combination of national wealth and labor
⑺ Other Economic Indicators
① Big Mac Index
○ A key index for comparing the value of currencies across about 120 countries based on the price of McDonald’s Big Mac
○ Compiled and published quarterly by the British economic magazine The Economist
○ Assumes that the real price of the Big Mac is the same everywhere due to its standardized quality, size, and ingredients worldwide
② Sharpe Ratio : An indicator that evaluates the performance of a fund using standard deviation
④ Atkinson Index : A method for measuring income inequality based on a social welfare function
⑤ Engel’s Coefficient : The proportion of food expenditure in total consumption expenditure
⑥ Gini Coefficient : A numerical representation of the degree of income inequality and wealth disparity, ranging from 0 (perfect equality) to 1 (perfect inequality)
⑦ Nifty-50 Index : An Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange
⑧ Buffett Indicator : = Market capitalization of a country / Gross Domestic Product (GDP) * 100
| Buffett Indicator | Description | | — | — | | Buffett Indicator < 81% | Market is significantly undervalued | | 81% < Buffett Indicator ≤ 104% | Market is moderately undervalued | | 104% < Buffett Indicator ≤ 127% | Market is fairly valued | | 127% < Buffett Indicator ≤ 150% | Market is moderately overvalued | | Buffett Indicator > 150% | Market is significantly overvalued | Table. 1. Meaning of Buffett Indicator Levels
4. The Financial Flow of National Economy
⑴ Financial System
⑵ Relationship between Households, Firms, Government, and Finance
① Households are the surplus sector of funds
○ Because household income is greater than household consumption
○ The way surplus funds are managed by households is important
② Firms are the deficit sector of funds
○ Because real assets exceed internal funds
○ The way firms finance their required funds is important
⑶ Financial Institutions
5. The Five Major National Account Statistics
Figure. 1. The National Account System and the Five Major National Account Statistics of Our Country
⑴ Input-Output Table (Flow Account)
⑵ National Income Statistics (Flow Account)
⑶ Flow of Funds Table (Flow Account)
① Definition : A table showing the results of asset transactions through the capital account and financial account
② Capital Account : Records the industrial circulation of funds, i.e., real economic activity
③ Financial Account : Records the financial circulation of funds, i.e., financial asset transactions
○ (Reference) The most representative non-financial asset : Real estate
⑷ Balance of Payments Table (Flow Account)
① Definition : A table showing transactions between countries
⑸ National Balance Sheet (Stock Account)
6. Macroeconomic Phenomena
⑴ Pareto Principle (80-20 Rule)
① A phenomenon where 80% of the outcome is produced by 20% of the causes
② Discovered by Italian economist Pareto (V. Pareto) while studying the relationship between income and wealth
③ In any country, 80% of the wealth is held by 20% of the population
④ 20% of customers account for 80% of total sales in a department store
Input: 2020.09.08 21:42