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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

3. National Income Statistics

4. The Financial Flow of National Economy

5. The Five Major National Account Statistics

6. Macroeconomic Phenomena



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


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○ p : Domestic price

○ pf : Foreign price

○ e : Nominal exchange rate



2. The Circular Flow of National Economy: Production, Income, and Expenditure

⑴ Household Sector


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① Y : Income

② T : Taxes

③ C : Consumption

④ SP : Private savings

⑵ Corporate Sector

⑶ Government Sector


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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


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① X : Exports

② Q : Imports

③ NX : Net exports

⑸ Aggregate Demand for Goods : Represents the flow moving to the goods market


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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

Tip. Unsold goods produced by companies are considered inventory investment and included in corporate investment

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


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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)

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

Supplementary Explanation]

○ 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

Sen Index

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

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


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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

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