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ECON1102 Notes
Macroeconomics 1 -2

Chapter 1: Aggregate Production and Prices
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Key aggregate variables include: total production of goods and services, the general level of
prices, the level of employment and the unemployment rate

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services) is to use the cost of providing the good or service
in place of its unknown market value
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3 Intermediate Goods and Value added
 GDP refers to final G/S, doesn’t include intermediate goods
 Intermediate goods: good that is used in the production of another good or service
 In calculating GDP, it is important to count the value of each good only once, avoid double
counting intermediate goods = value added concept
 Value added: the market value of a firms production less the cost of inputs purchased from
other firms
 Two ways to calculate the contribution of the production of a good to GDP
o One method is to measure the market price of the good when it
o The second method is to add-up the value added of each producer who contributes to
the final product
 Production approach: to calculating GDP is the summation of value added for all businesses
operating in an economy
 The definition of GDP refers to the production within a country
 The final element of the definition of GDP refers to it being measured over some period of
time, typically 3 months/1 quarter – excludes G/S produced in an earlier period, but re sold
in the current period

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4 Expenditure Approach to GDP
 Expenditure approach: to calculating GDP entails the summation of expenditures on
domestically produced final goods and services by households, businesses, governments and
by the rest of the world
 Expenditure on goods and services by final uses = value of their production
o Household expenditure = consumption spending C
o Business expenditure = private investment spending I
o Government spending G
o Domestically produced gods and services that are purchased by the rest of the world
= exports X
o Foreign produced that are purchased from the world = imports M
o Net exports NX= X-M
 Decomposition of GDP Y = (triple equal sign) C + I + G + X – M
 Supply of G & S = Demand for G & S
o The triple equal sign indicates this is an accounting identity
o The value of production of final goods and services must be equal to the value of
expenditure on final goods and services
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5 Statistical Discrepancy
 The three approaches to measuring GDP can result in errors and differences in result
 The ABS averages these three measures
 Private Investment – Inventories
o Inventories are currently unsold stocks of goods held by businesses, calculated by
inventory level (end of period) – inventory level (beginning period)
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6 Second Hand Goods
 A fraction of expenditure will involve the purchase of second-hand or used goods
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include the purchase of a used car or a second-hand
unemployed and includes retirees, unpaid home-workers or volunteers, permanently unable to
work, voluntary inactive in labour market and people in institutions
 LF = L + U – where LF is the labour force, L are those employed and U are
those unemployed
 Full time employment: corresponds to working at least 35 hours per week
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