What is Micro Economy

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What is MICRO ECONOMY?Macroeconomics is the branch of economics concerned with aggregates, such as nationalincome, consumption, and investment ".the Economist'sDictionary of Economics defines Macroeconomics as "The study ofwhole economic systems aggregating over the functioning of individual economic units.

It is primarily concerned with variables which follow systematic and predictable paths ofbehaviour and can be analysed independently of the decisions of the many agents whodetermine their level. More specifically, it is a study of national economies and thedetermination of national income." Macro Economics examines either the economy as awhole or its basic subdivisions or aggregetes such as the government,household,andbusiness sectors.

An aggregate is a collection of specific economic units treated as if they were oneunit.Therefore, we might lump together the millions of consumers in the U.S.economy and treat them as if they were on huge unit called consumers.

In using aggregates,macro economics seeks to obtain an over view,or general outline,ofthe structure of the economy and the relationships of its major aggregates.

Macroeconomics speaks of such economic measures as total output,totalemployment,total income,aggregate expenditures,and the general level of prices inanalysing various economic problems.No or very little attention is given to Specific units making up the variousaggregates.Macro economics examines the forest,not the trees.

Gross Domestic Production

What Does Gross Domestic Product - GDP Mean?The monetary value of all the finished goods and services produced within a country'sborders in a specific time period, though GDP is usually calculated on an annual basis. Itincludes all of private and public consumption, government outlays, investments andexports less imports that occur within a defined territory.

GDP = C + G + I + NX

where:

"C" is equal to all private consumption, or consumer spending, in a nation's economy"G" is the sum of government spending"I" is the sum of all the country's businesses spending on capital"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX= Exports - Imports)GDP is commonly used as an indicator of the economic health of a country, as well as togauge a country's standard of living. Critics of using GDP as an economic measure saythe statistic does not take into account the underground economy - transactions that, for


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whatever reason, are not reported to the government. Others say that GDP is not intendedto gauge material well-being, but serves as a measure of a nation's productivity, which isunrelated.GNP and GDP tend to be used as synonyms, although GDP is definitely the preferredmeasure among economists and is gaining popularity in general conversation as well; the

two measures are fairly close numerically.The difference is that GDP measures all production within a country's borders, bywhoever happens to be working here; GNP measures the production of all citizens of acountry, wherever they happen to be working. (Maybe you can remember the "N" inGNP stands for "anywhere").

Real Vs Nominal GDP

Real GDP:The number reached by valuing all theproductiveactivity within the country at a

specific year's prices. When economic activity of two or more timeperiods is valued at

the same year's prices, the resulting figure allows comparison ofpurchasing powerovertime, since the effects ofinflationhave been removed by maintaining constant prices.

inflation-adjusted measure that reflects the value of all goods and services produced in agiven year, expressed in base-year prices. Often referred to as "constant-price","inflation-corrected" GDP or "constant dollar GDP".OrReal GDP is gross domestic product in constant dollars. In other words, real GDPis anation's total output of goods and services, adjusted for price changes.

Nominal GDPNominal GDP is GDP evaluated at current market prices. Therefore, nominal GDP willinclude all of the changes in market prices that have occurred during the current year dueto inflation ordeflation. Inflation is defined as a rise in the overall price level, anddeflation is defined as a fall in the overall price level.

Nominal Interest Rates vs. Real Interest Rates

Suppose we buy a 1 year bond for face value that pays 6% at the end of the year. We pay$100 at the beginning of the year and get $106 at the end of the year. Thus the bond paysan interest rate of 6%. This 6% is the nominal interest rate, as we have not accounted for

inflation. Whenever people speak of the interest rate they're talking about the nominalinterest rate, unless they state otherwise.

Now suppose the inflation rate is 3% for that year. We can buy a basket of goods todayand it will cost $100, or we can buy that basket next year and it will cost $103. If we buythe bond with a 6% nominal interest rate for $100, sell it after a year and get $106, buy abasket of goods for $103, we will have $3 left over. So after factoring in inflation, our$100 bond will earn us $3 in income; a real interest rate of 3%. The relationship between
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the nominal interest rate, inflation, and the real interest rate is described by the FisherEquation:

Real Interest Rate = Nominal Interest Rate - Inflation

If inflation is positive, which it generally is, then the real interest rate is lower than thenominal interest rate. If we have deflation and the inflation rate is negative, then the realinterest rate will be larger.

2. Nominal GDP Growth vs. Real GDP Growth

GDP, orGross Domestic Productis the value of all the goods and services produced in acountry. The Nominal Gross Domestic Product measures the value of all the goods andservices produced expressed in current prices. On the other hand, Real Gross DomesticProduct measures the value of all the goods and services produced expressed in the pricesof some base year. An example:

Suppose in the year 2000, the economy of a country produced $100 billion worth ofgoods and services based on year 2000 prices. Since we're using 2000 as a basis year, thenominal and real GDP are the same. In the year 2001, the economy produced $110Bworth of goods and services based on year 2001 prices. Those same goods and servicesare instead valued at $105B if year 2000 prices are used. Then:

Year 2000 Nominal GDP = $100B, Real GDP = $100B

Year 2001 Nominal GDP = $110B, Real GDP = $105B

Nominal GDP Growth Rate = 10%

Real GDP Growth Rate = 5%

Once again, if inflation is positive, then the Nominal GDP and Nominal GDP GrowthRate will be less than their nominal counterparts. The difference between Nominal GDPand Real GDP is used to measure inflation in a statistic called The GDP Deflator.

3. Nominal Wages vs. Real Wages

These work in the same way as the nominal interest rate. So if your nominal wage is$50,000 in 2002 and $55,000 in 2003, but the price level has risen by 12%, then your$55,000 in 2003 buys what $49,107 would have in 2002, so your real wage has gonedone. You can calculate a real wage in terms of some base year by the following:

Real Wage = Nominal Wage / 1 + % Increase in Prices Since Base Year

Where a 34% increase in prices since the base year is expressed as 0.34.

GDP Deflator
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The GDP deflator is utilized as a measure of shifts in the prices of goods and services thatare produced in a given country. It is understood that the GDP deflator can help provide amore accurate picture of the current status of thegross domestic product within thecountry. Because the GDP deflator is understood to be an example of an implicit pricedeflator for GDP, economists consider calculating this economic indicatoras an essential

component in ascertaining the current strength or weakness of the countrys economy.

The formula for calculating the GDP deflator is relatively simple. Essentially, thecalculation requires current information regarding the chain volume measure or realGDP, and the current price or nominal GDP. This figure is calculated by taking thenominal GDP, dividing it by a known deflator, and multiplying the result by one hundred.This final figure will represent the real current status of the gross domestic product, as itallows for the change ordeflation of the nominal GDP into real world terms.

One of the easiest ways to think of the GDP deflator is to think of it as current dollars andconditions compared to the same set of factors in a previous time period. For example, an

idea of the GDP deflator associated with the most recent calendar year can be ascertainedby looking at the state of the GDP in a previous calendar year. This can be helpful indetermining if an inflation of the GDP is taking place from one period to another.

It is possible to use this approach both with the broad GDP for an entire country, or tounderstand the economic stability of some sub-category within the economy of thecountry. Businesses will often use this approach to gauge conditions within their ownindustry. Using the current year price and the number of units produced, as compared tothe price and production of a previous year can help to indicate whether there is actuallygrowth or shrinkage taking place.

The formula for the GDP deflator may indicate that the relationship between units andunit price is shifting in some manner, such as more generated revenue but less unitsproduced. This would indicate the presence of upward price changes or price inflation. Atthe same time, less revenue generated from more produced units indicates downwardchanges in prices that may eventually drive some manufacturers out of the industry.

Gross Domestic Product (GDP) deflator: The GDP deflator is thebroadest measure of inflation available for the national economy. Thisseries is broken down into great detail for the wide range of output

measures in the accounts. Deflators for individual items are developedfrom a variety of sources:

Personal Consumption Expenditure deflator: CPI estimates formthe basis of this deflator.

State and Local Government deflator: This deflator is frequentlyused in government programs. It is heavily weighted by wages and
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salaries in state and local government but also includes estimates forthe entire range of government purchases.

GDP deflator. Using the statistics on real GDP and nominal GDP, one can calculate animplicit index of the price level for the year. This index is called the GDP deflator andis given by the formula

The GDP deflator can be viewed as a conversion factor that transforms real GDP intonominal GDP. Note that in the base year, real GDP is by definition equal to nominal GDP

so that the GDP deflator in the base year is always equal to 100.

Gross Domestic Product Deflator Inflation Calculator

This is an inflation calculator for adjusting costs from one year to another usingthe Gross Domestic Product (GDP) Deflator inflation index. This inflation calculator isbased on the inflation rate during the US Government Fiscal Year, which begins on

GDP Deflator

Cost:

From: fiscal year

To: fiscal year

Inflation Index:

% Change:

Inflated Cost:


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October 1 and ends on September 30. This inflation calculator will compute inflationfrom 1940 to 2009.

Consumer Price index

What is Micro Economy

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