Macroeconomics

Gross Domestic Product

1. The Difference between Microeconomics and Macroeconomics ........ 2

1.1 Macroeconomic Goals .............................................................. 3

2. Gross Domestic Product - GDP and the circular flow model .............. 5
2.1 The Expenditure Approach ....................................................... 6
2.2 The Income Approach............................................................... 8
2.3 The Production Approach ......................................................... 9

3. The limits of GDP as an indicator of wealth ..................................... 13

4. The circular flow model including government, capital

accumulation sector and abroad ...................................................... 17
4.1 National income identities, sectoral balances.......................... 17

5. Consumer price index and Inflation.................................................. 21

5.1 Marketbasket und Calculation of CPI ...................................... 22

5.2 Real versus Nominal GDP: Deflating GDP by a Price Index ... 26

Self Study:
- Eisenhut Peter, Sturm Jan-Egbert: Economics today, Edition Rüegger, 2022/2023
Chapter 4, p. 73 - 92

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1. The Difference between Microeconomics and

Macroeconomics
Microeconomics
The prefix “micro-“ means “small,” so micro-economics is the study of small
economic units and is concerned with things like:
• Consumer decision making and utility maximization
• Firm production and profit maximization
• Individual market equilibrium
• Effects of government regulation on individual markets
• Externalities
Microeconomic studies the decisions that people and businesses make
regarding the allocation of resources. Ressources, goods and services are
allocated through prices. Pricechanges signal to consumers and producers
to increase or decrease quantity supplied or quantity demanded. Prices
play this fundamental coordination in a free economic system. They
coordinate what has to be produced, how to produce and what resources to
use in its production.
The best way to overcome shortages is a high price. A high price reduces
demand und increases supply. A high price triggers innovation as well,
since consumers look for alternatives that may not yet exist.

Macroeconomics
Macroeconomics can be thought of as the “big picture” version of
economics and focuses on aggregate production and the spendings of
consumers, government and foreigners (=exports) in an economy.
Our topics in macroeconomics are:
1. Gross Domestic Product (GDP)
2. The causes of business cycles like recessions and economic upswings
3. The tools of macroeconomic policy conducted by the government and
central bank to influence output, unemployment und price level:
4. Money and the financial system: Banks and the supply of money and
it's influence on interest rates and price level
5. Economic growth
6. International trade, determination of exchange rates, International
monetary systems like flexibel exchange rates, fixed exchange rates,
managed exchange rates and monetary union

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Economics is a science of allocation of scarce ressources

• Price signals show how scarce a good is and the market with it's price
signals brings ressources to it's best user, the one who can make most
out of it, maximising so output and ergo welfare.
• Division on labor (specialization) reduces the problem of scarcity by
increasing producitivity (= output per hour) and therefore the whole
productionvolume.
• Economic efficiency requires that an economy produces the highest
combination of quantity and quality of goods and services given its
technology and scarce ressources. An economy is producing efficiently
when no individual's economic welfare can be improved unless
someone else is made worse off (Pareto efficiency / Pareto optimality).

1.1 Macroeconomic Goals

Goals for our country are cited in our constitution include justice, peace,
national security, liberty, and general welfare:
Art. 2 Aims
1 The Swiss Confederation shall protect the liberty and rights of the people and

safeguard the independence and security of the country.

2It shall promote the common welfare, sustainable development, internal cohesion and
cultural diversity of the country.
3 It shall ensure the greatest possible equality of opportunity among its citizens.
4It is committed to the long term preservation of natural resources and to a just and
peaceful international order.

Questions:
1. Compare and contrast the economic performance of the following
countries: USA, China, India, Germany, Switzerland, and Japan by
using data from the worldbank: Indicators | Data (worldbank.org).
a) What kind of economic indicators would you use to compare their
economic performance? Give reasons why.
b) Make a ranking with your selected indicators for these countries. Give
reasons for the different rankings of a country depending on the
selected indicator.

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2. Compare welfare of the 5 poorest countries in the world. What kind of

yardsticks would you select to compare their welfare?

3 Watch the following videos on income and life expectancy and

population by income. Discuss the results with your neighbor and
conclude.
How Does Income Relate to Life Expectancy? | Gapminder
Gapminder Tools

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Macroeconomics I GDP

2. Gross Domestic Product and the circular flow model

What is GDP?

Circular Flow Model

Shows GDP by presenting the major exchanges between households and
businesses as moneyflows representing the flow of goods and services on
the one side and the flow of ressources on the other side. The circular flow
analysis is the basis of national accounts. National accounts measure the
economic activity of a nation like GDP and many related statistics.

The 3 Ways to measure GDP

1. By Expenditure - we aggregate the value of all goods and services that
consumers and businesses buy
2. By Income - we aggregate all incomes that were generated from
production of goods and services
3. By Production (added value) all products produced

Why are the three approaches equivalent?–They must be, by definition–

Any output produced (product approach) is purchased by someone
(expenditure approach) and results in income for someone (income
approach).

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The fundamental identity of national income accounting:

Total production = Total income = Total expenditure

2.1 The Expenditure Approach

The Components of Expenditure
Total spending of a country is classified into four components and add up
to GDP, which is denoted as Y:

C Consumption
I Investment
G Government Spendings
NX Net Exports

C - Consumption expenditures
is the largest component of GDP and are divided into 3 categories:
1. non-durable goods
2. durable goods
3. services

I - Investment
• In economics investments are the production of goods that will be used
to produce other goods. This definition differs from the popular usage,
where the purchase of stocks or bonds are regarded as investments.
For clarity in economics we call these financial investments.
• Investment increases the capital stock of an economy. It increases the
productive capacity for the future.

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• Investments consist of increases in:

• Machinery, equipment, software and tools
• New construction in factories, retail space and private homes
• Increases in public infrastructure: roads, hospitals, electric grids,
power plants, schools
• Research and development
• Educational expenses (increase in human capital)
• Change in inventory
If inventory increases – include in GDP because production has
increased
If inventory decreases – deduct from GDP because inventory was
produced in previous years to avoid double counting
• Grossinvestment = Net investment + Depreciation
As capital is being used, it depreciates: buildings get old, tools wear out,
equipment breaks down and becomes old. Depreciation is the amount
the capital has degraded. When businesses replace worn-out capital
they make replacement investments.
Why this distinction? If gross investment is growing at 5% per year
and capital is depreciating at 6% per year, then net investment falls by
1%, which means the country is using up its stock of capital.

G - Government spendings
Government spendings consist of the provision of services such as
education, healthcare, defense and social security. G includes all three
government levels: Federal, cantonal/state, and local.
Not included in G:
• Investments in public infrastructure like in schools, highways, airports.
• Transfer payments like unemployment insurance, old-age and disability
payments are excluded since they are not made in exchange for goods
and services. For example, the salary of a teacher is included in the
GDP, but the payment of an old-age pension is excluded from the GDP.

NX Net Exports = X - M
Exports (X) – produced inside country and sold abroad
Imports (M) – produced outside the country and sold inside, Imports are
subtracted from GDP since imported goods will be included in
the terms G, I, or C, and must be deducted to avoid counting
foreign production as domestic.

Statistical data for Switzerland:

Gross domestic product: expenditure approach - 1995-2022 | Tabelle | Bundesamt für Statistik (admin.ch)

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2.2 The Income Approach

The Income approach divides income from producing goods and services
into 5 categories:

1. Wages and salaries

2. Interest - earnings
3. Corporate Profits
4. Proprietors income: Income of non-corporate businesses
5. Rents: Income earned from renting or leasing property

The sum of these five income components is net domestic income at factor
cost. To get GDP two adjustments must be made.

= Net domestic income at factor cost

= Net domestic product

= Gross domestic product GDP

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GDP and Gross National Income GNI

• When calculating GDP the domestic principle is employed. It is the total
value of a country's production within its boundary produced with labor
and capital inside a country .
• Gross national income GNI is the total final output produced with labor
and capital owned by citizens of a country. GNI therefore includes
labor- and capital-income by citizens they earn abroad and excludes
income that foreigners earn.

Gross domestic product GDP

= Gross national income GNI

Statistic CH, gross national product by type of income:

Gross domestic product: income approach and gross national income - 1995-2022 | Tabelle | Bundesamt
für Statistik (admin.ch)

2.3 The Production Approach

This approach is interested in the added value made by every stage of
production.

From the production side GDP can be calculated in 3 ways:

1. Sales of all final products
2. The sum of sales receipts minus the cost of intermediate products at
every stage of production.

Source: Samuelson, Economics, 19th ed., page 390

Statistic CH, gross national product by production:

Industries production account (59 industries) - 1997-2021 | Tabelle | Bundesamt für Statistik (admin.ch)

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3. Sum of wages, depreciation, profits (= the margin of a company) at

every stage of production.

Source: Aymon Brunetti, Economics an Introduction, Swiss Edition, hep verlag ag, chapter 3,
page 87

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Questions on GDP statistics of Switzerland

(s. GDP statistics by expenditure, income and production with link from script)
1. Explain why the income -, the production -, and the expenditure
approach are the same and check if the statistics prove it.

GDP Expenditure Approach

1. Categorize in the expenditure statistic sheet: which positions in the
statistic belong to the GDP components C, I, G, X and M

2. Which GDP component is the largest, C, I, G or NX?

3. Which GDP component is affected by the following transactions:

• Swiss army buys new jets
• Income of teachers of the primary school
• A new highway is built
• Unemployed insurance is payed
• A company is not able to sell all the production and piles up
inventories

4. Why do we subtract imports to get GDP?

Question on statistic GDP by type of income

4. In the GDP by income the federal statistic shows only two income
types: compensation of employees and net operating surplus.
a) Which positions are included in the category “net operating surplus”?

b) Compare the development over the years of the salaries and the net
operating surplus. How do they differ and give reasons why?

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5. Which output/income measure is larger in Switzerland for 2022, GDP or

GNI (gross national income)? Explain why.

6. What is “consumption of capital” and what do taxes on production

consist of?

GDP by production
7. Make a ranking with the 10 largest sectors.

8. Look up the income statement of the company you are working for.
Name the income statement accounts that make up the added value.
How big is the contribution of this company to GDP?

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3. The limits of GDP as an indicator of wealth

Questions on the limits of GDP as a measure of growth and wealth
1. What kind of goods and services are not included in GDP?
Nonmarket activities

Digital economy

Illegal activities

GDP in Switzerland includes the following activities: prostitution, drug

dealing, research and development

2. What kind of things are included in GDP which we don't regard as

growth or welfare?

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Questions on GDP

1. How is Switzerland's GDP affected by the following transactions?

1. A pizza delivery brings you a pizza for Fr. 25.-.

2. The company Swiss buys new airplanes for 1 billion Fr.

3. Mr. Bond buys shares for Fr. 40'000.- at the swiss stock market from this amount
Fr. 1'000 are brokerage commission/fees.

4. A toyota car is imported for Fr. 35'000.- and for Fr. 45'000 it is sold to a customer
in Switzerland.

5. You book a holiday at Hotelplan for Fr. 10'000.-.

6. Canton Aargovia builds a university for Fr. 330 million.

7. Mr. Simpson trains an icehockey team as a volunteer worker.

8. Somebody sells his furniture at a flee market.

9. Mr. Bond sells his car through an auto-dealer for Fr. 10'000.- and pays Fr. 500 for
the commission.

10. Mrs. Bond was up till now working as a housewife and starts working as a
secretary with an income of Fr. 6'000.- per month. She employs a cleaning lady
for Fr. 600 per month and raises the pocket money of her daughter from Fr. 300
to Fr. 450 per month.

11. You change from part-time student to full-time student because you have
received a grant from the government.

12. Mrs. Bond sells her house to family Meier.

13. You become houseowner and move into a new built townhouse.

14. Your son buys a japenese gaming console.

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2. A Company has the following income statement:

Costs on raw materials 1800 Sales 8300

Costs on intermediate Changes (increase)in
goods and services 1000 Inventory 600
Maintenance repairs 600
Depreciation 500
Wages 3200
Interest expenses 700
Profit 1100

8900 8900

a) How much is the output of this company?

b) How much is the added value of this company?

c) How much does this company contribute to GDP?

d) How much is it's contribution to net domestic production?

e) There are 3 approaches in computing the production of an economy. The net

domestic production is equal to what other kind of approach?

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3. In this section we analyse the process of bread production and its influence on
output and income:

A farmer sells wheat to the flourmill for 20'000. He increases his wheat inventories
by 10'000, pays wages, interest expenses and rents of 24'000 and makes a profit of
6'000.
The flourmill sells flour for 50'000 to the bakery and increases its flour inventories to
12'000, pays wages, of 30'000, makes depreciations of 3'000 and makes a profit of
9'000.
The bakery sells bread for 165'000, depreciates 10'000, pays wages and interest
expenses of 100'000 and makes a profit of 5'000.

Farmer Flourmill Bakery GDP

Wages Sales Wheat Depre- Final
Interest 20'000 20'000 Ciation sales
Rent
24'000 Depre-
ciation
Increase 3'000
Profit inventory
6'000 10'000 Wages
30'000

Profit
9'000
Net Inventory
national invest-
product ments

a) Fill in the income statement for the bakery business and for the national account
GDP.

b) Compute the GDP by all 3 methods.

c) How much is the net national income?

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4. The circular flow model including government, capital

accumulation sector and abroad

Government

Businesses Households

Banks

Foreign
Country

Flow of money:
1. Wages 8. Investments
2. Consumer spending 9. Savings
3. Government expenditure 10. Depreciation
4. Taxes 11. Imports
5. Transfer payments 12. Exports
6. Budget surplus or deficit government 13. Capital export
7. Non-distributed profits 14. Capital import

4.1 National income identities / sectoral balances

Sectoral balances can be derived by bringing the different perspectives of
GDP together like the production approach and the income approach:

Y=C+I+G+X → the domestic production

and
Y=C+S+T+M →the use of income

where S is total saving, T is total taxation and M are imports.

We bring these two views of GDP together and equate them:

C+S+T+M=Y=C+I+G+X

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You can then drop the C (common on both sides) and you get:
S + T + M= I + G + X
Then you can convert this into the following sectoral balances accounting
relations, which allow us to understand the connection of indebtedness and
surpluses between private (S-I), government (G-T) and foreign sector(X-M).
(S – I) = (G – T) + (X – M)

Or

(I – S) + (G – T) + (X – M) = 0

Summary:
The sum of the surpluses or deficits across these three sectors must be
zero.

• Private sector: A surplus balance means that households and

businesses together are net savers, building their financial asset
position. In other words, savings by households and businesses
(retained profits) exceed the amount borrowed and invested by
businesses. There is a net inflow of money into the private sector. A
deficit would mean households and businesses together are net
borrowers, reducing their financial asset position.
• Government balance (all levels: federal, state and local): A surplus
balance represents a government collecting more tax revenue than it
spends. This would mean the government is a net saver. A deficit
balance means government spendings are greater than tax revenue and
it is reducing its net financial asset position (i.e., increasing its debt
position).
• Foreign sector or "rest of the world": A surplus balance means that the
country is from an international point of view a net saver. This is
consistent with a current account or trade surplus, in which residents
build up their net financial assets by lending it to foreigners so that they
can finance their imports. With a trade deficit a country spends more on
imports than they export. That means that domestic residents borrow
savings from foreign residents to finance import purchases.

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Worksheet: Extended Flow Model and National Accounting

Learning Objectives:
You know that National Accounting and the flow model show the economic activity
between sectors. Sector balances can be derived by recording all inflows and outflows
of each sector in an account.
Assignment
• Complete the accounts for the business-, foreign- and the capital accumulation
sector.
• Record all inflows and outflows for these sectors shown in the extended flow model
on page 16, the outflows on the left hand side and the inflows on the right hand
side (except for the foreign sector)
• For the account “foreign sector” list all inflows into the domestic economy on the left
hand side and all outflows to the foreign country on the right hand side.
• Underneath the account you can list all inflow- and outflow-components making an
equation: inflow = outflow. Rearrange the components in this equation so you get
the sector balance.

Example: Government
Outflows Inflows
Government expenditure Taxes
Transfer Payments Budget surplus or deficit

Sectoral Government expenditure +

Balance Transfer payments = Taxes +Budget deficit
G–T = Budget deficit or surplus

Businesses

Equation sectoral balance:

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Capital accumulation sector

Equation sectoral balance:

Questions on national income identities:

1. The government has a deficit, X equals M. Which sector finances the
deficit?

2. An economy has a savings surplus in the private sector and a balanced

government budget. What happens to the excess savings?

2. The government has a budget deficit. The savings of the private sector
equals the investments. How can the budget deficit be financed?

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5. Consumer price index and Inflation

Inflation occurs when the general level of prices is rising. We calculate
inflation by using price indexes - weighted averages of the prices of
thousands of individual products. The consumer price index (CPI)
measures the cost of a market basket of consumer goods and services
relative to the cost of those goods from a base year.
The rate of inflation is the percentage change in the price level.

• Rate of inflation (year t) =

• Calculate the rate of inflation from these consumer price indexes:

Base year 100=1977 Base year 100 = 1982 Base year 100 = 2000
1973 82.6 1980 87.1 1990 82.5
1974 90.7 1981 92.8 1991 87.4
Rate of 1974 1981 1991
inflation

• Price stability occurs when the inflationrate is < 2%.

Source: Volkswirtschaft verstehen, 7. Auflage 2012, page 292

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5.1 Marketbasket and Calculation of CPI

A consumer price index (CPI) measures changes in the price level of a
market basket of consumer goods and services purchased by households.
It indicates how much consumers have to increase or to decrease their
expenditure to maintain the same volume of consumption, despite the
variations in prices.
The market basket represents the consumption of an average household.
In Switzerland the CPI is measured by the Bundesamt für Statistik (BFS).
Every month the BFS gathers 100'000 prices, most of them directly from
the retailers. The basket of goods and services are represented in 12 main
groups:

Source: Warenkorb und Gewichtung | Bundesamt für Statistik (admin.ch)f

Question:
What would you assume: how do they the weights of the product
categories in poor countries differ from the weights in Switzerland?

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The CPI does not contain direct taxes, premiums for social insurance, or
health insurance premiums. The reason for this is that CPI measures
private consumption which is part of the national accounting. The health
insurance premium is therefore not included, but instead the prices for
health services and goods like medication, the cost for doctors- and
hospital visits and so on. The price changes of capital assets, such as
shares and property, are also not included in the CPI

CPI is calculated by steps:

Price Dec. 2010 Jan. 2011 Feb. 2011
1 kg apples Fr. 3.2 Fr. 3.5 Fr. 3.6
1kg pears Fr. 2.5 Fr. 2 Fr. 2.5

1. Calculation of the indices of the goods compared to the base

period Dec. 2010 = 100
Index Weight in % Dec. 2010 Jan. 2011 Feb. 2011
apples 0.2 100
pears 0.1 100
Pip fruit 0.3

2. Calculation of the subindex pip fruit as a weighted average (here

apples and pears)
Index Dec. 2010 Index Jan. 2011 Index Feb. 2011

Pip fruit 100

3. The index of fresh fruit is computed as a weighted average from

the subindices pip fruit and stone fruit.
Weight in % Index Dez. Index Jan. Index Feb.
2010 2011 2011
Fresh fruit 1.1 100
Pip fruit 0.3 100
Stone fruit 0.1 100 115 117
Other fruits 0.7 100 103 105

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4. The indices of the main groups housing, food, transportation etc. is

also computed by the weighted average of the subindices

5. At the last aggregate level CPI is computed in the same way by

calculating the weighted average out of the subindices from the
main groups.

Development of the indices of the main groups, yearly averge,

base month dec.2020=100

Item_E 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Total 100.9 99.8 99.3 99.9 100.8 101.2 100.4 101.0 103.9 106.1
Food and non-alcoholic
beverages 100.1 99.3 99.7 100.1 101.4 101.5 101.6 100.0 101.7 106.5
Alcoholic beverages
and tobacco 97.8 97.9 97.4 97.9 98.5 99.3 100.2 100.6 102.1 103.7
Clothing and footwear 91.1 91.3 92.5 95.2 96.7 98.6 98.9 98.4 100.4 102.8
Housing and energy 98.0 97.3 97.3 98.4 99.8 100.2 100.0 101.4 105.7 109.3

Household goods and

services 105.0 102.8 100.6 98.7 98.3 99.9 99.5 100.9 105.9 108.3
Healthcare 103.6 103.2 102.7 102.2 101.2 101.0 100.2 99.8 99.4 99.0
Transport 106.6 101.9 99.5 100.9 103.6 104.0 100.5 104.5 113.8 113.4
Communications 103.6 102.7 101.2 99.6 100.0 100.7 100.5 99.7 99.1 97.1
Recreation and culture 103.4 101.4 102.2 103.2 105.0 104.7 101.8 101.0 102.9 106.0
Education 94.2 95.3 96.1 97.0 98.0 98.7 99.6 100.3 100.8 101.7
Restaurants and hotels 99.0 98.9 98.8 99.1 99.6 100.2 100.7 101.6 103.8 106.9
Other goods and
services 102.4 101.6 99.9 99.4 99.9 100.5 100.2 100.4 101.3 103.8

source CPI (december 2020=100), detailed results since 1982, structure of basket 2020, including
additional classifications. [LIK20B20] - 1.12.1982-31.12.2023 | Tabelle | Bundesamt für Statistik
(admin.ch))

Question:
Compare the trend in health care prices with the trend in your health
insurance premiums over the past few years. How do they compare? What
are the reasons?

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5.1.1 Inflation in 2022

Source: CPI Infographik_2022.pdf

Discuss with your neighbour:

1. What are the biggest findings from this chart?

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2. 2022 the inflationrate in the United States was 6.5%. You run a business in the USA
and have to decide how much you want to pay for inflation compensation. Do you
adjust the salaries by 6.5% or less? List all factors which you have to take into
consideration to make a decision and discuss with your neighbour how you would
decide. Reflect the situation in the company you are working for. Did you receive
inflation compensation and if so, how did the company account the increased labor
costs?

5.2 Real versus Nominal GDP and GDP Deflator

Nominal GDP is measured for a particular year using the actual market
prices of that year, which is also known as GDP at current prices. But
usually we are more interested in determining what has happened to the
real GDP, which represents the volume or quantity of goods and services
produced. Real GDP is calculated by tracking the volume or quantity of
production after removing the influence of changing prices or inflation.
The difference between nominal GDP and real GDP is the GDP deflator.
The GDP deflator differs from the CPI because it includes investment
goods, government purchases and export goods. CPI in contrast only looks
at price changes of goods and services which are bought by households.

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Questions:
1. The country of Easyliving produces three goods: apples, T-shirts, and bicycles. The
prices of each good and the outputs for three years are listed in the table below.
Year 1 Year 2 Year 3
Product P1 Q1 P2 Q2 P3 Q3
Apples 1 50 3 60 4 70
T-shirts 6 100 8 140 7 160
Bicycles 80 90 100 100 90 110

a. Calculate nominal GDP for each year.

1. nominal GDP1 =
2. nominal GDP2 =
3. nominal GDP3 =

b. Assume that the first year is used as the base year. Calculate real GDP for each
year.
1. real GDP1 =
2. real GDP2 =
3. real GDP3 =

c. Calculate the value of the GDP deflator for each year.

1. GDP deflator1 =
2. GDP deflator2 =
3. GDP deflator3 =

d. Measure the rate of inflation from:

1. year 1 to year 2.
2. year 2 to year 3.
(Hint: These are percentage changes in the GDP deflator.)

e. By how much did the economy of Easyliving grow from:

1. year 1 to year 2?
2. year 2 to year 3?
(Remember: Economic growth is always measured in real terms.)

2. Suppose a nation’s GDP was $260 billion in 2010 and $325 billion in 2020. Both
figures were computed as usual in terms of market prices for the year involved. The
price index rose from 100 in 2010 to 130 in 2020.
a. Real output (increased / decreased) from 2010 through 2020.
b. In terms of 2020 prices, the 2010 GDP would be $___.
c. In terms of 2010 prices, the 2020 GDP would be $___.
d. The overall rate of inflation during the ten years is about ___.

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