INTERMED MACROECON Essay Example | Topics and Well Written Essays - 1750 words

INTERMED MACROECON - Essay Example It basically measures output and thus is a totally different concept from GDY (Gross Domestic Income) because the latter measures incomes. Also, only domestic production is counted in GDP and no foreign or abroad output. The calculation of GDP is facilitated by the use of price indices whereby current prices are measured against the price of a base year and thus, changes in the level of output are measured every year. Output and GDP changes are positively correlated. GDP is not directly impacted by a change in the level of prices and interest rates but indirectly, they bring about changes in employment levels and therefore, GDP is indirectly affected by these variables. APE (Aggregate Planned Expenditure) APE is the measure of total goods and services demanded by all the sectors in a country. Because it is the demand which creates GDP in domestic market, APE in reality also includes foreign imports which tend to increase the APE. In order to arrive at the actual APE, all imports (F) are subtracted from the sum total of household consumption (C), business investment (I), government purchases (G) and exports (X). Mathematically, it is denoted by the following formula: APE= C + I + G + X –F Variables affecting the APE are GDP and the interest rate levels. For GDP, the change is positive, strong and quick while for interest rates, it is slow, negative and weak. However, APE is not directly affected by price level changes. ASF (Aggregate Supply of Funding) To measure and define ASF, it is first essential to understand the meaning of velocity of money (V). V is the number of time a dollar is used to purchase goods or services within a year. Also, funds in a country can be categorized in currency and coins (CC) and checking account balances (CA), the sum of which gives us the money supply (M). While M increases with the increase in bank lending, V increases with the increase in non-bank lending. As such, ASF comes out to be: ASF= (M * V) / p where p= price inde x Consequently, change in ASF is directly proportional to a change in interest rates while it is inversely proportional to change in price levels. ADF (Aggregate Demand for Funding) Concept of ADF creeps in when we establish equality between APE and GDP. In case of APE almost equal to GDP, ASF supports the funding of production as well as sales. However, when APE is less than GDP, producers and businessmen need additional revenues to compensate their bills and costs. It thus follows that ADF equals APE when APE equals GDP. However, ADF equals GDP when APE < GDP. Chapter 2 Plotting GDP on a graph When plotting the macroeconomics variables of GDP, APE, ASF and ADF, the vertical axis is the interest rate level (i) and the other three are shown on the horizontal axis. Since interest rate level has no direct impact upon GDP level, the GDP line goes vertical unaffected. It just moves right or left by the amount of change in GDP. Adding APE to the graph To plot APE line on the graph, use o f the following formula is done which has already been discussed above: APE= a + b (GDY) – ci. The slope of the APE line is always to the left and upwards because rise in interest rates signifies fall in APE. Another line called IS which is not a measuring unit, depicts all the combination of interest rate levels and GDP at which GDP equals APE. The Macroeconomic Coordination Process tends the three lines to intersect at common points whether they shift to the right or left