Macroeconomics: National Accounts, Growth, Consumption, Investment and the Multiplier
National accounts
Understand the three approaches to GDP (expenditure, income, output), the expenditure identity Y = C + I + G + (X − M), and the distinction between GDP and GNP/GNI (factor income from abroad). Know nominal vs real GDP and the GDP deflator. Exclude transfer payments, second-hand sales and intermediate goods to avoid double counting; only value added counts.
Consumption, saving and the multiplier
Keynesian consumption function: C = a + bY, where b is the marginal propensity to consume (MPC). Since MPC + MPS = 1, the simple multiplier is k = 1/(1 − MPC) = 1/MPS. With taxation and imports, use the open-economy multiplier 1/(1 − MPC(1−t) + m). Investment depends on expected return versus interest rate.
Growth
Sources of growth: capital accumulation, labour, human capital, technology, institutions. The rule of 70 (doubling time ≈ 70/growth rate %) is a frequent calculation.
Traps
- Adding transfer payments or used-car sales to GDP.
- Using nominal GDP to compare living standards across years.
- Forgetting that the multiplier works in both directions (a fall in investment contracts income).
- Confusing GNP with GDP when multinational profits are repatriated.
Worked example
If MPC = 0.8, k = 1/(1 − 0.8) = 5. An autonomous investment of 200 raises equilibrium income by 200 × 5 = 1000. If the government then taxes at 25%, the multiplier shrinks because disposable income rises by less.