Introduction to macroeconomics
The basics of macroeconomics (GDP)
Shima Al-Mubarak: 201002182
Zainab Al-Mabuk: 200800942
Rowan Almahasnah: 201000982
Fatimah al-Mubasher: 200801106
Abrar Alribeh: 201002268
Asma Alharbi:
Instructor: Dr. Mahmood Hamad
In our project, we are aiming to mainly introducing macroeconomic and its basics.
We are going to handle several points and elaborate them. First, we will start with
introducing the economy and then we will see the economic problem, the principles of
economics, the circular flow model, the three big questions of macro economy and GDP.
Introduction
GDP is the short version of the Economics phrase Gross Domestic Product. GDP
is a measure on the value of final commodities and services produced within a country
over a period. The measure is a continuous process that helps in reviewing a country’s
living standards per individual. The idea to use GDP was put forward in 1934 as a tool to
measure a country’s economy. An economy is a component of systems that build up a
country. It is a combination of labor, capital, and land resources that produce goods and
services for both consumption and trade and can be described in three parts: capitalism,
socialism, or mixed economy.
The private sector controls the capitalism economy and produces goods and
services entirely. The government’s role is limited to formulating and implementing
policies that regulate the industry. It concentrates on other roles such as protection of
resources, provision of internal security, and ensuring employment is available to
citizens. In a socialism economy, the government controls manufacturing and distribution
of resources. The government only allows the private sector to consume goods. Land and
capital ownership are restricted to the central authority. Labor incentives or benefits to
workers are paid by the government. The third economy is a mixed one that embraces
elements of socialism and capitalism. It has evolved over time and is a common practice
in most countries. It allows for joint ownership and use of resources and innovations by
both private and government sectors.
Every economy has a foundation that revolves around individual contributors.
Their combined efforts eventually give the bigger picture of a country’s economy. These
are micro and macro economies. A micro economy is involved with the analysis
individual household behaviors and how they apply decisions on the use of limited
resources to produce goods and services. The demand and supply forces determine prices
that are charged to consumers. It is also concerned with the impacts of national
legislation such as the effects of taxation. In contrast, a macro economy sums up all the
economy’s activities and deals with general factors in the economy such as inflation,
unemployment, and growth in a country. The macro economy of a country revolves
around the micro patterns of an economy.
The difference between micro and macro economy is that, the micro economy
involves the study of individual households in relation to the distribution of scarce
resources that determine prices that are charged on goods and services. A micro economy
uses demand and supply forces to determine prices that will be paid for goods and
services. It is affected by government legislations such as taxes to determine prices. For
example, a micro economy could look at ways of cutting down cost of production and
translate that to lower prices of its produce to counter competition. The macro economy
is concerned with the economy as a whole; it is interested in the well-being of a country.
It focuses on changes in national income, taxation policies, unemployment trends, rate of
inflation, and national budgets.
In conclusion, the micro and macro economies might be different, but they are
interdependent and supplement each other. For example, the micro effect of determining
demand and supply helps in the formulation of taxation policies, which is a macro effect.
The macro effect such as inflation affects the prices that are charged to consumers. Both
economies provide fundamental tools on how economies can be grown to achieve
desirable Gross Domestic Product.
The economics problems
One of the most important economic problem and concept that could happen anytime
and anywhere is ''Scarcity", that is when the human needs and wants are greater than the
resources available in the society. In another words, there is no enough resources to
satisfy human needs and want. Resources are referring to the land, labour and capital.
The land, resources that come from nature. Labour, such as workers and employees and
capital is the machines that are used to produce the products.
Today, with the globalization, economic is developing more; and this may raise three
main questions that must be determined by the society in order to solve the scarcity and
reach the level of equity and equilibrium to human and eliminate the poverty percentage.
The first question is what to produce and what is the quantity, meaning by this what
product that need to produce. Shorts or pants, pizza or pasta. Also they need to know how
much quantity needs to be produced. Is it 100,200 or 50. This depends on the needs and
wants of people in that society. The second question that is raised, how to produce. This
means, how the society is going to produce the products, which machines will use in
manufacturing and what strategies will use to produce the products. And the third
question that must be put in mind is for whom are goods produced. Is it for students or
workers? Is it for rich, average or poor people? These three fundamental questions are
determined by planned, mixed or market economy.
In this case, with the limited resources and unlimited wants; people need to make a
choice. As people cannot have everything they want. So, they need to decide how they
can make the best and effective use of the resources that is limited and available to satisfy
their needs and wants. In order to be efficient, economy can use fewer worker and
machines when producing the product. They can also replace the higher cost labours with
the lower cost. And for every choice, there must be an opportunity cost that is where the
next best alternative is gone when a decision is made. This means, choosing one thing out
of two choices leads to lose the other one. For example, an individual have two choices
whether to study for the exam or to go to watch a movie. Choosing the studying leads to
the opportunity cost of good marks.
The principles of economics
1-people face trade-offs.
In your life, the trade-off has been exercised in your decisions. Trade-off means if you
want more from something, you need to give up something else you like. Example of
efficiency vs. equality is if the government provides money to unemployed people,
nobody will work.
2-the opportunity cost of something is what you give up to get it
Making decisions by comparing the cost you will spend and benefits you get from that
alternative. Example, you have 80, 000 SR you decide to buy car than travelling to U.K
because it is more beneficial.
3-Rational people think at the margin
Rational people think of the margin if and only if it excess marginal cost. Example, if a
person can work either fifteen hours or twenty hours he will not work 5 hours extra if and
only if the benefits will gain from extra working hours overs doing nothing.
4-people respond to incentives
Normally, people make their decision to buy something if the marginal benefits more
than marginal cost. You will be happy to buy more fish if the price of fish less than other
types of meat.
5-Trade can make everyone better off.
Each person has the ability to produce specific services or goods like orange or potato.
That does it means he is the only one produce it, there are many competitors produce the
same product or services (orange or potato)and the gain come from their ability to trade
with each other.
6-markets are usually a good way to organize economic activity
In the market, the households and firms understand each other via investable hand
because the households will decide what to buy so the firms understand what to produce
more.
7-Governments can sometimes improve market outcomes
The market can face failure due to unbalance of equality and efficiency which can be
from one of the following reasons.
Fail in invisible hand: fail in making efficient allocation of resources
External power: which can be one person or firm actions that causes impact on the wellbeing of by stander (it has good looker).
Market power: the ability of a single actor or actors to unduly influences the market price.
In all cases of failure the government will contribute to promote efficiency and equality.
8-Acountry’s standard of living depends on its ability to produce goods and services
The stander of living among countries differs according to their distinct abilities of
production. The productivity measure at each hour of works’ time the amount of goods
and services produces. The increase of productivity means increase in average person
income.
9-prices rise when the government prints too much money
Increasing the quantity of money it will cause reduction of price value which is a
condition known as inflation. In this case: a proportional increase in the price of the
goods and services will be and people prefer to deal with other currency which has more
value.
10-society faces a short-run trade-off between inflation and unemployment
There is inverse relationship between inflation and unemployment. When people want
more products and service, the unemployment is reduced due to inflation of demand. On
the other hand, if the price of the product increases, the inflation on demand will be
reduced in the same time it will contribute negatively on increasing unemployment.
Circular flow diagram:
Circular flow diagram is a model designed to summarize the operation of market
economy. It illustrates and explains the indirect interaction between the main actors,
firms which are producers and households which are consumers. It shows how this
interaction and flow of money and products done through market of production and
market of goods and services. Also, it is clearly labeled the relationship between the four
elements of the diagram (households, firms, market of production and market of goods
and services).
The big macro economy questions:
What determines the standard of living is Saudi Arabia?
Standard of living as defined by Meriam-Webster.com are the necessities,
comforts, and luxuries enjoyed or aspired to by individual or group or, the level of wellbeing of an individual or a country which is measured by the level of income like the
GDP or Gross Domestic Product as defined on the other hand by the World Bank. There
are number of ways in measuring the standard of living in a country, some are based on
economics and some are not. GDP or Gross Domestic Product which measures the
country’s output or products produced in a year. Another is the HDI or Human
Development Index that is used by the UN Development Program, which accounts
health, education and income as a measure. The others are Satisfaction with Life Index
and Happy Planet Index which are not based in economics.
As far as economics is concerned, the factors that determine the standard of living
in Saudi Arabia are its GDP together with health and education. The leading product of
Saudi Arabia is oil, the income incurred from it is used to build infrastructures such as
buildings, schools, hospitals which improves health services and upgrades the quality of
education. So for me, what determines the standard of living in Saudi Arabia is its oil
production. The more the country can produce and export oil products, the better the
standard of living in Saudi Arabia.
What determines the cost of living?
Cost of living is the needed expenditure in sustaining your standard of living. This
can be measured with the purchasing power of a country’s currency in purchasing
necessities such as food, clothing, personal/ household items, house rent and services
such as transport, utilities and others.
The big factor for me that determines the cost of living is house or home rental.
As we all know that a place to live in is one of the things that are at the top of the
necessities list. The higher you have to pay for home rental, the higher cost you have to
spend every month to sustain a good standard of living. Next is the cost of food. How
much are you going to spend in order for an individual to have a decent meal is also a big
factor in maintaining your standard of living.
Please note that gas or gasoline prices is not that much taken into consideration
because the price of it here in Saudi Arabia is lower compared to other countries. Given
that if it is in general, it will be at the top because oil price basically dictates the prices of
goods and services. Food will be high if gasoline price is high because gasoline is
essential in the cultivation and transportation of it into the markets. Services will be high
such as transportation because of the obvious fact that most of transportation services use
gasoline.
Why does economy fluctuate?
There are two causes on why an economy fluctuates; they are the shifts in
aggregate supply and the policy responses to a recession. Aggregate supply is defined as
the curve representing the total output and income of a nation at a range of price levels in
a period of time. As the aggregate supply changes there will be change in output,
unemployment as well as the price levels. As recession or the slowdown in economic
activity occurs, policy makers take action in different ways which in turn affect the
economy as well. Due to these variables, the economy fluctuates.
Gross Domestic Product (GDP):
GDP: The total market value of all final goods and services produced in a country in a
given year. That used to evaluate the health of a country’s economy.
Goods: products that offered by supermarket, gift shop and malls such as food, gifts and
clothes.
Services: include teaching at schools or university and housekeeping services at hotels.
GDP of Kingdom of Saudi Arabia:
The Gross Domestic Product (GDP) in Saudi Arabia expanded 6.80 percent in 2011.
(GDP) growth rate provides an aggregated measure of changes in value of the goods and
services produced by an economy. Saudi Arabia has an oil-based economy with strong
government controls over major economic activities. It possesses more than 20% of the
world's proven petroleum reserves, ranks as the largest exporter of petroleum, and plays a
leading role in OPEC. The petroleum sector accounts for roughly 80% of budget
revenues, 45% of GDP, and 90% of export earnings.
Economic data reported that GDP in Saudi Arabia achieved good growth during the first
year of the Development Plan of the Kingdom, recorded 4.6% at constant prices,
compared to achieve the target in the plan which is 4.3%. The Kingdom has been
classified as 21 out of 139 countries at 2011 in the Global Competitiveness Report,
released by the World Economic Forum, compared with 27 at 2008 - 2009 between 134
countries, ahead of many countries, such as China, Mexico, Turkey and India. That
economic stability is the primary power factor of the kingdom, in an environment of
strong financial firm, stressing that the Kingdom was classified as ninth globally for
economic stability index. GDP provides the Kingdom in a lot of major indicators
globally, and measures directs States to knowledge-based economy and knowledge
society, the most important indicator is development of information and communication
technology, to be issued by the International Telecommunication Union, where the
Kingdom classified as 46 out of 152 countries covered Classification in the year 2010.
The components of GDP:
GDP determine the total economic output for each year for each country. So, the
components of GDP are consumption expenditure, investment, government purchases
and net export.
 Consumption Expenditure: Consumption Expenditure: means a measure of
price changes in goods and services that purchased by the household which
targeted toward individuals and consumed by individuals to provide satisfaction
of wants and needs.
In KSA: Saudi Arabia: One of the world’s most consumer markets, it has large
number of population in GCC, rising disposable income and compelling
macroeconomic backdrop make it one of the world’s youngest and fastestgrowing consumer markets.
 Investment: is the purchase of goods that are not consumed today but are used in
the future to create wealth. Business investment includes purchases that
companies make to produce consumer goods.
In KSA: Saudi Arabia has been determined as a powerhouse of the Middle East.
Which is looking for, a different kind of future, a future that’s more inclusive,
expansive, sustainable and integrated on both economic and social levels. Now it
is become one of the world’s top ten most competitive nations.
 Government purchases: Expenditures made in the private sector by all levels of
government. For example, the government can hire a company to repair a road.
IN KSA: Saudi Arabia reported a Government purchases equal to 13 percent of
the country's GDP in 2011. A government purchase is the payments received by
government (taxes), and the payments made by government.
 Net export: The value of a country's total exports minus the value of its total
imports which is used to calculate a country's expenditures, or GDP, in an open
economy.
IN KSA: Export Documentation Requirements for shipments to Saudi Arabia,
which should be presented to the Royal Embassy of Saudi Arabia or one of the
Saudi Consulates in the following order:
o Commercial Invoice
o Certificate of Origin
o Insurance Certificate
o Bill of Lading
o Steamship Certificate
o Packing List
Real and Nominal GDP:
Real GDP: is a nation's total output of goods and services, adjusted for price changes.
Nominal GDP: is evaluated at current market prices that include all of the changes in
market prices during the current year due to inflation.

If inflation is positive, then the real interest rate is lower than the nominal interest
rate. And, if the inflation rate is negative, then the real interest rate will be larger.
Conclusion
References

"Government Purchases financial definition of Government Purchases.
Government Purchases finance term by the Free Online Dictionary.."
Financial Dictionary. N.p., n.d. Web. 11 Nov. 2012. <http://financialdictionary.thefreedictionary.com/Government+Purchases>.

"Export to Saudi Arabia - U.S.-Saudi Arabian Business Council." U.S.-Saudi
Arabian Business Council - U.S.-Saudi Arabian Business Council. N.p., n.d.
Web. 11 Nov. 2012. <http://www.ussabc.org/i4a/pages/index.cfm?pageid=3880#.UJ-nQuQUtuo>.

Saudi Arabian General Investment Authority: Why Saudi Arabia?."
Saudi
Arabian General Investment Authority: Saudi Arabia. Advancing your
business.. N.p., n.d. Web. 11 Nov. 2012. <http://www.sagia.gov.sa/en/WhySaudi-Arabia/>.