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Intro to Macroeconomics AP Comp Gov

Intro to Macroeconomics AP Comp Gov. Economic Systems. Fundamental problem: scarcity Partial solution: efficiency 3 Economic Qs: what, how, who? Systems’ answers to the Qs: Market/capitalist: the market (  cigarettes) Command: Stalin (  tanks)

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Intro to Macroeconomics AP Comp Gov

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  1. Intro to MacroeconomicsAP Comp Gov

  2. Economic Systems • Fundamental problem: scarcity • Partial solution: efficiency • 3 Economic Qs: what, how, who? • Systems’ answers to the Qs: • Market/capitalist: the market (cigarettes) • Command: Stalin (tanks) • Traditional: the way we’ve always done it (food) • The US: all 3 combined (iPhones used to drop bombs on people so we can get their oil to drive our Escalades with spinner rims)

  3. GDP • Gross Domestic Product: total market value ($) of all final goods and services produced within a country in 1 year • GDP= C + I + G + Xn • C: personal consumption (durable, nondurable, services; about 70% of US) • I: investment: esp. capital goods • G: government expenditures • Xn: exports – imports (what did Americans make)

  4. Nominal vs. Real and Inflation • Consumer Price Index = (price market basket specific year)/(price same basket in base year) x 100 • Inflation: rising price level • Inflation rate • Disinflation: slow in rate; 4%  2% • Hyperinflation: warm, flat beer • Deflation: great depression • Both Hyper- and de-  economic shutdown

  5. Unemployment • Frictional, structural, cyclical, seasonal • Full employment/natural rate potential output • Okun’s Law: every 1% actual U > natural rate, GDP gap (actual less than potential) 2% • Unequal burdens: occupation, age, race, gender, education, duration • Noneconomic costs: depression, crime, political impacts • Unemployed, discouraged, underemployed • “Real” unemployment rate closer to 16%

  6. Cycles • Expansion recession expansion • Causation of cycles: 1) major innovations I and C; 2) Political and random events (war); 3) Money supply • Noncyclical fluctuations: seasonal variations, secular trend

  7. AS Price Level • Aggregate Supply and Aggregate Demand AD2 AD1 AD0 Real GDP = employment level

  8. Shifts in AD • Change in any components of GDP: C, I, G, X-M entire curve shifts (if increase, “right,” if decrease, “left”) • Multiplier effect: a change in a component of agg expenditures leads to a larger change in equilibrium GDP • US estimated “complex multiplier”: 2x • So $100B increase G $200B increase GDP; $50B decrease  $100 decrease GDP • Tax cuts have much smaller multiplier: approx 0.9 larger tax cuts to achieve same spending effect • BUT: “crowding out effect”: G pushes private firms out of the business (but NOT at “zero lower limit”; i.e. 2009)

  9. Shifts in AS • 1) Input Prices • Domestic Resources: land, labor, capital, entrepreneurial ability; Price Imported Resources; Market Power • 2) Productivity • Total output/total inputs • Per unit prod.= total input cost/total output • 3) Legal-Institutional Environment • Taxes and Subsidies, Regulation

  10. AS3 PL AS1 AS2 AD rGDP

  11. Trade • Comparative advantage: what can do cheapest • Focus on: land, labor, capital, entrepreneurial ability • Currency manipulation: China buys $1.4 trillion stronger dollar/weaker renminbi/yuan relatively cheaper Chinese products US trade deficit

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