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Intro to Macroeconomics

Intro to Macroeconomics. Micro vs. Macro. Micro: study individual economic actors (households, firms, gov’t) Macro: study of economic systems Diff of perspective, same basic ideas (with caveats) E.g. the economy is not the same as your family

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Intro to Macroeconomics

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  1. Intro to Macroeconomics

  2. Micro vs. Macro • Micro: study individual economic actors (households, firms, gov’t) • Macro: study of economic systems • Diff of perspective, same basic ideas (with caveats) • E.g. the economy is not the same as your family • Circular flow: let’s all tighten our belts to save money during these hard times! • If we all cut wages, the economy will grow! • The world can grow its way out of the recession by increasing exports!

  3. GDP • Gross Domestic Product (measurement of national economic activity): • Dollar value (nominal vs. real GDP= nominal/price index) • of all final goods and services (vs. intermediate goods) • Produced within a country (vs. Gross National Product/GNP) • In a calendar year (avoid double counting)

  4. 4 Main Types GDP • Nominal GDP (prices; how much money from selling donuts?) • Real GDP (adjusted for inflation; how many donuts?) • GDP per capita: stuff/# people; • problem for developing countries w/rapid pop growth • Potential/full-employment GDP: if resources fully employed efficiently, what is possible to produce (think production possibilities curve) w/o increasing inflation

  5. Measuring GDP • Output-Expenditures Model • GDP= C + I + G + (x-m) • Consumption (households, 2/3 US economy) • Investment (only capital goods, not stocks; most volatile) • Government • eXports – iMports (domestic production; slightly misleading)

  6. Income Approach • GDP= Income generated from production • Must equal Output-Expenditure: circular-flow what is spent is earned

  7. Short- and Long-run • Short-run: period when input prices (e.g. wages) don’t change in response price changes (inflation) • Long-run: sufficiently long period when input prices can change in response to price changes • Slight diff. Micro

  8. Aggregate Supply/Demand • AD: total quantity of goods and services demanded at different price levels • AS: total quantity of goods and services in the economy

  9. Keynesian AS-AD Graph • “Mainstream” view: developed in response to Great Depression • Q= real GDP • Price Level: weighted average of all final g+s in economy • 3 ranges: horizontal, intermediate, vertical (at full-capacity/employment level of output) • Intersection AS-AD= equilibrium price and output

  10. AS Price Level Vertical At full-capacity/employment, any increase AD lost entirely to inflation (can’t produce more) Intermediate Some increase output “dissipated” as inflation (PL up) Horizontal: Excess capacity increase output w/o increase price Q= real GDP Qf

  11. AS Price Level AD2= recession AD3= depression AD1= full-employment production Q= real GDP Qr Qf Qd

  12. Ratchet? • Prices + wages “downwardly inflexible”: decline AD firms can’t (labor contracts)/ don’t want to (efficiency wages) decrease wages  price level doesn’t fall w/decrease AD • Recessions depressions

  13. AS Price Level AD1 AD2 Q= real GDP Qd Qf Qr

  14. Keynesian Assumptions • 1) Input prices (wages, rent, etc.) downwardly inflexible (hard to lower wages) • 2) Changes in Investment esp. important affecting GDP (“animal spirits”) • 3) “In the long-run we’re all dead”: Unemployment equilibrium economy can get stuck in recession/depression w/o external force (G)

  15. Neo-Classical AS-AD • Assumes v/ efficient markets (including labor market) • Distinction Short-run AS and Long-run AS • Long-run AS vertical at full-capacity/employment GDP • Long-run equilibrium only at intersection ASsr-AD-ASlr economy will by itself return to ASlr (self-regulating) • No long-run trade-off inflation + unemployment: just inflation

  16. ASlr Price Level ASsr AD2 Long-run equilibrium Short-run equilibrium AD Q= real GDP

  17. Business Cycle • Cyclical not periodic • Contraction > 2 consecutive quarters (6 months) = recession • Deep, long recession = depression • Stagflation: stagnation + inflation

  18. Factors Affecting Business Cycle • 1) Investment (prob. excess capacity) • 2) Availability $ and credit (interest rates) • 3) Expectations future economy • 4) Capital deepening (increase labor productivity; often result I) • 5) External shocks (supply shock)

  19. Indicators • Leading: where we’re going (housing starts) • Lagging: where we’ve been; confirms change in cycle (unemployment) • Coincident: where we are (income)

  20. Limitations of GDP • 1) estimate: slow to gather, sampling/surveys • 2) Underground/ nonmarket transactions • 3) National: hard at local level • 4) Changes in quality: can’t track change Apple IIG Alienware • 5) Distribution of income/goods • 6) Blind: doesn’t differentiate uses of g+s (externalities) •  Green GDP: + happiness, sustainability, etc.; - pollution, crime, etc.

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