Intro to Macroeconomics


Oct 28, 2013 (3 years and 10 months ago)


Intro to Macroeconomics

Performance Policy

Macroeconomics: the study of structure and performance of national economies and government
policies that affect economic performance.


economic growth and the short
run fluctuations in output and employment that are often
referred to as the
business cycle.

Economies show a distinct growth trend that leads to higher output and higher standards of living in
the long run, but in the short
run there is a great deal of variability.

Two main sources of growth that

over watched in Macroeconomic

• Population growth

• Increases in average labor productivity

Issues that are addressed



Business cycles



he international economy



Recession is business cycle goes negative (output and liv
ing standards actually decline)

4 Major Economic Statistics

Real Gross Domestic Product (GDP),

measures the value of final goods and service
s produced within the
borders of a given country during a given time period. (Tells us whether an economies output is


Real (adjusted value) GDP, or real gross domestic product, measures the value of final
goods and services produced within the

borders of a given country during a given period of
time, typically a year.


Nominal (stated value) GDP, or nominal gross domestic product, measures the dollar
value of all goods and services produced within the borders of a given country using their
current during the year that they were produced.


is a person who cannot get a job despite willing to work and actively seeking work.

Nominal GDP

totals the dollar value of producers within the borders using their current prices during
the y
ear it was produced.


measures the extent to which the overall level of prices is rising in the economy. It also
increases in the overall level of prices

Deflation: when prices of most goods and services decline

Inflation rate: the
percentage increase in the level of prices

Hyperinflation: an extremely high rate of inflation

Miracle of Modern Economic Growth

Output began to grow faster than the population. . Before the Industrial Revolution began in the late
1700’s in England,
standards of living showed virtually no growth over hundreds or even thousands of
years. The vast differences in living standards seen today between rich and poor countries are almost
entirely the result of the fact that only some countries have experience
d modern economic growth.

Savings and Investments

Macroeconomists believe that the promotion of investing and saving (the purchase of capital goods) is
the key to economic growth.

Savings are generated when current consumption is less than current outpu

Investment happens when resources are devoted to increasing future output.

Financial Investment captures what ordinary people mean when they say
investment, namely the purchase of assets like stocks, bonds, or real estate in the
hope of reaping a

financial gain.

Economic Investment only includes money spent purchasing newly created capital
goods such as machinery, tools, factories, and warehouses. This what economists
mean when they refer to “

Savings, current consumption is less t
he current output invest, resources are devoted to increasing
future output Macro believes that these are the keys to Modern Growth. At the heart of economic
growth is the principle that in order to raise living standards over time, an economy must devote
at least
some fraction of its current output to increasing future output

Uncertainly, Expectations, Shocks

If people and businesses are more positive about the future, they will save and invest more. Demand
shocks are unexpected changes in the demand for

goods and services.

Decisions about savings and investment are complicated by the fact that the future is uncertain.
Investment projects sometimes produce disappointing results or even fail totally. This implies that

Expectations are
important for two reasons. The more obvious reason involves the effect that changing
expectations can have on current behavior. For example, if businesses become pessimistic about the
future of the economy they may reduce investment today.

The less obvious

reason is that firms are
often forced to cope with “shocks” to the economy.

The economy is exposed to both demand shocks and supply shocks. Economists believe that most short
run fluctuations are the result of demand shocks.

How Sticky Are Prices?

prices combine with shocks to drive short
run fluctuations in output and employment. Only in a
very short run are prices totally inflexible. Firms often attempt to set and maintain stable prices in order
to please customers.

Prices often stay inflexible i
n the s
hort run because of two things

First, firms attempts to set and maintain stable prices to please customers who like the
predictable prices to make their planning easier.

Second, because a firm in a competitive market will be reluctant to cut its pr
ices and declare a
price war where the competitors slash their prices to compete, which leaves the original firm
worse than when it started.

Inflexible prices, or “sticky prices” as economists like to say, help explain how unexpected changes in
demand lea
d to fluctuations in GDP and employment, which is referred to as the business cycle.