Econ III (Macroeconomics)

Acadeca 2025-26

Macroeconomics studies…[p.62]

…the performance of national economies

1. What determines the long-run growth in the size of economies? (+ standard of living provided for their participants; price level)

2. What are the causes & consequences of short-run fluctuations in the level of economic activity, unemployment, and inflation?

Types of aggregate economic indicators [p.62]

Gross Domestic Product (GDP), the cost of living, and the unemployment rate

• used to describe the performance of the aggregate (total) economy

Real GDP (Gross Domestic Product) [p.62]

measure of the total quantity of goods & services produced in the economy, adjusted to remove the effects of inflation

U.S. long-run history of growth [p.62]

since 1900, the total real output of the U.S. economy has increased by nearly 40x.

• decline btwn 1929-1933 (Great Depression)

• expansion btwn 1941-1945 (WWII)

[Figure 30]

U.S. historical population growth [p.63]

since 1900, the U.S. population has increased by over 4x.

Per Capita [p.63]

Latin for “per head;” used to denote averages calculated for an entire population

U.S. real output per capita [p.63-64]

since 1900, average output per capita has increased by a factor of 9

• provides an indication of what the typical person can consume

• 2019: >$65,000

[Figure 31 - blue line]

Average Labor Productivity [p.63]

economy’s total output divided by the total # of workers employed

• measure of how much the typical worker can produce

[Figure 31 - orange line]

Other countries’ output per capita in 2019 [p.63-64]

In comparison to U.S: >$65,000

• China: 2/3 GDP and 15% output

Lowest levels of production

• (South Asia) India: 13.4% GDP and 3.2% output; Pakistan: 1.3% GDP and 2% output

• (Africa) Egypt: 1.4% GDP and 4.6% output; Nigeria: 2.1% GDP and 3.4% output; Ghana: 0.3% GDP and 3.4% output

[Figure 32]

Living Standards [p.64]

• poorest citizens of developed countries can still access material goods far exceeding the consumption possibilities of the typical resident of developing countries (with low economic growth)

• Quality of Life: material resources created by higher levels of production make possible longer life, broader access to education, better healthcare, and a cleaner environment

[Figure 33]

Expansion [p.65]

a period btwn a trough and a peak in economic activity

Recession [p.65]

a period btwn a peak and a trough in economic activity

• 2008 financial crisis

Depression [p.65]

when a recession is particularly severe

• Great Depression (1929-1933)

Business Cycle [p.65]

the alternation of periods of expansion and recession

• these fluctuations are one of the fundamental features of the economy that macroecon seeks to explain

• + finding ways to reduce the severity & duration of recession periods (associated w/ declining employment opportunities & slower wage growth)

Labor Force [p.65]

ALL individuals either employed or unemployed (looking for a job)

Unemployment rate [p.65]

Percentage of the labor force that would like to work but cannot find employment

• 100 x (unemployed / labor force)

• INC during recessions (GD), DEC during expansions

• never zero! people are always searching for work (continual entry of new job-seekers and shifting fortunes of different industries)

• since 1900, no indication that the rate is increasing in the long term - despite huge economic changes

High unemployment rate [p.65]

during this time it’s hard to find work and employed ppl generally find it harder to earn promotions or increase their pay

Inflation [p.66]

when all prices (of individual goods) rise together / all the things people consume are becoming more expensive

• reduces purchasing power, makes consumers worse off + other economic costs

• macro policy: keep inflation low

• since 1900, rate varies considerably over time with notable price drop during GD & 2008 financial crisis

How size affects dependence on trade [p.66]

U.S. is large and relatively less dependent on trade than other smaller countries

• international trade has generally increased since the 1950s

• U.S: level of export/imports as a share of GDP has fallen over the past few years

Trade Surplus [p.67]

when exports exceed imports

Trade Deficit [p.67]

when imports exceed exports

Levels of U.S. imports vs exports [p.67]

• up until late 1950s: exports > imports (trade surplus)

• since 1970s: imports > exports (trade deficit)

• trade deficit allows us to focus on exporting goods and services we have a comparative advantage in producing

• + able to trade for things that other countries can produce using less expensive resources

Aggregation [p.67]

combination of many different things into a single economic variable

Gross Domestic Product (GDP) [p.68]

the market value of all final goods and services produced within a country during a specified period of time

• domestic: counts only good produced within the borders of that country, whether by the domestic or foreign manufacturer [p.71]

(formal definition)

Higher priced goods contribute more to total GDP [p.68-69]

goods that have higher prices have a higher value to consumers and therefore more to total output

• (market prices reflect the value the marginal consumer places on the good)

Intermediate Goods

goods that are used up in the production of a final good

• excluded from GDP to ensure GDP is not affected by the extent of vertical integration in the economy (regardless of the pattern of industry ownership)

If goods are either final or intermediate… [p.70]

…we only count that portion of production that is sold to final users.

Capital Goods [p.70]

long-lived goods that are themselves produced and are used to produce other goods/services but aren’t used up in production

• EX: machinery, factory buildings

• included in GDP in the year they are produced

GDP is during a specified period [p.71]

annual or quarterly (three month periods); and counts do not carry over to the next year

the conceptual basis for the measurement of GDP was developed in the…[p.71]

1930’s

one of the earliest known efforts to measure national output [p.71]

Sir William Petty - mid 1600s: part of the British govt’s effort to assess the ability of the Irish people to pay taxes to the crown

1930’s GDP Invention [p.71]

The lack of comprehensive data on national economic activity was hampering efforts to respond to the Great Depression

• 1932: U.S. Dept of Commerce commissions economist Simon Kuznets to develop a system to measure national output

• 1934: Kuznets presents his system in a report to the U.S. Senate

• U.S. entry to WWII provides additional impetus for perfecting techniques of measuring output and establishing the necessary data collection tools to produce ongoing estimates of GDP

• 1971: Kuznets receives Nobel Prize in Economic Science for his contributions

Important Limitations of GDP [p.71]

1. Not always easy to determine what constitutes final goods and services (EX: treatment of expenditures on national defense = “intermediate good?”)

2. Non-market production: exclusion of goods that aren’t bought and sold in markets (EX: unpaid household work, when women entered the labor force the GDP rose w/o actual change in total production OR underground economy/illegal black market)

3. Ignores activities that may increase our GDP but don’t make us better off (EX: natural disasters, crime). Also doesn’t account for production that may deplete a country’s stock of natural resources/pollutes the environment