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Macroeconomics
Measure of how a country is performing and includes all production and consumption within every market.
What are the 3 macroeconomic goals?
Economic growth, low unemployment, and low inflation
What does macroeconomics focus on?
It focuses on the economy as a whole and how whole economies interact
Is production supply or demand?
supply
Is consumption supply or demand?
demand
Economic Growth
Economic growth determines the standard of living in a country, measured by the change in GDP adjusted for inflation.
Low employment
Unemployment is the percentage of the labor force without a job.
Low inflation
Inflation is the overall increase in the level of prices in an economy. Inflation is measured by the Consumer Price Index
What are the principal tools that economists use?
Theories and models
In macroeconomics what theories do you use?
Aggregate demand and aggregate supply
What are two perspectives of macroeconomics?
Neoclassical and Keynesian
What does the Monetary Policy involve?
Managing the money supply and interest rates
What does the Fiscal Policy involve?
Changes in government spending, purchases, and taxes
What’s the first step in macroeconomics?
Measuring the overall economy
How do economists measure the size of a nation’s overall economy?
GDP
What does GDP mean?
Gross domestic product
What are 3 ways to measure GDP?
By demand, by supply, and the national income approach
How do you measure GDP by Demand?
Consumption, Investment, Government spending on goods and services, and spending on net exports
Whats the largest compenent of GDP?
Consumption
How much does consumption account for?
two-thirds in any year
What does consumption tell us?
The spending decisions are a major driver of the economy
Does consumer spending fluctuate much with consumption?
No, not much, and it only increased modestly over time
What do investment expenditures refer to?
To purchase buildings and equipment
Does investment fluctuate more noticeably than consumption?
yes
What demand is far smaller than consumption demand?
investment demand
How much does investment demand account for?
15%-18% of GDP
Buying a new fighter jet for the Air Force
Federal government spending
Building a new highway
State government spending
Building a new school
Local government spending
What is the only art of government spending that is counted in demand?
Government purchases of goods or services produced in the economy
What does exports > imports mean?
trade surplus
What does imports > exports mean?
trade deficit
Exports
Domestically porduced goods that a country sells abroad
Imports
Goods produced in other countries that residents of this country purchase
What’s the gap between exports and imports called?
Trade balance
How do you measure GDP by Supply?
Durable goods, Non-durable goods, services, structures, and inventories
What’s another way to measure GDP?
Adding up all the income produced in a year
The total value of a nation’s output is equal to what?
The total value of its income
Double counting
Counting output more than once as it travels through production
How do you avoid double-counting?
Only count the value of final goods and services, not intermediate goods
What does Gross National Product mean?
Measures what a country’s citizens and firms produce, regardless of whether it is produced domestically or internationally
What does Net National Product mean?
GNP minus how much physical capital depreciates due to aging over the course of a year
Can GNP or NNP be divided into national income and personal income?
NNP
Nominal GDP
Equal to the quantity of every good or service produced, multiplied by the price at which it was sold, summed up for all goods and services
Real GDP
Equal to nominal GDP divided by the price index
GDP deflator
A price index measuring the average prices of all final goods and services included in the economy
What’s the equation of the GDP deflator?
Nominal GDP/Real GDP x 100
What’s the equation of the Real GDP?
Nominal GDP/ (Price index/100)
What do we use to compute the real statistic?
Prices in the base year
One year/period plays a special role in what?
Whenever you compute a statistic in real terms instead of nominal terms across a period of time
How do you calculate real GDP
The quantities of goods and services produced in each year are multiplied by their base year price
As long as inflation is positive, real GDP should be what?
Less than nominal GDP in any year after the base year
What’s amplified by inflation?
Value of nominal GDP
Nominal and real GDP will be what in the base year?
Equal
What’s the equation of real GDP growth rate?
(Current year real GDP— base year real GDP)/base year real GDP x 100
How long does the business cycle run?
From the height of the economy to the lowest point and back to the peak
How long does a recession last?
It lasts from peak to trough
How long does an economic upswing last?
From trough to peak
What is a depression?
A longer and deeper decline
What are the steps to calculating CPI?
Fix the basket, find the prices, then compute the basket’s cost, Choose a base year, and the compute the inflation rate
What’s the CPI equation?
Inflation rate in year 2 = CPI in year2 — CPI in year 1/ CPI in year 1 × 100
What societal factors are not included in GDP?
Environmental cleanliness, population health, air quality, and infant mortality rates