macro chapter 1

what is macroeconomics

• the study of the forces that affect the economy as a whole

• the science of macroeconomic processes

• looks into prosperity variation, value of money, inflation rates, recessions, etc

macroeconomic variables

• real GDP (gross domestic product): reflects the price-adjusted total income of all economic actors in an economy

  • nominal GDP: not price adjusted (measured at current prices)

• inflation rate: describes how quickly prices are rising

• unemployment rate: tells you what portion of labour force in an economy is out of work

• measures: investments, inequality, satisfaction

what does an increased GDP mean

• economy grew

• income has risen, more trade, more products produced

GDP per capita (per person)

• measures economic activity/income per person

• can tell you if the size of the economy per individual is larger than before

• graph is not price adjusted

what is inflation

• a monthly statistic

• a sustained increase in the general price level of goods/services in an economy over a period of time, which reduces the purchasing power of currency

• measured as change compared to previous year in %

Macroeconomic instruments

• Simplified representations of reality in models

• We concentrate on the central variables (try to abstract irrelevant details)

• Models are constructed using very restrictive assumptions.

exogenous vs endogenous variables

• Exogenous variables are determined outside the model. They are introduced into the model or are fixed

• Endogenous variables are determined within the model itself.

how economic models work

• simplified theories and show the essential relationships between economic variables

• exogenous variables are variables that are determined outside the model

• endogenous variables are explained by the model

• model shows how a change in an exogenous variable affects all endogenous variables

supply and demand model

problems of simplifying assumptions

• not all varieties of the same product are sold at the same price

• not all place selling similar products are located in the same place (some may be easier/harder to get to)

flexible vs fixed prices

• economists assume that price of goods adjusts quickly → market clearing

  • at this price, consumers can demand desired quantity, which is offered by producers at this price

• flexible: adapt to changes in supply and demand without delay → suitable for describing the long-term (fully adjusted) equilibrium

• wage + price rigidity justify a slow/delayed adjustment to changes in supply or demand

• Short-term (cyclical) fluctuations are often associated with fixed prices

what is market clearing?

• economic process where quantity of a good or service supplied exactly matches the quantity demanded, establishing an equilibrium price

• no shortages or surpluses