MACROECONOMICS

THE STUDY OF THE ECONOMY AS A

WHOLE.

GROSS DOMESTIC PRODUCT

• IS A YARDSTICK FOR THE ECONOMY'S PERFORMANCE

• CONSUMPTION + INVESTMENT + GOVERNMENT SPENDING + (EXPORTS - IMPORTS) = GDP

• C + I + G + (X - IM) = GDP

CONSUMPTION

• WHAT WAS BOUGHT OR USED BY PEOPLE IN A SOCIETY IN A GIVEN PERIOD OF TIME.

• THE AMOUNT OF MONEY WE SPENT BUYING THINGS.

INVESTMENT

• THE AMOUNT OF MONEY BUSINESSES SPEND ON CAPITAL EQUIPMENT USED FOR PRODUCTION.

GOVERNMENT SPENDING

• THE AMOUNT OF MONEY THE GOVERNMENT SPENT IN THE ECONOMY. ( DOES NOT INCLUDE MONEY SPENT ON PAYING OFF THE NATIONAL DEBT)

EXPORTS

• THE DOLLAR VALUE OF AMERICAN MADE GOODS AND SERVICES THAT ARE SOLD TO FOREIGN COUNTRIES.

IMPORTS

• GOODS AND SERVICES THAT ARE PURCHASED BY AMERICAN CONSUMERS AND BUSINESSES THAT ARE NOT OWNED BY AMERICAN COMPANIES.

Business Cycles

• Systematic ups and downs of the GDP.

Phases of the Business Cycle

PeakRecession

Trough

Expansion

Peak- the point where the Real GDP stops going up

PeakRecession

Trough

Expansion

Recession-A period where the real GDP declines for Two quarters in

a row (6 months)

PeakRecession

Trough

Expansion

Trough: the turnaround point where the GDP stops going down

PeakRecession

Trough

Expansion

Expansion: a period of recovery from a recession

PeakRecession

Trough

Expansion

Depression

• A severe recession with high unemployment, shortages, and excess capacity in manufacturing.

Causes of the Business Cycle

• Capital Expenditures: growth or decline of expanding inventories of businesses

• Inventory Adjustments: changes in the level of business inventories

• Innovation: New products or new methods

• Monetary Factors: Credit and loan policies of the FED- Easy money vs. Tight Money

External Shocks to Business Cycles

• Increased Oil Prices- OPEC shortages in 1970s

• Wars

• International Conflicts

Business Cycle Effects

1. Unemployment

• Unemployment Rate: # of unemployed people divided by total # of people in the labor force.

Types of Unemployment

• Frictional: Unemployment caused by workers who are between jobs

• Structural: A fundamental change in the economy- outdated technology

• Cyclical: Changes based on the business cycle• Seasonal: Changes based on the weather, or

demand for certain products. • Technological: Changes caused by jobs being

replaced by machines/automation

Inflation

• General Increase of products

• Types of Inflation:• Creeping: inflation in between 1-3%• Galloping: inflation that can go as high as

100 to 300%• Hyperinflation: 500% + (Germany during

the Great Depression)

Inflation Causes

• Demand pull Theory: all sectors of the economy try to buy more goods and services than can be produced

• Federal Deficit: Government spending• Rising Input Costs: Rising cost of

manufacturing increasing prices (Labor)• Excessive Monetary Growth: Money supply

grows faster than Real GDP.

Poverty

Causes of PovertyEducation

Wealth- Distribution of wealth uneven.

Discrimination

Ability

Monopoly Power- limited professions or membership- Unions, ABA, AMA

Stabilizing the GDP- Demand Side

• Fiscal Policy- Federal Government’s attempt to stabilize the economy through taxes and spending.

• Concepts created by economist John Maynard Keynes.

Demand Side Limits

• Government spending counteracting Business Investing

• Government unable to control spending

Supply Side Policies

• Policies designed to stabilize the economy by increasing production rather than demand.

• Became popular during the Reagan administration.

Supply Side Limits

• Lack of experience using Supply side

• Policies designed to promote growth not stability.

• Weakens the stabilizers of the economy

• Supply- Side• Stimulate production• Cut Taxes and

Regulations.• Reduce Government

• Businesses invest and expand, creating jobs

• Investment increases

• Demand- Side• Stimulate

consumption• Cut taxes or increase

Federal spending. • More Money= More

Consumption• Businesses increase

output