Macroeconomics: Study of the determinants of Output, Employment and the Price Level Put less formally, macroeconomics is about understanding the causes of prosperity and poverty.

National Income Accounting Purpose: measure the performance of the economy for purposes of public policy Created in the aftermath of the Great Depression GDP: most important measure of the economy’s performance

Gross Domestic Product GDP is the most important measure of economic output GDP is defined as the total value of all final goods and services produced by the domestic economy in one year

Measuring GDP Expenditure Approach: GDP = C + I + G + X - M Income Approach: GDP = Wages + Profits + Rents + Interest + Indirect Business Taxes

Types of Expenditures Consumption: – durable goods –nondurable goods –services Investment –inventories –producer goods –new construction Government Net Exports –exports –imports

Consumption as a Percentage of GDP

Investment as a Percentage of GDP

Government Spending as a Percentage of GDP

Government Expenditures

Government Revenues

Exports and Imports as a Percentage of GDP

Net International Investment Position

Types of Income Compensation Corporate Profits Proprietor Profits Interest Rents

Employee Compensation as a Percentage of National Income

Corporate Profits, Proprietorships, and Interest as a Percentage of National Income

GDP over time

Nominal and Real GDP

Real GDP

Percentage Change in GDP: The Business Cycle

Employment Unemployment rate--unemployed/labor force unemployed –between 16 and 65 –involuntarily unemployed –noninstitutionalized labor force--employed + unemployed

Unemployment Rate

Labor Force Participation Rate Number employed/Working age population

Types of Unemployment Frictional unemployment structural unemployment seasonal unemployment cyclical unemployment

Costs and Benefits of Unemployment Costs –Costs of supporting the unemployed –loss of output –crime, suicide, etc. –psychological costs Benefits (dubious) –disciplines the labor force –checks wage increases (Marx’s point) –reduces inflationary pressures

The Price Level Price level--average level of prices of a market basket of goods CPI--measures changes in prices of consumer goods PPI-- measures changes in prices of producer goods GDP Price Deflator--measures changes in prices of goods making up GDP

Price Level

Inflation (Percentage change in the Price Level)

Costs and Benefits of Inflation Costs –hurts creditors –hurts those on fixed incomes –increases uncertainty –costs of marking up prices Benefits –alleviates the burden of debt –raises profits, and therefore may help the economy