TWO BIG MACROECONOMIC QUESTIONS 1. What determines (causes) long-run economic growth? 2. What determines (causes) short-run economic fluctuations? Why do we have a higher “standard of living” (i.e. “more stuff”) than people in the past and in other parts of the world? Why do we have good years and bad years? Why has Q – real GDP – risen over time? Why is q very uneven? ***********************************

Economics – the social science that studies mankind’s attempts to deal with …. Supply is what we are able to have. DEMAND SUPPLY Demand = (is measured by) how much we will spend. … we will always want more than we can have … the allocation of scarce resources to satisfy alternative wants. … how to match Supply -- the scarce resources, and Demand – the wants The wants the available resources

PRINCIPLE 0 Supply -- the ability to produce -- the quantity, quality and prices of the factors of production Supply determines the long run; Demand determines the short run. Demand -- the willingness to spend -- total spending

Long-run growth can be said to be the result of: -- our ability to produce goods and services. -- the supply side of the economy. -- the quantity, quality and prices of our factors of production Factors of Production Factor Costs Labor Wages Land Rent Capital Interest Entrepreneurship Profit (or “risk” or “human capital”) The Factor Costs can also be described as the sources of Income

Factors of Production Factor Costs Labor Wages Land Rent Credit Interest Capital/Entrepreneurship Profit Another list Raw Materials Energy Knowledge Another list Learn the list on the previous page!

Short-run fluctuations are the result of demand changes; of spending changes. Comments: 1. some economists (a minority) disagree. 2. The recessions of the 1970s are an exception. 3. We measure spending (and production) by the most important economic statistic – Gross Domestic Product (GDP), “the dollar value of the goods and services produced in an economy during some time period.” GDP is the sum of spending by the sectors. 4. Real GDP is (nominal) GDP corrected for the effect of inflation. Real GDP is intended to measure “production” or “output” not just “spending.”

Sector Spending Household Consumption (Cd)* Business Investment (I) Government Gov’t Purchases (G) The Rest of the World Exports (E) (the Foreign Sector) Who does the spending? We classify spending by breaking the economy into four sectors and the four types of spending. * Cd stands for “domestic Consumption, spending on US-produced goods & services We will summarize this with an important equation: X = Cd + E + I + G X (Xpenditures) stands for total spending = nominal GDP

Another important list of four is the four uses of income Income is used for: Cd – domestic Consumption F – Imports (think “Fimports”) S – Savings T – Taxes This is summarized by the equation: Y = Cd + E + S + T where Y stands for total National Income (think Yncome”)

The “job” of the economy is to balance DEMAND (what we want, expressed in our willingness to spend) with SUPPLY (what we are able to produce, determined by the available factors of production).

LISTS OF FOURA summary 1a. The Factors of Production (FOPs) 1b. Payments to the FOPs = Wages + Rent + Interest + Profit = Sources of Income 2a. The Sectors Households, Business, Government, Foreign 2b. Spending by the sectors X = Cd + E + I + G 3. The Uses of Income Y = Cd + F + S + T