Intro to Macroeconomics

Micro vs. Macro  Micro: study individual economic actors (households, firms, gov’t)  Macro: study of economic systems  Diff of perspective, same basic ideas (with caveats) E.g. the economy is not the same as your familyE.g. the economy is not the same as your family  Circular flow: let’s all tighten our belts to save money during these hard times!  If we all cut wages, the economy will grow!  The world can grow its way out of the recession by increasing exports!

GDP  Gross Domestic Product (measurement of national economic activity):  Dollar value (nominal vs. real GDP= nominal/price index)  of all final goods and services (vs. intermediate goods)  Produced within a country (vs. Gross National Product/GNP)  In a calendar year (avoid double counting)

4 Main Types GDP  Nominal GDP (prices; how much money from selling donuts?)  Real GDP (adjusted for inflation; how many donuts?)  GDP per capita: stuff/# people; problem for developing countries w/rapid pop growthproblem for developing countries w/rapid pop growth  Potential/full-employment GDP: if resources fully employed efficiently, what is possible to produce (think production possibilities curve) w/o increasing inflation

Measuring GDP  Output-Expenditures Model  GDP= C + I + G + (x-m)  Consumption (households, 2/3 US economy)  Investment (only capital goods, not stocks; most volatile)  Government  eXports – iMports (domestic production; slightly misleading)

Income Approach  GDP= Income generated from production  Must equal Output-Expenditure: circular-flow  what is spent is earned

Short- and Long-run  Short-run: period when input prices (e.g. wages) don’t change in response price changes (inflation)  Long-run: sufficiently long period when input prices can change in response to price changes Slight diff. MicroSlight diff. Micro

Aggregate Supply/Demand  AD: total quantity of goods and services demanded at different price levels  AS: total quantity of goods and services in the economy

Keynesian AS-AD Graph  “Mainstream” view: developed in response to Great Depression  Q= real GDP  Price Level: weighted average of all final g+s in economy  3 ranges: horizontal, intermediate, vertical (at full-capacity/employment level of output)  Intersection AS-AD= equilibrium price and output

Q= real GDP Price Level Horizontal: Excess capacity  increase output w/o increase price Intermediate Some increase output “dissipated” as inflation (PL up) Vertical At full- capacity/employment, any increase AD lost entirely to inflation (can’t produce more) AS Qf

Q= real GDP Price Level Qf AS AD1= full- employment production AD2= recession AD3= depression Qr Qd

Ratchet?  Prices + wages “downwardly inflexible”: decline AD  firms can’t (labor contracts)/ don’t want to (efficiency wages) decrease wages  price level doesn’t fall w/decrease AD  Recessions  depressions

Q= real GDP Price Level Qf AD1 AD2 Qr Qd AS

Keynesian Assumptions  1) Input prices (wages, rent, etc.) downwardly inflexible (hard to lower wages)  2) Changes in Investment esp. important affecting GDP (“animal spirits”)  3) “In the long-run we’re all dead”: Unemployment equilibrium  economy can get stuck in recession/depression w/o external force (G)

Neo-Classical AS-AD  Assumes v/ efficient markets (including labor market)  Distinction Short-run AS and Long-run AS  Long-run AS vertical at full- capacity/employment GDP  Long-run equilibrium only at intersection ASsr-AD-ASlr  economy will by itself return to ASlr (self-regulating)  No long-run trade-off inflation + unemployment: just inflation

Q= real GDP Price Level AD ASsr ASlr Long-run equilibrium AD2 Short-run equilibrium

Business Cycle  Cyclical not periodic  Contraction > 2 consecutive quarters (6 months) = recession  Deep, long recession = depression  Stagflation: stagnation + inflation

Factors Affecting Business Cycle  1) Investment (prob. excess capacity)  2) Availability $ and credit (interest rates)  3) Expectations future economy  4) Capital deepening (increase labor productivity; often result I)  5) External shocks (supply shock)

Indicators  Leading: where we’re going (housing starts)  Lagging: where we’ve been; confirms change in cycle (unemployment)  Coincident: where we are (income)

Limitations of GDP  1) estimate: slow to gather, sampling/surveys  2) Underground/ nonmarket transactions  3) National: hard at local level  4) Changes in quality: can’t track change Apple IIG  Alienware  5) Distribution of income/goods  6) Blind: doesn’t differentiate uses of g+s (externalities)   Green GDP: + happiness, sustainability, etc.; - pollution, crime, etc.