AP MACROECONOMICS INTRODUCTION

MACROECONOMICS Macroeconomics is the study of the economy as a whole. Microeconomics is the study of individual parts of the economy such as business, households, and prices. Scarcity exists because we have limited resources and unlimited wants. No society has ever had enough resources to produce all the goods and services its members wanted.

SCARCITY Scarcity requires people to make choices. Every society must answer 3 questions: What to produce? How to produce? Who should receive the goods & services? Nations have used traditional, command and market systems to allocate resources

The Circular Flow A diagram of the circular flow of resources, goods and services, and money payments is a simplified way of illustrating how a market economy operates. Prices in the product market and prices in the factor market are determined by the interaction of supply and demand. Factors of Production are: land, labor, capital, entrepreneurship and technology.

GROSS DOMESTIC PRODUCT GDP is the market value of all final goods and services produced in a nation in one year. GDP counts only final goods and services. GDP does not include secondhand goods; the buying and selling of stocks and bonds; and transfer payments. GDP includes profits earned by foreign-owned businesses and income earned by foreigners in the U.S. but it excludes profits earned by U.S.-owned companies overseas and income earned by U.S. citizens working abroad. GDP is calculated in two ways: C + I + G + NE OR Add all the incomes received by owners of productive resources in the economy