Macroeconomics How do you define economics Knowing how to use your resources efficiently in order to be financially stable and have an understanding of money The majority of third world countries Pakistan Afghanistan etc have cheap labor where products such as clothes are cheaper to produce due to minimum wage payments Three Important Questions in Economics What to produce How to produce Who are you producing for Resources Labor Capital Land Entrepreneurship GDP Gross Domestic Product the value of the sum of ALL goods and services provided throughout the economy Components o C Consumption I investment G Government X Export M Import 70 Consumer Confidence Index a monthly evaluation of prevailing business conditions and likely developments for the months ahead This monthly report details consumer attitudes and buying intentions with data available by age income and region Stagflation when solving one economic problem leads to another When there is no balance Ex High inflation and extremely high unemployment rate Equilibrium The point where both supply and demand are the same The point on a graph where both the supply and demand lines intersect Classical School Invisible hands will help in the long run Let the market work on its own and it will take care of itself if something becomes out of place the government will help push the prices back to equilibrium Keynesian demand creates its own supply but the government can step in to hell if needed CH 3 Demand Supply QDA f PA Quantity Demanded of Product A Function of Product A Quantity demanded of product A QDA a b PA B initial slope is negative PA 10 5 D Q DA 12 20 QDA f PA y PO E T P Tax of buyers y income PO Price of other products T P Tastes and Preferences Subsitute Two products that are interchangeable Ex Coffee Tea Complimentary Two products that cannot work without the other Ex Car Gas Supply and Demand and Market Efficency Supply and demand curves can be used to show market efficiency o Can be understood through consumer and producer surplus Producer Surplus the difference between the current market price and the cost of the firm Chapter 5 Introduction to Macroeconomics Macroeconomics deals with the economy as a whole and focuses on the determinants of total national income Aggregate Behavior the behavior of all households and firms together Sticky Prices prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded Macroeconomic Concerns Output economic growth Unemployment Inflation and Deflation Output Growth Business Cycle the cycle of short term ups and downs in the economy Aggregate Output the total quantity of goods and services produces in an economy in a given period Recession a period during which aggregate output declines Conventionally a period in which aggregate output declines for two consecutive quarters Depression a prolonged or deep recession Expansion or Boom the period in the business cycle from a trough up to a peak during which output employment grows Inflation and Deflation Inflation an increase in the overall price level Hyperinflation a period of very rapid increases in the overall price level Deflation a decrease in the overall price level The Components of the Macroeconomy Households Firms Market Economy The Circular Flow Diagram Circular Flow a diagram showing the flows in and out of the sectors in the economy Transfer Payment cash payments made by the government to people who do not supply goods services or labor in exchange for these payments They include Social Security benefits veterans benefits and welfare payments The Three Market Arenas The goods and services market The labor market Money market Goods and Services Market Households and the government purchase goods and services from firms in the goods and services market Labor Market households supply labor and the firms and government demand labor Labor is also supplied to and demanded from the rest of the world Money Market households supply funds to the money market expecting income in the form of dividends on stocks and interest on bonds Households also demand funds from this market The government borrows by issuing bonds The rest of the world borrows from and lends to the money market Much of this borrowing and lending is coordinated by financial institutions which take deposits from one group and lend to another Treasury bonds notes or bills promissory notes issued when the federal government borrows money Corporate bonds promissory notes issued by corporations when they borrow money Shares of Stock financial instruments that give to the holder a share in the firms ownership and a right to share the firms profits Dividends the portion of a firms profits that the firm pays out each period to shareholders The Role of the Government in the Macroeconomy Fiscal Policy government policies concerning taxes and spending Monetary Policy the tools used by the Federal Reserve to control shortterm interest rates History of Macroeconomics Fine tuning phrase used by Walter Heller to refer to the government s role in regulating inflation and unemployment Stagflation both high inflation and high unemployment Chapter 6 Measuring the Nation s Income Why is average income high in some countries and low in others Why do prices rise rapidly in some time periods while they are more stable in others Why do production and employment expand in some years and contract in others The Economy s Income and Expenditure For an economy as a whole income must equal expenditure because o Every transaction has a buyer and a seller o Every dollar of spending by some buyer is a dollar of income for some seller The Measure of Gross Domestic Product GDP A measure of the income and expenditures of an economy Total market value of all final goods and services produced within a country in a given period of time Important Phrases GDP Is the Market Value o Output is vauled at market price of all o Includes all items produced in the economy and legally sold in markets final o It records only the value of final goods not intermediate goods the value is counted only once Goods and Services o It includes both tangible goods food clothing cars and intangible services haircuts housecleaning doctor visits produced o It includes goods and services currently produced not transactions involving goods produced in the past within a country o Measures the value of production within the geographic confines of a country in a given period of time o