Macroeconomics Lecture Textbook Notes Chapter 22 Macroeconomics The Big Picture Macroeconomics it is the study of the behavior of the economy as a whole Microeconomics vs Macroeconomics Questions Microeconomics Should I go to business school or take a job right now What determines the salary offered by Citibank to Cherie Camajo a new MBA What determines the cost to a university or college of offering a new course What government policies should be adopted to make it easier for low income students to attend college What determines whether Citibank opens a new office in Shanghai Macroeconomics How many people are employed in the economy as a whole this year What determines the overall salary levels paid to workers in a given year What determines the overall level of prices in the economy as whole What government policies should be adopted to promote employment and growth in the economy as a whole What determines the overall trade in goods services and financial assets between the United Sates and the rest of the world Self Regulating Economy in a self regulating economy problems such as unemployment are resolved without government intervention through the working of the invisible hand Keynesian economics economic slumps are caused by inadequate spending and they can be mitigated by government intervention Monetary policy uses changes in the quantity of money to alter interest rates and affect overall uses changes in government spending and taxes to affect overall spending spending Fiscal policy THE BUSINESS CYCLE the short run alternation between recessions and expansions Recessions periods of economic downturn when output and employment are falling Expansion periods of economic upturn when output and employment are rising Business cycle peak the point at which the economy turns form expansion to recession Business cycle trough the point at which the economy turns from recession to expansion A high unemployment rate tells us that jobs are scarce and a low unemployment rate tells us that jobs are easy to find Long run economic growth the sustained upward trend in the economy s output over time Inflation a rise in the overall level of prices Deflation a fall in the overall level of prices Money supply the total quantity of assets that can be readily used to make purchases Hyperinflation prices rise by thousands or hundreds of thousands of percent invariably occurs when governments print money to pay their bills Price stability when the overall level of prices in an economy changes slowly or not at all Open economy an economy that trades goods and services with other countries A country runs a trade deficit when the value of goods and services bought from foreigners is more than the value of goods and services it sells to them It runs a trade surplus when the value of goods and services bought from foreigners is less than the value of the goods and services it sells to them Chapter 23 Tracking the Macroeconomy The national income and product accounts or national accounts keep track of the flows of money between different sectors of the economy The more reliable the accounts the more economically advanced the country Consumer spending the household spending on goods and services own factors of production labor land physical capital human capital and Households financial capital They sell the use of these factors of production to firms receiving wages profit interest payments and rent in return Most households derive the bulk of their income from wages earned by selling labor and human capital But households derive additional income from their indirect ownership of the physical capital used by firms mainly in the form of stocks shares in the ownership of a company and bonds borrowing in the form of an IOU that pays interest Firms buy and pay households for the use of those factors of production in the factor markets Government transfers payments by the government to individuals for which no good or service is provided in return such as social security Disposable income equal to income plus government transfers minus taxes is the total amount of household income available to spend on consumption and to save Private savings equal to disposable income minus consumer spending is disposable income that is not spent on consumption Financial markets the banking stock and bond markets which channel private savings and foreign lending into investment spending government borrowing and foreign borrowing The total flow of money out of households the sum of taxes paid consumer spending and private savings must equal to the total flow of money into households the sum of wages profit interest rent and government transfers Government borrowing the amount of finds borrowed by the government in the financial market This also comes from its tax revenue Government purchases of goods and services total expenditures on goods and services by federal state and local governments goods and services purchased from other countries lending by foreigners to borrowers in the United States and purchases by goods and services sold to other countries Export sales lead to a flow of funds from the Exports rest of the world into the United States to pay for them Imports Foreign lending foreigners of shares of stock in American companies generates a flow of funds into the United States from the rest of the world Foreign borrowing stock in foreign companies leaders to a flow of funds out of the United States to the rest of the world borrowing by foreigners form U S lenders and purchases by Americans of Inventories stocks of goods and raw materials held to facilitate business operations Investment spending spending on productive physical capital such as machinery and construction of buildings and on changes to inventories The national accounts count this as part of total spending on goods and services Changes to inventories of finished goods are counted as investment spending because like machinery they change the ability of a firm to make future sales So spending on additions to inventories is a form of investment spending by a firm Spending includes spending on construction of any structure regardless of whether it is an assembly plant of a new house Suppose we add up consumer spending on goods and services investment spending government purchases of goods and services and the value of exports then subtract the value of imports This gives us a measure of the overall market value of the goods and services the economy