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Macroeconomics
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The study of the economy as a whole
Ex) analyze all consumers/businesses
Ex) analyze all consumers/businesses
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Macroeconomics was created to...
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1. measure the health of the whole economy
2. guide government policies to fix problems
2. guide government policies to fix problems
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Circular flow diagram
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Shows the characteristics and relationships that exist between households and businesses in the economy
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Private sector
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Part of the economy that is run by individuals and businesses
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Public sector
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the part of an economy that is controlled by the government.
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Factor payments
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Payments for the factors of production like rent, wages, interest, profit
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Transfer payments
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When the government redistribute income like Social Security, welfare, stimulus checks
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Subsidies
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Government payments to businesses
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All countries have three macro economic goals
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1. Promote economic growth
2. Limit unemployment
3. Price stability= limit inflation
2. Limit unemployment
3. Price stability= limit inflation
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Gross Domestic Product (GDP)
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Dollar value of all final goods and services produced within a country in one year.
Measures how well the US is doing financially
Measures how well the US is doing financially
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GDP necessary aspects
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Dollar value= US dollars
Final goods= only counts NEW goods and services
Within a country= within country borders
One year= annual economic performance
Final goods= only counts NEW goods and services
Within a country= within country borders
One year= annual economic performance
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How do you use GDP
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1. Compare to previous years (Is there growth?)
2. Compare policy changes (Did a new policy work?) effective
3. Compare to other countries (Are we better off?)
2. Compare policy changes (Did a new policy work?) effective
3. Compare to other countries (Are we better off?)
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Some countries have higher GDP's (more productivity)
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Because of the economic system, rule of law, capital stock, human capital, natural resources
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Economic system
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Capitalism tends to promote innovation and provides incentives to improve productivity
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Rule of law
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Countries with solid institutions and political stability have historically had more economic growth
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Capital stock
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Countries have more machines and tools to be more productive
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Human capital
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Countries have more education and training opportunities for citizens to be more productive
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Natural resources
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Countries have more access to natural resources to be more productive
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Growth in GDP FORMULA
(Year to year)
(Year to year)
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Year 2 GDP- year 1 GDP/ year 1 GDP *100= % change in GDP
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Expenditures approach**
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add up all the spending on final goods and services produced in a given year
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Income approach
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Add up all income earned from selling all final goods and services produced in a given year
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Value added approach
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Add up the dollar value added at each stage of the production process
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Three ways of calculating GDP
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expenditures approach, income approach, value-added approach
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Income approach examples (factor payments)
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Labor income- wages earned from performing work
Rental-income earned from property owned by individuals
Interest-interest earned from loaning money to businesses
Profit-money businesses have after paying all their costs
Rental-income earned from property owned by individuals
Interest-interest earned from loaning money to businesses
Profit-money businesses have after paying all their costs
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GDP formula
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Y = C + I + G + NX
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1. Consumer spending (C)
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Purchases of final goods and services by individuals
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2. Business investment spending (I)
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Businesses spending on tools and equipment
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3. Government spending (G)
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Spending done by the government where they get something in return. Not transfer payments
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4. Net exports (NX)
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Exports (X)- Imports (M)
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3 Parts of consumer spending
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Durable goods- last more than three years Ex) refrigerators and cars
Nondurable goods-Life of less than three years
Ex) food and clothes
Services-dental work and oil changes
** largest portion of the US GDP
Nondurable goods-Life of less than three years
Ex) food and clothes
Services-dental work and oil changes
** largest portion of the US GDP
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Investment is NEVER when individuals buy assets like stocks or bonds
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ALWAYS when businesses buy capital like machines, resources, and tools
Home= consumer vs restaurant= investment
Home= consumer vs restaurant= investment
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The production of a new home is...
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New home real estate
counts as investment spending since the new home could potentially be rented out
counts as investment spending since the new home could potentially be rented out
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Inventories
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goods that have been produced but not yet sold
Counted in the year they are produced not the year they are sold
Counted in the year they are produced not the year they are sold
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Government spending tracks the public sector...
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Ex) pilot salaries
DOES NOT INCLUDE= transfer payments like welfare, Social Security, subsidies, stimulus checks, interest payments on the national debt
DOES NOT INCLUDE= transfer payments like welfare, Social Security, subsidies, stimulus checks, interest payments on the national debt
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The government hast to get some thing in exchange...
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For their payments in order for it to count as government spending in GDP
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Exports versus imports
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Exports are the goods and services you sell to others
Imports are the goods and services a country purchases from others
Imports are the goods and services a country purchases from others
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Net exports let us know the status of trade within a country
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Exports greater= surplus
Imports greater= deficit ( usually what the US has)
Imports greater= deficit ( usually what the US has)
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Not included in GDP
(HAS TO GO TO GOVERNMENT)
(HAS TO GO TO GOVERNMENT)
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used goods, made in other country, stocks, social security, unemployment benefits, stimulus checks, doing your own stuff, illicit/illegal, volunteering
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