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Macroeconomics
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Deals with the economics as a whole. Focuses on determinants of total national income, deals with aggregate such as aggregate consumption and investment. Looks at overall price level
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Aggregate behavior
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Behavior of total households and firms together
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Sticky prices
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Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded
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3 concerns of macroeconomics
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output growth, unemployment, inflation and deflation
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Business cycle
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the cycle of short-term ups and downs in the economy
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aggregate output
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total quantity of goods and services produced in an economy in a given period
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epansion
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period in business cycle from trough up to a peak during which output and employment grow
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Contraction
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period in business cycle from peak down to a trough during which output and employment fall
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Depression
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A prolonged and deep recession
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Inflation
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Increase in overall price level
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Hyperinflation
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A very rapid rise in the price level; an extremely high rate of inflation.
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deflation
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decreases in overall price level
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Participants of the macroeconomy
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households / firms / government (public sector) / rest of the world (imports)
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Private sector
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households and firms
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public sector
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the part of the economy that involves the transactions of the government
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foreign sector
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The segment of the circular flow of income that includes exports and imports.
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circular flow diagram
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a visual model of the economy that shows how dollars flow through markets among households and firms
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Factors of production
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Labor resource (wages) / land resource (rent) / capital (interest) / entrepreneurship (profit, risk)
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3 market arena
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the goods and services market / the labor market / money market (financial)
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Goods and services market
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Households and the government purchase goods and services from firms in the goods-and-services market.
Firms purchase goods and services from each other and also supply to the goods-and-services market.
Households, the government, and firms demand from this market.
The rest of the world buys from and sells to the goods-and-services market.
Firms purchase goods and services from each other and also supply to the goods-and-services market.
Households, the government, and firms demand from this market.
The rest of the world buys from and sells to the goods-and-services market.
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Labor market
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Households supply labor and firms and government demand labor
Labor is also supplied to and demanded from the rest of the world
Labor is also supplied to and demanded from the rest of the world
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Money market
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-Households supply fund to the money market with expectation of earning income in the form of dividend on stock and interest on the bond
-Households borrow fund from this market to finance various purchases
-Firms borrow to build new facilities in the hope of earning more in the future
-Government borrows by issuing bonds
-Rest of the world borrows and lends from money market
-Activities coordinated by financial institutions which take deposits from one group and lend to the other group
-Households borrow fund from this market to finance various purchases
-Firms borrow to build new facilities in the hope of earning more in the future
-Government borrows by issuing bonds
-Rest of the world borrows and lends from money market
-Activities coordinated by financial institutions which take deposits from one group and lend to the other group
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Treasury Bond, notes, or bills
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Promissory notes issued by federal government when it borrows money
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Corporate bond
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Promissory notes issued by corporation when they borrow money
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Share of stock
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financial instruments that give to the holder a share in the firm's ownership and therefore the right to share in the firm's profits
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dividend
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portion of firms profit that the firms pay out each period to its shareholder
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Fiscal Policy
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Government policies concerning taxes and spending
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Monetary Policy
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Tools used by federal reserve to control short term interest rate
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Fine tuning
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Phrase by Walter Heller to refer to government role in regulating inflation and unemployment
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Stagflation
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a situation of both high inflation and high unemployment
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National Output/Income
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Data collected and published by government describing the various components of national income and output in the economy
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Gross domestic product
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total market value of all finals goods and services produced within a given period by factors of production located within a country
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Final goods / Services
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Goods and services produced for final use
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Intermediate good
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goods produced by one firm for use in further processing or for resale by another firm
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value added
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difference between the value of goods as they leave a stage of production and cost of goods as they entered this stage
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Gross national product
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The total market value of final goods and services produced within a given period by factors of production owned by country citizens, regardless of where the output is produced
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Expenditure approach
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a method of computing GDP that measures the total amount spend on all final goods and services during a given period
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income approach
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a method of computing GDP that measures the income - wages, rents, interest, and profits received by all factors of production in producing finals goods and services
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Personal Consumption (C)
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Households spending on consumer goods / expenditures by consumers on goods and services
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Gross private domestic investment (I)
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Spending by firms and households on new capital; that is plant, equipment inventory and new residential structure
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government consumption and gross investment (G)
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Government purchases for current goods and services like health care and police
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Net Exports NX (EX-IM)
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Net Spending by the rest of the world or exports minus imports
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Durable Goods
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Goods that last a little longer, such as cars and household appliances
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Non durable goods
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Goods that are used up fairly quickly, such as food and clothing
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Services
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Things we buy that do not involve the production of physical goods
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Gross Private Domestic Investment (I)
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Expenditures by firms for machines, tools, plants, and so on
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Nonresidential investment
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expenditures by firms for machines, tools, plants, and so on
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Depreciation
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The amount by which an asset value falls in a given period
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Net investment
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Gross investment minus depreciation
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Government consumption / gross investment (G)
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expenditures by federal, state, and local governments for final goods and services
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National income
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Total income earned by the factors of production owned by a countries citizens
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Proprietor income
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income of unincorporated business
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Rental income
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Income received by property owners in the form of rent
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Exports > Imports
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trade surplus
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Exports < Imports
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trade deficit
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Exports = Imports
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balanced trade
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Nominal GDP
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GDP measured in current prices
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Real GDP
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GDP adjusted for inflation
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Purchasing power
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Volume of goods and services that money can actually buy in the marketplace
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Net national Product (NNP)
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Gross national product minus depreciation; a nation's total product minus what is required to maintain the value of its capital stock.
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Nominal Vs. Real
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-Current prices that we pay for goods and services
-Nominal GDP= Gross domestic product measured in current dollars
-Nominal GDP= Gross domestic product measured in current dollars
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GDP deflator
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a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
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Calculating Real GDP
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Real GDP= units of output x price per unit in the base year
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Calculating Nominal GDP
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Price x Quantity + Price x Quantity
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Price Indicators
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GDP Deflator, CPI, PPI, PCE indicator
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Excluded from GDP
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Intermediate goods / Financial Transactions / Transfer payments
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What is an example of a final good?
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a tractor purchased by a farmer to cultivate his farm.
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Which of the following would not be counted in the 2003 GDP?
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The value of a 2001 car you purchase from a car dealer in 2003
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If no foreign companies produce in a country, but many of the country's companies produce abroad, then it is safe to say that
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The country's GNP exceeds its GDP
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A company produced 8 dishwasher machines in 2005. The company sold 6 in 2005 and added 2 to its inventories. The market value of the dishwasher machines in 2005 was $200 per unit. What is the value of this company's output that will be included in the 2005 GDP.
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$1,600
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Which of the following is a topic studied in Macroeconomics?
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Gross domestic product
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In the circular flow diagram, the different payments made by firms to households are?
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wages and profits
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The demand for corn has decreased in may without any change in supply. Eight months later there still has been no change in corn prices. This is an example of a
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Sticky price
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Compared to the period after world war II, business cycles in the United State before wWorld War II were
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More Severe
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If output is rising and unemployment is falling, the economy must be in a
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Expansion
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Unemployment means that
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at the going wage rate, there are people who want to work but cannot find work
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In which of the following markets are funds demanded and supplied?
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The money market
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The government encourage consumer spending through cutting income taxes. This is an example of
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Fiscal Policy
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The GDP of the U.S. in 2002 was around $10 trillion. This means
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The total spending, value of output, and income in 2002 was $10 trillion
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Which of the following is a good or service counted in GDP?
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A new tire you buy for your personal car
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Which of the following is an example of an intermediate good?
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The pizza sauce you purchase to make pizzas to sell for a fund raiser for an organization you belong to
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Double counting can be avoided by
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not counting the value of intermediate goods in GDP
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Which of the following would be counted in 2003's GDP?
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The bonus check a stockbroker gets from his/her company is 2003
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Gross national product is the total market value of
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All final goods and services produced by resources owned by a country, regardless of where production takes place
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Which of the following is not counted in the GNP of the United States?
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The profit earned by a restaurant location in the United State but owned by a Mexican company
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One of the flaws of GDP is that
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Ignores transactions that do not occur in organized markets
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True/false: GDP measure the total income of everyone and the total spending by everyone in the economy
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True
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True/false: Total income in the economy can sometimes be greater than total spending
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False
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True/false: The income of U.S. citizens working abroad counts in U.S GDP
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False
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True/false: Stock market transactions are part of GNP
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False
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True/false: Value added is the difference between the value of goods as they leave a stage of production and cost of the goods as they entered that stage of production
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True
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The single largest expenditure component in GDP is
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Consumptions
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The base year of an index is
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the year chosen for the weights in a fixed weigh procedure
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Legalizing all forms of illegal activities would
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reduce the size of the underground economy and increase measured GDP
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True/false: If real GDP rises, then so must nominal GDP
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False
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True/false: GDP measured in base year prices is real GDP
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True
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True/false: If the GDP deflator next year is less than the GDP deflator this year, then the price level has fallen.
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True
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