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4 Objectives of Macroeconomics
1.) Output
1.) Output
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-Gross Domestic Product- The market value of all final goods and services produced annually in the economy
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*Two types of GDP
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A. Normal- measured in current market prices.
B. Real- Measured in constant dollars.
B. Real- Measured in constant dollars.
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*Four divisions of the Business Cycle
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1.) Expansion- Output increases (GDP increases)
2.) Peak- Highest attainable production level
3.) Contraction- Output decreases
4.) Trough- Lowest level of production
2.) Peak- Highest attainable production level
3.) Contraction- Output decreases
4.) Trough- Lowest level of production
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*Potential GDP
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Maximum attainable GDP
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*GDP Gap
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Difference between potential and real GDP
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2.) Full Employment
Note: Full Employment DOES NOT mean 100% employment or 0% unemployment
Note: Full Employment DOES NOT mean 100% employment or 0% unemployment
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*Provide high paying jobs that people find attractive
*5% unemployment means the same thing as full employment
*5% unemployment means the same thing as full employment
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3.) Stable Prices
A. Consumer Price Index
B. Inflation
A. Consumer Price Index
B. Inflation
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*CPI-Measures the market value of a fixed basket (exact list) of goods.
*Inflation- Rate of growth of the price level from year to year
*Inflation- Rate of growth of the price level from year to year
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4.) Foreign Policy
A. Interdependence
A. Interdependence
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*Interdependence is caused by:
-Increased imports and exports
-Borrowing and lending to foreigners
-Imitations of foreign technology
-Worldwide travel
-Worldwide Communication
-Increased imports and exports
-Borrowing and lending to foreigners
-Imitations of foreign technology
-Worldwide travel
-Worldwide Communication
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*Two ways to judge foreign policy
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A. Balance of trade- Imports minus exports
B. Exchange Rate- The value of one country's currency in terms of the currency of another country
B. Exchange Rate- The value of one country's currency in terms of the currency of another country
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*Leading Economic Indicators
1.) GDP
2.) Full Employment
3.) CPI
1.) GDP
2.) Full Employment
3.) CPI
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1. GDP- Real (3.5% is considered a good number)
2. Full employment- Look at the unemployment rate (5% is considered full employment).
3. CPI- Inflation indicator
2. Full employment- Look at the unemployment rate (5% is considered full employment).
3. CPI- Inflation indicator
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4 Instruments of Macroeconomics
1. Fiscal policy
2. Monetary policy
3. Trade Policy
4. Income Policy
1. Fiscal policy
2. Monetary policy
3. Trade Policy
4. Income Policy
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*Fiscal Policy- The government's manipulative power to tax and spend
(AKA Budget Policy)
- How much the government has coming in
- How the government spends that money
*Taxation- Higher taxes reduce income and control inflation.
-Helps determine the market price for capital goods
Spending
-Public- Spending by the government
-Private- Spending by consumers and businesses
(AKA Budget Policy)
- How much the government has coming in
- How the government spends that money
*Taxation- Higher taxes reduce income and control inflation.
-Helps determine the market price for capital goods
Spending
-Public- Spending by the government
-Private- Spending by consumers and businesses
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2.) Monetary Policy
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*Monetary Policy- The FED's goals concerning money supply, interest rates, and the banking system
-FED decreases interest rates---> lower interest rates= people buy more houses
-FED decreases interest rates---> lower interest rates= people buy more houses
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3.) Trade Policy
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*Trade Policy- Tariffs, (tax on imports) quotas, or anything else that encourages or discourages imports and exports. (Taxes like this are what caused the Boston Tea Party)
- UAW asks government to raise taxes on imported cars. The higher tax discourages companies to import cars to America--->supply of imported cars decreases.
- UAW asks government to raise taxes on imported cars. The higher tax discourages companies to import cars to America--->supply of imported cars decreases.
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4.) Income Policy
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*Income Policy- Setting a limit on wages and prices ($7.25/hr-$16.00/hr)
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*Know the difference between Fiscal Policy and Monetary Policy
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A. Fiscal Policy- About the budget. About Congress.
B. Monetary Policy- About the money. About the FED
B. Monetary Policy- About the money. About the FED
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Aggregation
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-Combining many individual markets into one overall market
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Two Foundations for Aggregation
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1.) The compositions of supply and demand are of little importance when dealing with the economic-wide issues of inflation and unemployment
2.) During economic fluctuations, markets tend to move up or down together
2.) During economic fluctuations, markets tend to move up or down together
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*Aggregate Demand
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*The quantity of domestic product that is demanded at each possible value of a price level in a given period
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Determinants of Aggregate Demand
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1. Price Level
2. National income
3. Expectations
4. Foreign Conditions
5. Governmental Policy
2. National income
3. Expectations
4. Foreign Conditions
5. Governmental Policy
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*Aggregate Supply
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*The quantity of domestic product supplied at each possible value of the price level in a given period of time
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Determinants of Aggregate Supply
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1.) Price level
2.) Productive Capacity (AKA Potential GDP)
3.) Costs of production
2.) Productive Capacity (AKA Potential GDP)
3.) Costs of production
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Two types of Goods and Services
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1.) Final Goods- Goods that are purchased by their ultimate (end) user
2.) Intermediate Goods- Goods that are purchased for resale or used as input in producing another good
2.) Intermediate Goods- Goods that are purchased for resale or used as input in producing another good
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What the GDP omits
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1.)Non market goods and services
2.)Illegal markets
3.)Sale of used goods
4.)Leisure Time (doctor, lawyer)
5.)Social Costs (externalities)
2.)Illegal markets
3.)Sale of used goods
4.)Leisure Time (doctor, lawyer)
5.)Social Costs (externalities)
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Two ways to measure (calculate) GDP
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1.) Expenditures-Sum of all the money spent in buying goods and services. Consumers + Government + Investment (business) + Exports minus Imports equals balance of trade.
2.) Income Approach (earnings)- Sum of the income derived or created from producing goods and services. Wages + Rent + Interest + Profits equals earnings approach
2.) Income Approach (earnings)- Sum of the income derived or created from producing goods and services. Wages + Rent + Interest + Profits equals earnings approach
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* The connection between GDP and disposable income
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1.) Transfer Payments- Government takes from those who "have" and gives to those who "have not" (Robin Hood)
How to attempt to achieve income equality
1.) Progressive tax----> Makes rich people poorer
2.) Transfer Payments-----> Makes poor people richer
How to attempt to achieve income equality
1.) Progressive tax----> Makes rich people poorer
2.) Transfer Payments-----> Makes poor people richer
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* Equality-Efficiency trade off
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A society's effort to make incomes more equal, will result in reduced efficiency
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Two types of taxes
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1.) Direct- Levied on individuals
2.) Indirect- Levied on particular goods
2.) Indirect- Levied on particular goods
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Two types of consumer incomes
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1.) Personal- All earnings received by households from the factors of production plus transfer payments equals personal consumer income.
2.) Disposable- Portion of income that actually gets to the consumer. Personal income minus direct taxes equals disposable income
2.) Disposable- Portion of income that actually gets to the consumer. Personal income minus direct taxes equals disposable income
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*Discretionary Income
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Money left over after bill payment
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*Net Foreign Factor Income
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The income Americans gain from supplying resources abroad minus the income that foreigners gain by supplying resources in the United States
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*Depreciation
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Makes allowances for the amounts of capital that has been used up (AKA Consumption of fixed Capital)
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*The relationship between GDP and Disposable Income
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1.) GDP minus Depreciation= Net National Product
2.) NNP- Statistical discrepancy + Net Foreign Factor Income= National Income (NI)
3.) NI + transfer payments minus social security taxes minus retained earnings= Personal Income
4.) Personal income minus direct taxes equals Disposable Income
2.) NNP- Statistical discrepancy + Net Foreign Factor Income= National Income (NI)
3.) NI + transfer payments minus social security taxes minus retained earnings= Personal Income
4.) Personal income minus direct taxes equals Disposable Income
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