MACROECONOMICS:STUDY OF HOW ENTIRE INDUSTRIES,

COUNTRIES, SOCIETIES MAKE ECONOMIC DECISIONS

(HOW DOTHEY ANSWER THE THREE BIG QUESTIONS?)

HOW DO WE MEASURE ECONOMIC SUCCESS/FAILURE?(ECONOMIC INDICATORS)

THREE ECONOMIC INDICATORS

Gross Domestic Product

Consumer Price Index

Unemployment

GDP

The dollar amount of all final goods and services within a country’s borders, regardless of who owns the FoPs, in one year (Measures goods, services, and buildings)

Not Included in GDP

Intermediate Products

Secondhand/Used goods

Do-it-yourself/Non-market transactions

Underground Economy/Black Market

Four Categories of Goods/Services C – consumers—2/3 of GDP spending comes from households

I – Investment by firms (machines, tools, warehouses)

G – Government spending at all levels (schools, military, highways)

Xn = Exports – Imports (The foreign sector) spending by ppl abroad on US-made

goods/services (X) minus spending by ppl in the US on foreign-made goods/services (N)

How to Calculate GDP

Output-Expenditure Model:

GDP = C + I + G + Xn

In 2006 (in billions of dollars): 10.04=6.81 + 1.87 + 1.75 + (1.13-1.52)

C I G Xn

C or I or G GDP

Due to a tax cut, consumers decide to buy more new cars.

Worried about an increasing budget deficit, the government decides to buy fewer military planes.

Increasing prices in the US encourage Americans to buy more foreign goods.

Due to a tax increase, consumers decrease purchases on vacation travel.

Due to increased incomes, Europeans buy more US goods and services.

A foreign government imposes a tariff that discourages its citizens from buying goods from the US

Businesses are optimistic about the future and increase construction of new factories.

Many more Americans decide to buy cars manufactured by Japanese companies who operate within the US.

Households worry about future unemployment and decide to spend less income.

Because interest rates increased, businesses cut back on spending for new machinery.

Consumers feel good about the future and take out loans to buy more durable goods such as washing machines.

Decreases in interest rates encourage businesses to take out loans to construct more buildings.

To fight unemployment, the government decides to hire more people to work in national parks.

Tax cuts to businesses give businesses incentives to buy more computers.

To stimulate the economy and provide jobs, the government builds more bridges in California.

C or I or G GDP

Consumer Price Index

Measures change in prices over time

Market Basket of the first price period = 100% at base year

US CPI is calculated by finding prices of 80,000 goods across 85 geographic areas Collected by Bureau of Labor Statistics

Calculating Inflation

General increase is price levels

Inflation Rate = (Δ Price Level

--------------------- x 100

Beginning Price Level)

How to Describe Inflation

Deflation – decrease in general price 20’s recession 30’s depression

Creeping Galloping Hyper

Causes of Inflation

Demand-Pull – high demand pulls prices up and leads to shortages

Price-Push – wage demands drive prices up or a quick spike in cost of inputs

Gov’t deficit spending – similar to demand-pull but it’s only demand from the government

Money supply grows faster than GDP

Consequences of Inflation

The dollar buys less Spending habits change

Durable goods purchases decrease Increased speculation

Debtors benefit over creditors