Macroeconomic principles

SECTION 1
Overview of economics

A study of economics usually begins by dividing the subject into microeconomics and macroeconomics. The former focuses on the exchanges between consumers and firms in markets for goods and services. In contrast, the latter focuses on exchanges that occur across all markets within a country, taking into account the interrelated actions of consumers, businesses, government agencies, financial intermediaries, and global trading partners as they exchange resources, goods, and services as well as facilitate currency and quantity flows.

Furthermore, microeconomics concerns itself narrowly with the profit maximization goal, and macroeconomics addresses what should be done to achieve a greater, broader set of goals. Moreover, a feature common to a successful study of economics is your ability to distinguish changes that occur moving along a curve versus those that occur shifting a curve outward or inward.

Objectives

Upon successful completion of this unit, you will be able to:

identify the determinants of demand and supply;
describe how changes in demand and supply lead to changes in a market's equilibrium price and quantity;
distinguish microeconomics from macroeconomics; and
describe the circular flow model, identifying linkages between the markets for goods and resources as well as the exchanges between businesses and households.

1.1 Basic introduction to marketplace economics

1.2 Markets in aggregate form: An introduction to macroeconomics

SECTION 2
Macroeconomics: Goals, measures, and challenges

A major focal point of macroeconomics is the total output generated within an economy. Measurement of that output includes Gross Domestic Product (GDP), which is the dollar value of all final goods and services produced within a nation's borders during the course of one year. Macroeconomics also focuses on the difference between nominal GDP and real GDP. The latter version removes the effect of inflation, which increases its importance as a useful measure because total output might be increasing in terms of current dollars but not in constant dollars.

Economic growth, which is the increase in real GDP over time, is one of three major goals. The other two goals are full employment and price level stability. Fiscal and monetary policies, which are introduced in Unit 5, are formed, implemented, and evaluated against those three goals. You will likely find that macroeconomics focuses on what should be done to achieve those goals as opposed to what is done. Accordingly, this unit and those that follow will uncover scenarios and philosophical debates about the role of government in a market-based economy and whether the GDP is an accurate measure of societal well-being, quality of life, and the standard of living.

Objectives

Upon successful completion of this unit, you will be able to:

define nominal gross domestic product and real gross domestic product;
compare and contrast as well as discuss various measures of output and income;
distinguish between real and nominal values;
analyze the problems associated with using GDP as a measure of well-being;
identify the components of the expenditure and the income approaches to the measurement of GDP;
explain how consumer income relates to spending and saving;
describe the consumption and savings functions and the terms attached to their slopes;
define automatic stabilizers, and explain changes in government spending and taxing during a macroeconomic recession and expansion;
describe how savings and investment contribute to economic growth; and
define economic growth in terms of changes in the production possibilities curve and in real gross domestic product.

2.1 Rationale for GDP: A monetary measure

2.2 Avoidance of double counting

2.3 Calculating GDP: Expenditure and income approaches

2.4 Calculating nominal GDP vs. real GDP

2.5 Problems using GDP as a measure of well-being

SECTION 3
Unemployment and inflation

Most individuals probably understand the economic concepts of unemployment and inflation. Unemployment reflects the number of people out of work who are actively seeking work, and inflation indicates an overall rise in the price level of most, but not all, goods and services. This unit will give you a deeper look at these concepts, as well as their interrelationship.

Consider first that inflation erodes the purchasing power of the dollar - or any other monetary unit, like the euro, yen, or pound. By distinguishing between nominal income, or the actual amount of money, and real income, or the amount of goods and services it can buy, macroeconomics helps measure the effects that inflation has on an economy and on its constituents' standards of living. Second, consider some details about unemployment. There is the labor force, which includes both the employed and unemployed, or those able and willing to work but not currently working, and those not in the labor force, including full time students, nonworking spouses, and retirees. Third, adding another layer of evolving depth, this unit defines and describes three types of unemployment: frictional unemployment (or temporary unemployment); structural unemployment (affecting whole sectors of the economy); and cyclical unemployment (caused by downturns in the economy).

To better understand the interrelationship between unemployment and inflation consider the following unlikely event. Suppose everyone who was seeking a job got one tomorrow, began earning income, and spent their income. As it would take longer for the products to arrive in retail stores, there would be a lot of money chasing a few goods. Consequently, unemployment would fall and the overall price level would rise. Gaining further depth in the progression of this course, the differences between our expectations for inflation and our observations of it tend to reinforce the notion that expectations play a large role in macroeconomics.

Objectives

Upon successful completion of this unit, you will be able to:

define unemployment rate;
calculate the unemployment rate;
identify and distinguish between the different forms of unemployment;
analyze the problems associated with the unemployment rate;
describe the three types of unemployment and factors that relate to them;
define inflation and deflation, and explain how each affects the price and economic growth of an economy;
define, interpret, and calculate inflation rate and the consumer price index;
describe the problems and biases associated with the consumer price index;
articulate sources of inflation, and explain how they can affect economic stability;
use the model of aggregate demand and aggregate supply to explain stagflation;
explain the relationship between inflation and unemployment;
describe and analyze the Classical as well as the Keynesian views on unemployment; and
discuss various explanations for wage and price stickiness.