Economics: Intro to GDP

• Economics is the study of how societies allocate scarce resources to satisfy unlimited wants and needs.
• It involves analyzing production, distribution, and consumption of goods and services.
• Macroeconomics focuses on the behavior of the economy as a whole.
• Key areas of study include economic growth, inflation, unemployment, and international trade.

Gross Domestic Product (GDP)

• GDP is the total market value of all final goods and services produced within a country in a given period.
• It is a primary indicator of a country's economic performance.
• GDP can be calculated using the expenditure approach: GDP = Consumption + Investment + Government Spending + (Exports - Imports).
• Nominal GDP is measured at current prices, while real GDP is adjusted for inflation.
• Real GDP provides a more accurate measure of economic growth.
• GDP per capita is GDP divided by the population, indicating the average standard of living.
• Potential GDP represents the maximum level of output an economy can produce.

Economic Growth

• Economic growth is the increase in the real GDP of an economy over time.
• It is typically measured as the annual percentage change in real GDP.
• Factors driving economic growth include:
  • Increases in the quantity and quality of labor
  • Increases in the stock of capital
  • Technological advancements
  • Improvements in efficiency
• Productivity growth, which is the increase in output per worker, significantly contributes to economic growth.
• Government policies, such as investments in education and infrastructure, can foster economic growth.
• Sustainable economic growth aims to balance current needs with the ability of future generations to meet their needs.

Inflation

• Inflation is a sustained increase in the general price level of goods and services in an economy.
• It erodes the purchasing power of money.
• The inflation rate is usually expressed as a percentage.
• The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• The GDP deflator is a measure of the price level of all new, domestically produced, final goods and services in an economy.
• Causes of inflation include:
  • Demand-pull inflation (excess demand)
  • Cost-push inflation (rising production costs)
  • Increased money supply
• Central banks use monetary policy to manage inflation, often by adjusting interest rates.
• Hyperinflation is very rapid inflation, often exceeding 50% per month.

Unemployment

• Unemployment occurs when people who are willing and able to work cannot find jobs.
• The unemployment rate is the percentage of the labor force that is unemployed.
• The labor force includes all people who are employed or actively seeking employment.
• Types of unemployment include:
  • Frictional unemployment (temporary unemployment due to job search)
  • Structural unemployment (mismatch between skills and available jobs)
  • Cyclical unemployment (due to economic downturns)
  • Seasonal unemployment (due to seasonal variations in employment)
• The natural rate of unemployment is the unemployment rate that exists when the economy is at full employment.
• Government policies, such as job training programs, can reduce unemployment.
• High unemployment can lead to decreased economic output and social problems.

Business Cycles

• A business cycle is the periodic but irregular up-and-down movement of economic activity.
• It consists of four phases:
  • Expansion (period of economic growth)
  • Peak (highest point of economic activity)
  • Contraction (period of economic decline)
  • Trough (lowest point of economic activity)
• Recessions are significant declines in economic activity spread across the economy, lasting more than a few months.
• Depressions are severe and prolonged economic downturns.
• Business cycles are influenced by factors such as:
  • Changes in aggregate demand and supply
  • Monetary and fiscal policies
  • External shocks
• Governments use fiscal and monetary policies to stabilize the business cycle.

Fiscal Policy

• Fiscal policy involves the use of government spending and taxation to influence the economy.
• Expansionary fiscal policy (increased spending or reduced taxes) is used to stimulate economic growth during a recession.
• Contractionary fiscal policy (decreased spending or increased taxes) is used to cool down an overheated economy and combat inflation.
• The government budget balance is the difference between government revenue and government spending.
• A budget deficit occurs when government spending exceeds revenue.
• A budget surplus occurs when government revenue exceeds spending.
• The national debt is the accumulation of past budget deficits.
• Fiscal policy can be implemented through:
  • Changes in government purchases
  • Changes in taxes
  • Changes in transfer payments

Monetary Policy

• Monetary policy is the actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Tools of monetary policy include:
  • Open market operations (buying and selling government securities)
  • The reserve requirement (the fraction of deposits banks must hold in reserve)
  • The discount rate (the interest rate at which commercial banks can borrow money directly from the central bank)
  • Interest on reserves (IOR)
• Expansionary monetary policy (lower interest rates, increased money supply) is used to stimulate economic growth.
• Contractionary monetary policy (higher interest rates, decreased money supply) is used to combat inflation.
• Central banks often target an inflation rate to maintain price stability.
• The Federal Reserve (the central bank of the United States) uses the federal funds rate as its primary policy tool.

International Trade

• International trade involves the exchange of goods and services between countries.
• Exports are goods and services sold to other countries.
• Imports are goods and services purchased from other countries.
• A trade surplus occurs when a country's exports exceed its imports.
• A trade deficit occurs when a country's imports exceed its exports.
• Comparative advantage is the ability of a country to produce a good or service at a lower opportunity cost than another country.
• Trade benefits countries by:
  • Allowing specialization
  • Increasing efficiency
  • Lowering prices for consumers
• Trade barriers, such as tariffs and quotas, restrict international trade.
• Free trade agreements reduce or eliminate trade barriers between participating countries.

Exchange Rates

• An exchange rate is the price of one currency in terms of another currency.
• A floating exchange rate is determined by the supply and demand for currencies in the foreign exchange market.
• A fixed exchange rate is maintained by a central bank that buys and sells its currency to keep it at a target level.
• Exchange rate appreciation is an increase in the value of a currency relative to another currency.
• Exchange rate depreciation is a decrease in the value of a currency relative to another currency.
• Exchange rates affect international trade and investment flows.
• A strong currency can make exports more expensive and imports cheaper.
• A weak currency can make exports cheaper and imports more expensive.

Aggregate Supply and Demand

• Aggregate demand (AD) is the total demand for goods and services in an economy at a given price level.
• The AD curve slopes downward, indicating an inverse relationship between the price level and quantity demanded.
• Factors that shift the AD curve include:
  • Changes in consumer spending
  • Changes in investment spending
  • Changes in government spending
  • Changes in net exports
• Aggregate supply (AS) is the total supply of goods and services in an economy at a given price level.
• The short-run AS curve is upward sloping, indicating a positive relationship between the price level and quantity supplied.
• The long-run AS curve is vertical, representing the potential output of the economy.
• Factors that shift the AS curve include:
  • Changes in input prices
  • Changes in productivity
  • Changes in the availability of resources
• The equilibrium price level and quantity are determined by the intersection of the AD and AS curves.
• Shifts in AD and AS can cause inflation and unemployment.