Intro to Macroeconomics

• Economics is the study of how societies allocate scarce resources to satisfy unlimited wants and needs.
• Macroeconomics focuses on the behavior of the economy as a whole.
• It examines economy-wide phenomena such as inflation, unemployment, and economic growth.

Key Macroeconomic Goals

• Economic Growth: Sustained increase in the production of goods and services in an economy.
• Full Employment: A situation where the number of job seekers is approximately equal to the number of job vacancies.
• Price Stability: Maintaining a stable average price level to avoid high inflation or deflation.

Gross Domestic Product (GDP)

• GDP is the total market value of all final goods and services produced within a country's borders in a specific time period.
• It is the primary indicator of a country's economic performance.
• GDP can be calculated using the expenditure approach or the income approach.

Expenditure Approach to GDP

• GDP = C + I + G + (X - M).
• C: Consumption expenditure by households.
• I: Investment expenditure by businesses.
• G: Government purchases of goods and services.
• X: Exports of goods and services.
• M: Imports of goods and services.

Income Approach to GDP

• GDP is calculated by summing all income earned in the economy, including wages, profits, rent, and interest.
• Also includes adjustments for indirect taxes and depreciation.

Nominal vs. Real GDP

• Nominal GDP is measured in current prices.
• Real GDP is adjusted for inflation, providing a more accurate measure of economic growth.
• Real GDP = (Nominal GDP / GDP Deflator) * 100.

GDP Deflator

• The GDP deflator is a measure of the price level of all new, domestically produced, final goods and services in an economy.
• GDP Deflator = (Nominal GDP / Real GDP) * 100.
• It is used to convert nominal GDP into real GDP.

Inflation

• Inflation is a sustained increase in the general price level in an economy.
• It reduces the purchasing power of money.
• Measured using the Consumer Price Index (CPI) or the GDP deflator.

Consumer Price Index (CPI)

• CPI measures the average change over time in the prices paid by urban consumers for a basket of consumer goods and services.
• CPI = (Cost of Basket in Current Year / Cost of Basket in Base Year) * 100.
• Inflation Rate = ((CPI in Current Year - CPI in Previous Year) / CPI in Previous Year) * 100.

Types of Inflation

• Demand-Pull Inflation: Occurs when aggregate demand exceeds aggregate supply, pulling prices upward.
• Cost-Push Inflation: Occurs when the cost of production increases, pushing prices upward.

Unemployment

• Unemployment occurs when people who are willing and able to work cannot find jobs.
• Unemployment Rate = (Number of Unemployed / Labor Force) * 100.
• Labor Force: The sum of employed and unemployed individuals.

Types of Unemployment

• Frictional Unemployment: Occurs when people are temporarily between jobs or are new entrants to the labor force.
• Structural Unemployment: Occurs when there is a mismatch between the skills of workers and the requirements of available jobs.
• Cyclical Unemployment: Occurs during economic downturns or recessions.

Business Cycle

• The business cycle refers to the periodic but irregular ups and downs in economic activity.
• Phases: Expansion, Peak, Contraction (Recession), Trough.

Fiscal Policy

• Fiscal policy involves the use of government spending and taxation to influence the economy.
• Expansionary Fiscal Policy: Increased government spending or tax cuts to stimulate economic growth.
• Contractionary Fiscal Policy: Decreased government spending or tax increases to reduce inflation.

Monetary Policy

• Monetary policy involves the actions of a central bank to control the money supply and credit conditions to influence the economy.
• Expansionary Monetary Policy: Lowering interest rates or increasing the money supply to stimulate economic growth.
• Contractionary Monetary Policy: Raising interest rates or decreasing the money supply to reduce inflation.

Central Bank

• The central bank is the institution responsible for overseeing the monetary system and implementing monetary policy.
• Functions include: controlling the money supply, acting as a lender of last resort, and regulating banks.

Interest Rates

• The interest rate is the price of borrowing money.
• Nominal Interest Rate: The stated interest rate.
• Real Interest Rate: The nominal interest rate adjusted for inflation.
• Real Interest Rate = Nominal Interest Rate - Inflation Rate.

Exchange Rates

• The exchange rate is the price of one currency in terms of another.
• Appreciation: An increase in the value of a currency.
• Depreciation: A decrease in the value of a currency.

Aggregate Supply and Aggregate Demand (AS-AD) Model

• The AS-AD model is a framework used to analyze macroeconomic equilibrium.
• Aggregate Supply (AS): The total quantity of goods and services that firms are willing and able to supply at various price levels.
• Aggregate Demand (AD): The total quantity of goods and services that households, firms, the government, and foreigners are willing and able to buy at various price levels.

Factors Affecting Aggregate Supply

• Changes in input prices (e.g., wages, raw materials).
• Changes in technology.
• Changes in government regulations.

Factors Affecting Aggregate Demand

• Changes in consumer spending.
• Changes in investment spending.
• Changes in government spending.
• Changes in net exports (exports minus imports).

Economic Growth

• Economic growth is the increase in the amount of goods and services produced by an economy over time.
• Factors:
• Increase in the labor force.
• Increase in capital stock.
• Technological advancements.
• Improvements in human capital (education and training).

Productivity

• Productivity is a measure of the efficiency with which resources are converted into outputs.
• Total Factor Productivity (TFP) measures the overall efficiency of production, accounting for the contributions of labor and capital.

Government Debt

• Government debt is the accumulation of past government deficits.
• Budget Deficit: Occurs when government spending exceeds government revenue in a given period.
• Budget Surplus: Occurs when government revenue exceeds government spending in a given period.

Balance of Payments

• Balance of payments is a record of all economic transactions between a country and the rest of the world.
• Current Account: Records trade in goods and services, net income, and current transfers.
• Capital Account: Records flows of financial capital (e.g., foreign direct investment, portfolio investment).