Intro to Macroeconomics

• Economics studies how societies allocate scarce resources to fulfill unlimited wants and needs.
• Macroeconomics concentrates on the economy's overall performance, covering economic growth, inflation, unemployment, and government policies.

Key Macroeconomic Goals

• Economic growth is a sustained rise in the production of goods and services within an economy.
• Full employment signifies an economy operating at its potential output level, marked by low unemployment.
• Price stability involves maintaining a stable average price level to avoid high inflation or deflation.

Gross Domestic Product (GDP)

• GDP represents the total market value of all final goods and services produced within a country's borders during a specific period.
• It serves as a primary indicator of an economy's size and health.

GDP Calculation Methods

• Expenditure Approach: GDP = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (NX).
  • Consumption includes household spending on goods and services.
  • Investment covers business spending on capital goods, inventories, and residential construction.
  • Government spending encompasses government expenditures on goods and services.
  • Net exports are exports minus imports (NX = Exports - Imports).
• Income Approach: GDP equals the sum of all income earned: wages, rents, interest, and profits.

Nominal vs. Real GDP

• Nominal GDP is measured in current prices.
• Real GDP is adjusted for inflation, reflecting the actual quantity of goods and services produced.
• Real GDP offers a more accurate measure of economic growth by eliminating the effects of price changes.

GDP Deflator

• The GDP deflator measures the price level of all new, domestically produced, final goods and services.
• It is calculated as (Nominal GDP / Real GDP) * 100.
• It reflects changes in prices.

Inflation

• Inflation is a sustained increase in the general price level over time.
• It erodes purchasing power.
• It is typically measured using the Consumer Price Index (CPI) or the GDP deflator.

Consumer Price Index (CPI)

• The CPI measures the average change over time in prices paid by urban consumers for a basket of goods and services.
• It is utilized to track inflation and adjust wages, salaries, and government benefits.

Calculating Inflation Rate

• Inflation Rate = ((CPI in Current Year - CPI in Previous Year) / CPI in Previous Year) * 100.
• The inflation rate is the percentage change in the price level from one period to another.

Types of Inflation

• Demand-pull inflation occurs when aggregate demand exceeds aggregate supply, pulling prices upward.
• Cost-push inflation occurs when production costs increase, pushing prices upward.
• Built-in inflation occurs when wages and prices increase in response to past inflation.

Unemployment

• Unemployment is when individuals willing and able to work cannot find employment.
• It represents wasted resources and economic inefficiency.

Labor Force

• The labor force includes all employed individuals and those unemployed but actively seeking work.
• It excludes those not actively seeking work (e.g., students, retirees).

Unemployment Rate

• Unemployment Rate = (Number of Unemployed / Labor Force) * 100.
• It indicates the percentage of the labor force that is unemployed.

Types of Unemployment

• Frictional unemployment occurs when workers are temporarily between jobs or are new entrants to the labor force.
• Structural unemployment occurs when there is a mismatch between workers' skills and employers' demands.
• Cyclical unemployment occurs due to business cycle fluctuations, rising during recessions and falling during expansions.
• Seasonal unemployment occurs due to seasonal variations in employment (e.g., agricultural work).

Natural Rate of Unemployment

• The natural rate of unemployment is the sum of frictional and structural unemployment.
• It represents the unemployment rate when the economy operates at its potential output.

Business Cycles

• Business cycles are recurring fluctuations in economic activity, marked by periods of expansion and contraction.
• Expansion is a period of economic growth with increasing employment and output.
• Peak is the highest point of economic activity in a business cycle.
• Contraction is a period of economic decline with decreasing employment and output; also known as a recession.
• Trough is the lowest point of economic activity in a business cycle.

Fiscal Policy

• Fiscal policy uses government spending and taxation to influence the economy.
• It aims to stabilize the economy, promote economic growth, and reduce unemployment.

Fiscal Policy Tools

• Government spending directly impacts aggregate demand and can stimulate the economy during a recession.
• Taxation influences disposable income and can be used to curb inflation or stimulate spending.

Types of Fiscal Policy

• Expansionary fiscal policy involves increasing government spending or decreasing taxes to stimulate economic activity.
• Contractionary fiscal policy involves decreasing government spending or increasing taxes to cool down an overheated economy and reduce inflation.

Budget Deficit and National Debt

• A budget deficit occurs when government spending exceeds government revenue in a fiscal year.
• National debt is the accumulation of past budget deficits.

Monetary Policy

• Monetary policy involves actions by a central bank to manipulate the money supply and credit conditions.
• The primary goal is to maintain price stability and promote full employment.

Central Bank

• The central bank oversees the banking system and conducts monetary policy.

Monetary Policy Tools

• Open market operations involve buying and selling government securities to influence the money supply.
• Discount rate is the interest rate at which commercial banks can borrow money directly from the central bank.
• Reserve requirements are the fraction of deposits that banks must keep in reserve.

Types of Monetary Policy

• Expansionary monetary policy involves increasing the money supply and lowering interest rates to stimulate economic activity.
• Contractionary monetary policy involves decreasing the money supply and raising interest rates to cool down an overheated economy and reduce inflation.

Aggregate Supply and Demand

• The aggregate supply and demand model explains the relationship between the overall price level and production in an economy.
• Aggregate Demand (AD): The total demand for goods and services at a given price level.
• Aggregate Supply (AS): The total supply of goods and services at a given price level.

Factors Affecting Aggregate Demand

• Changes in consumer spending, investment spending, government spending, and net exports.

Factors Affecting Aggregate Supply

• Changes in input costs, technology, and resource availability.

Equilibrium in AS-AD Model

• Equilibrium occurs where aggregate demand intersects aggregate supply.
• The price level and output are determined at this intersection.

Economic Growth

• Economic growth is the increase in the production of goods and services over time.
• It is typically measured by the percentage change in real GDP.

Factors Contributing to Economic Growth

• Increase in Physical Capital: more machines, factories and infrastructure
• Increase in Human Capital: more skilled and educated workforce
• Technological Advancements: innovation and improvements in production processes.
• Natural Resources: The availability and efficient use of natural resources

Productivity

• Productivity is the amount of output produced per unit of input.
• Higher productivity leads to greater economic growth.

Long-Run Economic Growth

• Long-run economic growth depends on factors that increase the economy's potential output.
• Policies promoting investment in physical and human capital and encouraging technological innovation can foster long-run growth.