Macroeconomics: GDP and Inflation

• Macroeconomics studies the behavior of a country and how its policies influence the economy
• It analyzes entire industries and economies rather than individuals or specific companies

Gross Domestic Product (GDP)

• GDP measures the total value of all goods and services produced within a country's borders during a specific period
• GDP is often used to assess a country's economic health and growth rate
• It can be calculated using the expenditure approach: GDP = Consumption + Investment + Government Spending + (Exports - Imports)
• Real GDP is adjusted for inflation, reflecting the actual increase in the quantity of goods and services produced
• Nominal GDP is measured in current prices, without adjusting for inflation
• GDP per capita is a country's GDP divided by its population, representing the average output per person

Inflation

• Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling
• It is typically 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
• High inflation erodes purchasing power, reduces the real value of savings, and can lead to economic instability
• Deflation, the opposite of inflation, is a decrease in the general price level of goods and services
• Central banks often target a specific inflation rate to maintain price stability

Unemployment

• The unemployment rate is the percentage of the labor force that is unemployed but actively seeking employment
• The labor force includes all people who are employed and unemployed
• Frictional unemployment occurs when workers are temporarily between jobs
• Structural unemployment arises from a mismatch between the skills of workers and the requirements of available jobs
• Cyclical unemployment is associated with fluctuations in the business cycle
• Natural rate of unemployment is the sum of frictional and structural unemployment

Monetary Policy

• Monetary policy involves managing the money supply and credit conditions to influence interest rates and overall economic activity
• Central banks use monetary policy to control inflation and stabilize the economy
• Tools used include setting the federal funds rate, reserve requirements, and conducting open market operations
• Expansionary monetary policy lowers interest rates and increases the money supply to stimulate economic growth
• Contractionary monetary policy raises interest rates and reduces the money supply to curb inflation

Fiscal Policy

• Fiscal policy involves the use of government spending and taxation to influence the economy
• Expansionary fiscal policy increases government spending or cuts taxes to stimulate economic growth
• Contractionary fiscal policy reduces government spending or raises taxes to curb inflation or reduce government debt
• Government debt is the total amount of money that a government owes to lenders
• Budget deficit occurs when a government spends more than it collects in revenue

Economic Growth

• Economic growth is the increase in the production of goods and services in an economy over a period
• It is typically measured as the percentage increase in real GDP
• Factors that contribute to economic growth include increases in the labor force, capital stock, and technological progress
• Productivity is a measure of economic output per unit of input, such as labor or capital
• Technological innovation can lead to higher productivity and faster economic growth
• Human capital, the skills and knowledge of the workforce, is crucial for economic growth

Business Cycles

• Business cycles are the periodic but irregular up-and-down movements in economic activity
• A typical business cycle consists of an expansion, peak, contraction, and trough
• During an expansion, the economy is growing, unemployment is falling, and inflation may rise
• During a contraction (recession), the economy is shrinking, unemployment is rising, and inflation may fall
• Leading economic indicators are used to forecast future economic activity
• Coincident economic indicators reflect the current state of the economy
• Lagging economic indicators become apparent after an economic trend has already occurred