Macroeconomics: Key Concepts

• 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, therefore focusing on aggregate variables

Important concepts

• Gross Domestic Product (GDP): Total value of goods and services produced within a country's borders in a specific time
• Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling
• Unemployment Rate: Percentage of the labor force that is unemployed
• Fiscal Policy: Government's use of spending and taxation to influence the economy
• Monetary Policy: Actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity

National Income

• Total income earned by a nation's residents
• Includes wages, profits, rent, and interest

Circular Flow Model

• Illustrates how money moves through an economy
• Money flows from producers to workers as wages and then flows back to producers as payment for products

Measuring GDP

• Expenditure Approach: Adds up all spending on final goods and services. GDP = C + I + G + (X - M), where:
  • C = Consumption, spending by households
  • I = Investment, spending by businesses on capital goods, inventories, and structures
  • G = Government Purchases, spending by government on goods and services
  • X = Exports, goods and services sold to foreign countries
  • M = Imports, goods and services purchased from foreign countries
• Income Approach: Adds up all income earned in the economy, including wages, profits, and rents
• Production Approach: Sums the value added at each stage of production across all sectors

Nominal vs. Real GDP

• Nominal GDP: GDP measured in current prices
• Real GDP: GDP adjusted for inflation, providing a more accurate measure of economic growth

GDP Limitations

• Doesn't account for non-market activities such as household work or volunteer services
• Doesn't account for the underground economy
• Doesn't factor in income distribution, environmental degradation, or quality of life

Unemployment

• Types of Unemployment:
  • Frictional Unemployment: Occurs when workers are temporarily between jobs
  • Structural Unemployment: Arises from a mismatch between workers' skills and available jobs
  • Cyclical Unemployment: Results from economic downturns or recessions
  • Natural Rate of Unemployment: The unemployment rate that exists when the economy is at full employment

Inflation

• Causes:
  • Demand-Pull Inflation: Occurs when aggregate demand exceeds aggregate supply, pulling prices upward
  • Cost-Push Inflation: Results from increases in the costs of production, such as wages or raw materials
• Measurement: Commonly measured using indexes like the Consumer Price Index (CPI) or the GDP deflator

Fiscal Policy

• Tools:
  • Government Spending: Direct government expenditures on goods and services
  • Taxation: Influences disposable income and affects both consumption and investment
• Types:
  • Expansionary Fiscal Policy: Increases government spending or decreases taxes to stimulate economic activity
  • Contractionary Fiscal Policy: Decreases government spending or increases taxes to cool down an overheating economy

Monetary Policy

• Tools:
  • Open Market Operations: Buying or selling government bonds to influence the money supply
  • Reserve Requirements: Setting the fraction of deposits that banks must hold in reserve
  • Discount Rate: The interest rate at which commercial banks can borrow money directly from the central bank
• Types:
  • Expansionary Monetary Policy: Increases the money supply or lowers interest rates to stimulate economic activity
  • Contractionary Monetary Policy: Decreases the money supply or raises interest rates to curb inflation

Aggregate Supply and Demand

• Aggregate Demand (AD): The total demand for goods and services in an economy at a given price level
• Aggregate Supply (AS): The total supply of goods and services in an economy at a given price level
• Short-Run Aggregate Supply (SRAS): Aggregate supply in the short term when wages and other resource prices are sticky
• Long-Run Aggregate Supply (LRAS): Aggregate supply in the long term when all prices and wages are fully flexible
• Macroeconomic Equilibrium: Determined by the intersection of AD and AS curves. Shifts in these curves can lead to changes in output, employment, and price levels

Economic Growth

• Factors Influencing:
  • Increase in the quantity and quality of resources
  • Technological advancements
  • Improvements in productivity
• Measurement: Primarily measured by the percentage increase in real GDP or real GDP per capita

Business Cycles

• Fluctuations in economic activity, characterized by periods of expansion and contraction
• Phases:
  • Expansion: A period of economic growth
  • Peak: The highest point of economic growth before a downturn
  • Contraction: A period of economic decline
  • Trough: The lowest point of economic decline before a recovery

Economic Indicators

• Leading Indicators: Predict future economic activity (e.g., stock market, building permits)
• Lagging Indicators: Reflect past economic activity (e.g., unemployment rate, inflation rate)
• Coincident Indicators: Occur simultaneously with economic activity (e.g., GDP, personal income)

International Trade

• Exports: Goods and services sold to foreign countries
• Imports: Goods and services purchased from foreign countries
• Trade Balance: The difference between a country's exports and imports.
  • Trade Surplus: Exports exceed imports
  • Trade Deficit: Imports exceed exports

Exchange Rates

• Definition: The value of one currency in terms of another
• Factors Influencing:
  • Interest rates
  • Inflation rates
  • Economic growth
  • Political stability
• Types:
  • Fixed Exchange Rate: A currency's value is fixed or pegged to another currency or commodity
  • Floating Exchange Rate: A currency's value is determined by supply and demand in the foreign exchange market

Balance of Payments

• A record of all economic transactions between a country and the rest of the world
• Components:
  • Current Account: Includes trade in goods and services, income receipts, and current transfers
  • Capital Account: Includes transactions in financial assets and liabilities
  • Financial Account: Includes foreign direct investment, portfolio investment, and other investments

Economic Development

• Focuses on improving the quality of life in developing countries
• Indicators:
  • GDP per capita
  • Life expectancy
  • Education levels
  • Poverty rates
• Strategies:
  • Investing in education and healthcare
  • Promoting free markets and trade
  • Improving infrastructure
  • Encouraging foreign direct investment