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Principles of Economics Thirteenth Edition Chapter 20 Introduction to Macroeconomics Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Chapter 20 Introduction to Macroecon...

Principles of Economics Thirteenth Edition Chapter 20 Introduction to Macroeconomics Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Chapter 20 Introduction to Macroeconomics (1 of 2) microeconomics Examines the functioning of individual industries and the behavior of individual decision-making units—firms and households. macroeconomics Deals with the economy as a whole. Macroeconomics focuses on the determinants of total national income, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Chapter 20 Introduction to Macroeconomics (2 of 2) aggregate behavior The behavior of all households and firms together. sticky prices Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Macroeconomic Concerns Three of the major concerns of macroeconomics are: – Output growth – Unemployment – Inflation and deflation Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Output Growth (1 of 2) business cycle The cycle of short-term ups and downs in the economy. aggregate output The total quantity of goods and services produced in an economy in a given period. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Output Growth (2 of 2) expansion or boom The period in the business cycle from a trough up to a peak during which output and employment grow. contraction, recession, or slump The period in the business cycle from a peak down to a trough during which output and employment fall. depression A prolonged and deep recession. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Figure 20.1 A Typical Business Cycle In this business cycle, the economy is expanding as it moves through point A from the trough to the peak. When the economy moves from a peak down to a trough, through point B, the economy is in recession Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Figure 20.2 U.S. Aggregate Output (Real GDP), 1900–2017 The periods of the Great Depression and World Wars I and II show the largest fluctuations in aggregate output. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Unemployment unemployment rate The percentage of the labor force that is unemployed. The existence of unemployment seems to imply that the aggregate labor market is not in equilibrium. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Inflation and Deflation inflation An increase in the overall price level. hyperinflation A period of very rapid increases in the overall price level. deflation A decrease in the overall price level. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Components of the Macroeconomy To see the big picture of the macroeconomy, we divide the participants in the economy into four broad groups: 1. Households 2. Firms 3. The government 4. The rest of the world Households and firms make up the private sector, the government is the public sector, and the rest of the world is the foreign sector. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Circular Flow Diagram circular flow A diagram showing the flows in and out of the sectors in the economy. transfer payments Cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments. They include Social Security benefits, veterans’ benefits, and welfare payments. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Figure 20.3 The Circular Flow of Payments Households receive income from firms and the government, purchase goods and services from firms, and pay taxes to the government. They also purchase foreign-made goods and services (imports). Firms receive payments from households and the government for goods and services; they pay wages, dividends, interest, and rents to households and taxes to the government. The government receives taxes from firms and households, pays firms and households for goods and services—including wages to government workers—and pays interest and transfers to households. Finally, people in other countries purchase goods and services produced domestically (exports). Note: Although not shown in this diagram, firms and governments also purchase imports. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Three Market Arenas (1 of 6) Another way of looking at the ways households, firms, the government, and the rest of the world relate to one another is to consider the markets in which they interact. We divide the markets into three broad arenas: 1. The goods-and-services market 2. The labor market 3. The money (financial) market Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Three Market Arenas (2 of 6) Goods-and-Services Market Households and the government purchase goods and services from firms in the goods-and-services market. Firms purchase goods and services from each other and also supply to the goods-and-services market. Households, the government, and firms demand from this market. The rest of the world buys from and sells to the goods- and-services market. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Three Market Arenas (3 of 6) Labor Market In the labor market, households supply labor, and firms and the government demand labor. Labor is also supplied to and demanded from the rest of the world. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Three Market Arenas (4 of 6) Money Market Households supply funds to the money market (or financial market) in the expectation of earning income in the form of dividends on stocks and interest on bonds. Households also demand (borrow) funds from this market to finance various purchases. Firms borrow to build new facilities in the hope of earning more in the future. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Three Market Arenas (5 of 6) Money Market The government borrows by issuing bonds. The rest of the world borrows from and lends to the money market. Much of this borrowing and lending is coordinated by financial institutions, which take deposits from one group and lend them to others. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Three Market Arenas (6 of 6) Money Market Treasury bonds, notes, or bills Promissory notes issued by the federal government when it borrows money. corporate bonds Promissory notes issued by corporations when they borrow money. shares of stock Financial instruments that give to the holder a share in the firm’s ownership and therefore the right to share in the firm’s profits. dividends The portion of a firm’s profits that the firm pays out each period to its shareholders. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved The Role of the Government in the Macroeconomy fiscal policy Government policies concerning taxes and spending. monetary policy The tools used by the Federal Reserve to control short-term interest rates. Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved Review Terms and Concepts aggregate behavior Great Depression aggregate output hyperinflation business cycle inflation circular flow macroeconomics contraction, recession, or microeconomics slump monetary policy corporate bonds shares of stock deflation stagflation depression sticky prices dividends transfer payments expansion or boom Treasury bonds, notes, or fine-tuning bills fiscal policy unemployment rate Copyright © 2020, 2016, 2011 Pearson Education, Inc. All Rights Reserved