Macroeconomics

Circular flow – the movement of output and income from one sector of the economy to another

Aggregate demand is the total demand in the

economy

AD = C + I + G + net exportsAD = C + I + G + net exports

What factors affect each component of aggregate demand?

GDP –Gross Domestic Product – the market value of all final goods and services produced in a country in a calendar year

Add up total spending to come up with total GDPMarket value of production in the economy, not the availability of goods and servicesGDP is NOT an indication of consumer well beingIf C, I or G increase, aggregate expenditures increase, therefore GDP increasesHistorically, GDP is @ 3%

Consumption – spending by households on goods and services

1. Disposable Income2. Past consumption3. Expectation of : a) future income

b) future prices of durable goods4. Community attitudes towards thrift5. Cost and availability of credit6. Rate of introduction of new products7. Average age of stock and durable goods owned by households

Investment – the purchase of capital goods (including machinery, technology and new buildings) that

are used to produce goods and services.

1. Interest rates2. Expected sales3. Excess capacity4. Average age of existing capital5. Degree of competition6. Shifts in consumer demand7. Degree of uncertainty8. Expected money wage rate increases

Government 1. Social needs2. Politics3. Foreign affairs (doesn’t usually cause prosperity but they can cause full production)

4. Attitudes toward the role of government5. Demand for fiscal policy (changes in the expenditure or tax revenues of the federal government, undertaken to promote full employment, price stability and reasonable rates of economic growth)

Net ExportsExports – Imports (goods we send to other countries minus goods from other countries we buy in the United States)

Aggregate supply is the total supply in the

economy

What factors affect aggregate supply?

1. Land - “gifts of nature” that can be used to produce

goods and services; for example, oceans, air, mineral deposits, virgin forests and

actual fields of land

2. Labor – the quantity and quality of human effort available to produce goods and services

A) changes in populationB) Inclusion of more people in the labor force c) Labor productivity (education)

Capital – resources and goods made and used to produce other goods and service. Examples include buildings, machinery, tools and equipment

A) new investment in real capitalB) investment in human capital