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Principles of Macroeconomics

ECON 103

Week 1

Introduction

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Macroeconomics:Flow Chart

Introduction

Macroeconomics:

Short Run

Macroeconomics:

Long Run

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Art and Science of Economics

Desires and wants

Scarcity

Choice

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Art and Science of Economics

Opportunity cost

Rational self interest

Marginal decisions

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Art and Science of Economics

Macroeconomics

Microeconomics

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Art and Science of Economics

Economic theory

Models

Simplifies

Focuses attention

Testable hypotheses

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Art and Science of Economics

Positive economics

Normative economics

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Art and Science of Economics

Fallacy of Composition

Unintended Consequences

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Macroeconomics:Flow Chart

Introduction

Demand/SupplyIssues and Tools Measurement

Models

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Macroeconomic Issues

Long-Run Issues Economic growth

Inflation

Government Size

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Macroeconomic Issues

Short-Run Issues Unemployment

Inflation

External balance

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Macroeconomic Tools

Monetary Policy Money stock

Interest rate

Exchange rate

Price level or inflation rate

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Macroeconomic Tools

Fiscal Policy Government purchases and transfer

payments

Taxes

Government budget deficit and debt

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Macroeconomics:Flow Chart

Introduction

Demand/SupplyIssues and Tools Measurement

Models

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Macroeconomic Output

Gross Domestic Product (GDP)

Nominal GDP

Real GDP

Implicit price deflator

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Macroeconomic Output

Circular Flow of Income

Households and businesses

Goods & service and factor markets

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Circular Flow of Income: I

HouseholdsBusinesses

Goods & Services

Inputs or Factors

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ECON 103 -- Fall 2011 Stephen M. Miller

Circular Flow of Income: II

HouseholdsBusinesses

Goods & Services

Inputs or Factors

C

Leakages Injections

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Players

Households (C)

Firms (I)

Government (G)

Rest of world (NX = X - M)

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Macroeconomic Output

Expenditure Definition of GDP

Y = C + I + G + (X M)

Income Definition of GDP

Y = wages & salaries + profits + rents +interest

Value Added Definition of GDP Farmermillerbakergrocerconsumer

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The Big Equation

Expenditure Definition

Y = C + I + G + (X M)

Household Use of Income

Y = C + S + NT

Equating Two Definitions

C + S + NT = C + I + G + (X M)

S + (NT G) = I + (X M)

S + NT + M = I + G + X

Injections = Leakages

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Macroeconomics:Flow Chart

Introduction

Demand/SupplyIssues and Tools Measurement

Models

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Circular Flow and Recession

Accounting Identity and Equilibrium

Desired spending equals production (realGDP)

Desired spending less than production

Inventories accumulate

Layoffs and unemployment

Cut production Falling prices and incomes

Falling desired spending

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Comparative Advantage

Absolute advantage

Comparative advantage

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Comparative Advantage

Hours Needed to

Make One Item

Amount Produced

in 48 Hours

Bicycles Wheel-barrows

Bicycles Wheel-barrows

Worker #1 6 6 8 8

Worker #2 8 12 6 4

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Comparative Advantage

Absolute advantage? Worker #1 in both bicycles and wheelbarrows

Comparative advantage

Worker #1 in wheelbarrows

Worker #2 in bicycles

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Economys Production

Production possibilities frontier (PPF)

Shifts in PPF

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PPF: Efficiency and Inefficiency

10

20

30

34

43

4850

Consumergoods(millions

ofunitsperyea

r)

100 50403020

Capital goods (millions of units per year)

A

C

D

E

F

B

U

Unattainable

I

Inefficient

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Shifting PPF

A

A

FF

A

A

FFCapital goods

Consume

rgoods

Consume

rgoods

Capital goods

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ECON 103 Fall 2011 Stephen M Mille

Shifting PPF

A

A

Consu

mergoods

F

A

FFCapital goods

Consumergoods

Capital goods