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SECTION 3: Macroeconomics Mileina Monica


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Page 1: Macroeconomics

SECTION 3:Macroeconomics


Page 2: Macroeconomics

Economic Growth & Living StandardsFIGURE 30:

• Is the growth of total output of the U.S. economy. (Gross Domestic Products)-(GDP) This is the measure of the total quantity of good and services produced in the

economy, adjusted to remove the effects of inflation.

Since 1900, economy increased by a factor of nearly 32. (Population increased by a factor of 4, and output by a factor of 8. output is growing more faster than population.)• Decline in output between 1929-1933 (Great Depression)• Expansion of output from 1941-1945 (WWII)

-REASON for ^ is partially by the expansion of the size of the overall economy.

• WHAT WE CONSUME IS LIMITED BY WHAT WE PRODUCE(growth of population = increasing of production (more output)

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FIGURE 31:• Is the growth of output per person.

• output per capita: how much the typical worker can produce.• output per worker: history of average labor productivity since 1900.

-2008: over $43,000 per person• average labor productivity: the economy’s output divided by the total number of workers

employed.• “per capita”: is a Latino phrase literally meaning “per head” which is commonly used to denote

average calculated for an entire population.FIGURE 32:

• Is the total output and output per person in the U.S. to a selection of other countries around the world.

• China’s population is 5x larger than U.S. but production isn’t great.- 1/5 production per person.-per capita: 5% of what U.S. production has.

• Africa has lower level of production per person.• Ghana’s output per person average $458 or more than 1% than U.S. (this is less than $2 per

day)FIGURE 33:

• Is the output per person and several other indicators of quality of life.- No matter how poor, people like receiving material goods even if they can’t produce much, but

being able to produce brings greater healthcare, cleaner environment, possibly live longer, and broader access to education.

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Recessions & ExpansionsFIGURE 34:

• is the percentage change in output between successive years. (variability of growth is more obvious in this figure.)

• Expansion: periods of rapid growth of output.• Recession: periods of slow growth of decline in output.• Depression: when a recession is particularly severe.• Business Cycle: the alternation of periods of expansion and recession. - because periods of recession are associated with declining employment opportunities and slower wage growth, a central focus of macroeconomic policy is to find ways to reduce the severity and duration of such periods.


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Unemployment• Unemployment Rate: the percentage of the labor force that would like to

work but cannot find employment.FIGURE 35:

• Shows the unemployment rate since 1900-when the unemployment rate is high, it is hard to find work, and people

who do have jobs generally find it harder to earn promotions or increase their pay.

-unemployment rate goes ^ during bad economy.1. Unemployment rate is never zero. 2. There is no indicator that the unemployment rate is increasing in the long

term.-there are always some people searching for work.-even in expansions some companies are closing, while others are


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Inflation• When all prices rise together.

-meaning all things people consume are becoming more expensive, inflation reduces purchasing power and makes people worse off.(KEEPING INFLATION LOW IS GOOD)

FIGURE 36:• Shows the U.S. inflation rate since 1900.

-inflation was high during 1st and 2nd WW.-inflation was low since the early 1980s.

International Trade• U.S. is less dependent on trade than to small countries.

FIGURE 37:• Shows the volume of exports from the U.S. to other countries and the volume of import to the

U.S. since 1929 as a percentage of total output.• Trade Surplus: said by economists when a country is consecutively having exports exceed

imports.• Trade Deficit: ^ BUT exports are less than imports.

-up until the late 1500s, the U.S. generally exported more than it imported. Since the 1970s, the relationship has shifted, and imports are greater than exports.

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Measuring Total Output: GDP• The market value of all final goods and services produced within a country during a specific period of time.• Market Value: goods that have higher prices have a higher value to consumers and therefore should

contribute more to total output.-EX: If t-shirts sell for $5 each, while shorts sell for $10, and the economy produced 100 t-shirts and 25 pairs of shorts, then its GDP would be 100 x $5 + $25 x $10 = $750.• Final Goods & Services: last purchaser’s value is counted in GDP and exclude the purchase of input.-International Goods: goods that are used up in the production of a final good. (some goods can either be final or intermediate goods, and we only count that portion of production that is sold to final users.) -EX: Sylvia raises $200 worth of tomatoes. She sells $100 worth at a local farmers market and used the other $100 to make tomato sauce, which sells for $200. HER CONTRIBUTION TO GDP IS $300. we DO NOT count directly the $100 worth of tomatoes used to produce the sauce, BUT it is reflected in the value of the final product that it is used to produce.-Capital Goods: are long-lived goods that are themselves produced and are used to produce other goods and services but are not used up in production. (capital goods is counted in GDP, because if not then a country that invested in its future by building capital equipment would appear to have a lower GDP than one that used all its resources to produce consumer goods.) -EX: machinery and factory buildings• Within A Country: in GDP the word domestic indicates that we count only goods produced within the

borders of the country.-EX: GDP includes, all automobiles produced in the U.S., whether made by an American auto manufacturer or by a foreign-owner one.• During A Specific Period: the sales of goods produced in earlier periods is not included in GDP.-EX: if a 20-year-old house is sold this year for $150,000, then this amount is not included in GDP. (It was counted when produced so no need to count it again)

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Understanding What GDP Measures

• Economist Simon Kuznets developed a system – GDP, and received the Nobel Prize in Economic Science.

1. Its not always easy to determine what constitutes final goods and services, but Kuznets pointed out that it should might as well be intermediate goods that enable the citizens of a country to enjoy other final goods and services.

2. Exclusion of goods that are not bought and sold in markets, for example housekeeping and childcare. This does not reflect an increase in total production.-Labor Force: the amount of commercially provided childcare and

housecleaning has increased, causing GDP to rise.3. Ignores activities that deplete a country’s stock of natural resources or pollute the environment. Measure their value has proved to be difficult.

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Other Ways To Measure GDP: Expenditures Equal Production

• Economist divide purchasers into 4 categories: households, firms, government, and the foreign sector.

• Household purchases are called consumption expenditures.-Consumer durable: long-lived consumer goods, such as automobiles, washing

machines, and furniture. -Consumer nondurable: used up more quickly than ^, such as food and clothes. -Services: are intangible goods, such as education, legal services, insurance, and

financial services.• Firms – comprise investment (purchase of new capital goods, ex: building and equipment).

-Business fixed investment: business purchases of factories, offices, machinery, and equipment.

-Residential fixed investment: the purchase of new homes and apartment buildings-Inventories: consist of additions of unsold goods to company inventories.

• Government purchases include all of the goods and services purchased by federal, state, and local governments.

• Net exports is the difference between the value of domestically produced goods sold to foreigners (exports) and the value of foreign-produced goods purchased by domestic buyers.

• GDP = Production = Expenditures = Income

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Saving, Investment, and The Financial System

• Financial market: individuals that have money saves can supply funds directly to persons or companies that wish to borrow money for investment.

• The Bond Market: its sort of an IOU. The typical bond specifies when the loan will be repaid (date of maturity) and the rate of interest to be paid periodically until the loan is repaid.

• The Stock Market: is a public entity for the trading of company stock (shares) and results at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.

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Financial Intermediaries• Intermediary: is a 3rd party who acts as a link between two things.

– Banks: small businesses go to banks to borrow money, because they’re to small to issue bonds. Risk of this is that some borrowers may be unable to repay their loans and provide profits for the bank owners. Peoples deposits don’t interfere with the bank’s borrowers. They facilitate purchases of goods and services by providing checking accounts.

– Mutual Funds: this allows savers with small amount of money to purchase bonds and stocks that would be difficult for them to purchase. This makes it possible to achieve a higher degree of diversification than would be feasible through the direct purchase of stock and bonds. This could be risky, because it depends on the companies fortune. Another advantage is that it provides access to knowledge and insight of professional money managers, meaning that people don’t have to closely follow market development.

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Money and Prices in the Long Run

• money supply is the task of controlling the quantity of money in the economy. This is the responsibility of the Federal Open Market Committee (FOMC), which is composed of 7 governors of the Fed plus five regional bank presidents. They meet every 6 weeks to assess the state of the economy and determine any changes in monetary policy are necessary. If change needed then Fed does this through open market operation. – Money Multiplier: the amount of money the banking sector creates

from each dollar of servers.• Velocity of money: if Y stands for real GDP and P is the price level,

then the nominal GDP = P x Y measures the value of goods and services (and hence dollars) that change hands. Money = V, divide P x Y by the number of dollars in circulation, M. [V = (P x Y)/M]

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Short-Run Economic Fluctuations• Economists call the level of unemployment due to frictional and structural

causes the natural rate of unemployment. It is the level of unemployment that would exist when actual output is equal to potential output.– Consumption (C) is spending by households on final goods and

services.– Investment (I) is spending by firms on new capital goods.– Government purchase (G) is spending by governments—federal, state,

and local—on goods and service.– Net Exports (NX) is the difference between the value of good and

services produced domestically and sold to foreigners and the value of goods and services produced abroad and purchased by domestic residence.