Moving from Microeconomics to Macroeconomics

Our textbook defines microeconomics as the area of economics that deals with behavior and decision making by small units, such as individuals and firms. What are some examples of microeconomic behaviors that we have discussed in class? What are some microeconomic behaviors you have taken part in during the last month?

Deciding what goods and services you have demand for based on careful decision-making. Deciding whether to save your money or spend it while considering the opportunity cost involved. Budgeting your money so that your “needs” are met first and your “wants” are met if there is anything leftover. Why do we have to employ decision-making with opportunity costs and trade-offs?

Our text defines macroeconomics as the branch of economics that deals with the economy as a whole, including employment, gross domestic product (GDP), inflation, economic growth, and the distribution of income. Let’s break this definition down into some of its parts. Some parts we are familiar with and some not so much.

Inflation- a rise in the general price level of goods and services over a period of time. Good News! You just got a 10% raise at work. However, the inflation rate this year is approximately 8% on goods and services you buy. How much was your raise actually worth?

Employment: at the Macro level, employment refers to the percentage of people who have jobs at a national level. It also refers to the percentage of people who are unemployed at the national level. What impact do employed or unemployed people have on the economy?

Gross Domestic Product (GDP): the dollar amount of all final goods and services produced within a country’s borders in a year. It is the most important measure of the economy’s overall economic performance. How is the final dollar amount of goods and services a reflection of the economy? If you own a small business, how does the dollar amount of goods and services reflect your success?

Economic Growth: refers to a sustained period during which a nation’s total output of goods and services increases. Remember, the bigger the value of the final goods and services at the end of the year, the better the economy is doing. Therefore, it makes sense that a period of economic growth deals with an increase in those good and services.

Distribution of Income: the way in which income is allocated among families, individuals, or other designated groups in the economy. When you choose to shop at grocery store rather than a convenience store, it has an impact on the distribution of income. If people stop spending their money at a convenience store, it can cost jobs or even cause the store to close. Financial choices impact individuals, businesses, cities, states, nations………

Economic growth, decline, recession, and depression happen in a continuous cycle.

More people choose to shop at store A than store B. Store B has to fire employees and eventually closes. Those unemployed people can no longer buy goods and services or pay taxes. With a decrease in taxes, the local government has to fire employees and cancel projects. With a decrease in taxes, the state government may have to fire employees and cancel projects. Individual decisions can make a difference at much higher levels. Micro and Macro don’t exist separately.

Imagine the last time you saw a television show involving an emergency room (hospital). Imagine all of the machines and people trying to determine how the patient is doing. What vital signs do they look at? Now, we are going to look at the three most important vital signs of the United States Economy. (Hint: you already wrote down their definitions today)

Economic Indicator: A statistic that describes the current performance of the U.S. economy. Three Main Economic Indicators: 1. Real Gross Domestic Product (GDP) This indicator measures the output of the final goods and services produced in the U.S. economy in a given time period (typically, one year). 2. The Inflation Rate This indicator measures how rapidly the overall price level is changing in the U.S. economy. 3. The Unemployment Rate This indicator measures the percentage of the U.S. labor force that wishes to work, but are currently without jobs.

VISUAL 18.2 LETTER FROM A CLIENT 275 From the Desk Of: J. Q. Public, CEO Acme Industries, Inc. November 19, 2008 The Economic Forecasters, Inc. 123 Any Street Muncie, Indiana To Whom It May Concern: I am the CEO of a successful business. My firm manufactures and distributes many consumer products. I would like to have the company open another factory, but our Board of Directors is concerned that the U. S. economy is too weak to support its expansion. Recent economic reports—especially in the popular media—paint a mixed picture. Therefore, I would like to hire your firm to produce a report that describes the current state of the U.S. economy and forecasts the performance of the economy over the next 12 months. I would appreciate a complete report, so please include several charts or graphs that will help me see the trends in the economy. I will then share these results with the Board of Directors. I look forward to receiving your report. Sincerely, Jocelyn Q. Public Chief Executive Officer Acme Industries, In