MACROECONOMICS THE STUDY OF THE ECONOMY AS A WHOLE.

GROSS DOMESTIC PRODUCT IS A YARDSTICK FOR THE ECONOMY'S PERFORMANCE CONSUMPTION + INVESTMENT + GOVERNMENT SPENDING + (EXPORTS - IMPORTS) = GDP C + I + G + (X - IM) = GDP

CONSUMPTION WHAT WAS BOUGHT OR USED BY PEOPLE IN A SOCIETY IN A GIVEN PERIOD OF TIME. THE AMOUNT OF MONEY WE SPENT BUYING THINGS.

INVESTMENT THE AMOUNT OF MONEY BUSINESSES SPEND ON CAPITAL EQUIPMENT USED FOR PRODUCTION.

GOVERNMENT SPENDING THE AMOUNT OF MONEY THE GOVERNMENT SPENT IN THE ECONOMY. ( DOES NOT INCLUDE MONEY SPENT ON PAYING OFF THE NATIONAL DEBT)

EXPORTS THE DOLLAR VALUE OF AMERICAN MADE GOODS AND SERVICES THAT ARE SOLD TO FOREIGN COUNTRIES.

IMPORTS GOODS AND SERVICES THAT ARE PURCHASED BY AMERICAN CONSUMERS AND BUSINESSES THAT ARE NOT OWNED BY AMERICAN COMPANIES.

Business Cycles Systematic ups and downs of the GDP.

Phases of the Business Cycle Peak Recession Trough Expansion

Peak- the point where the Real GDP stops going up Peak Recession Trough Expansion

Recession-A period where the real GDP declines for Two quarters in a row (6 months) Peak Recession Trough Expansion

Trough: the turnaround point where the GDP stops going down Peak Recession Trough Expansion

Expansion: a period of recovery from a recession Peak Recession Trough Expansion

Depression A severe recession with high unemployment, shortages, and excess capacity in manufacturing.

Causes of the Business Cycle Capital Expenditures: growth or decline of expanding inventories of businesses Inventory Adjustments: changes in the level of business inventories Innovation: New products or new methods Monetary Factors: Credit and loan policies of the FED- Easy money vs. Tight Money

External Shocks to Business Cycles Increased Oil Prices- OPEC shortages in 1970s Wars International Conflicts

Business Cycle Effects

1. Unemployment Unemployment Rate: # of unemployed people divided by total # of people in the labor force.

Types of Unemployment Frictional: Unemployment caused by workers who are between jobs Structural: A fundamental change in the economy- outdated technology Cyclical: Changes based on the business cycle Seasonal: Changes based on the weather, or demand for certain products. Technological: Changes caused by jobs being replaced by machines/automation

Inflation General Increase of products Types of Inflation: Creeping: inflation in between 1-3% Galloping: inflation that can go as high as 100 to 300% Hyperinflation: 500% + (Germany during the Great Depression)

Inflation Causes Demand pull Theory: all sectors of the economy try to buy more goods and services than can be produced Federal Deficit: Government spending Rising Input Costs: Rising cost of manufacturing increasing prices (Labor) Excessive Monetary Growth: Money supply grows faster than Real GDP.

Poverty Causes of Poverty Education Wealth- Distribution of wealth uneven. Discrimination Ability Monopoly Power- limited professions or membership- Unions, ABA, AMA

Stabilizing the GDP- Demand Side Fiscal Policy- Federal Government’s attempt to stabilize the economy through taxes and spending. Concepts created by economist John Maynard Keynes.

Demand Side Limits Government spending counteracting Business Investing Government unable to control spending

Supply Side Policies Policies designed to stabilize the economy by increasing production rather than demand. Became popular during the Reagan administration.

Supply Side Limits Lack of experience using Supply side Policies designed to promote growth not stability. Weakens the stabilizers of the economy

Supply- Side Stimulate production Cut Taxes and Regulations. Reduce Government Businesses invest and expand, creating jobs Investment increases Demand- Side Stimulate consumption Cut taxes or increase Federal spending. More Money= More Consumption Businesses increase output