# Macroeconomics by dffhrtcv3

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```									Macroeconomics

Unit 3
Macroeconomics
• The branch of economic theory that deals
with the economy as a whole.

• Does not deal with small decisions by
individuals.

• Example: Government; University
National Income Accounting
• Economic success is based off the amount
of an income and by the standard of living
(high or low).

• The measurement of a country’s economic
health is called the national income
accounting.
--Deals with the overall output and income.
Macroeconomics
• There are 5 major statistics that measure
the national economy (In order of value):
1. Gross Domestic Product
2. Net domestic Product
3. National Income
4. Personal Income
5. Disposable Personal Income
Gross Domestic Product (GDP)
• The total dollar value of all final goods and
services produced in a nation in a single
year.
--How many goods were produced and
available to be bought in 1 year.

• Always measured in dollars (\$). This is
the common measure of value in
economics
Gross Domestic Product (GDP)
• GDP deals only with final products ready
for sale for the first time

• Deals with the value of the item the
consumer would buy at the store
--The value of the whole computer, not the
parts.
--Only for items sold for the first time –
Used cars sold do not count into GDP
Gross Domestic Product (GDP)
• GDP can be determined by an equation

• GDP=Consumption (C)+ Investment (I)+ Govt.
Spending (G)+ [Exports(X)-Imports(M)].

• The way you will usually see it:
GDP=C+I+G+(X-M)
• GDP=C+I+G+(X-M)
Consumption (C)
• All private consumptions in our economy.

• Personal Expenses such as food, rent,
medical expenses that are bought by
common people.

• Does not include the buying of a new
house.
• If total consumption is \$5 million.

GDP=5 million+I+G+(X-M)
Investment (I)
• Investments by businesses or households
into capital.

--Household Ex.: Purchasing a new house

• Only applies to situations when money is
exchanged for a product/service.
• Investments totaled \$6 million

GDP=5 million+6 Million+G+(X-M)
Government Spending (G)
• Any money the government spends on
goods and services.

--Ex.: Salaries, supplies, military spending.

• Includes all levels of government (federal,
state, & local)
• Government spending totaled \$10 million

GDP=5 million+6 million+10 million+(X-M)
Exports (M) – Imports (M)
• The answer you get when you do X-M is
called the Net Exports.
--It’s the difference between and country’s
exports and imports

• This could end up being a negative
number because a country might import
more than it exports
Exports (X)
• This is the amount of goods or services a
country produces and sends out to other
countries.

• We export oil from our oilrigs in the oceans
and from land.
Imports (M)
• These include any goods or services we

• America receives a large number of
products from China and Taiwan.
X-M
• Be sure exports are first and imports are
second.

• Exports totaled \$8 million

• Imports totaled \$3 million

• \$8 million - \$3 million = \$5 million
GDP=5 million+6 million+10 million+5 million
GDP
• GDP is simply an estimate of the
economic health of a country

• There are many ways this figure can be
flawed and untrue.
Macroeconomics
• There are 5 major statistics that measure
the national economy (In order of value):
1. Gross Domestic Product
2. Net domestic Product
3. National Income
4. Personal Income
5. Disposable Personal Income
Net Domestic Product (NDP)
• Depreciation is the loss of value due to
use and wear and tear.

• GDP does not factor in depreciation

• NDP subtracts the amount of depreciation
from the GDP
• GDP = \$26 Million

• NDP = \$2 Million

• GDP – NDP

• \$26 Million - \$2 Million

• Economic health = \$24 Million
Macroeconomics
• There are 5 major statistics that measure
the national economy (In order of value):
1. Gross Domestic Product
2. Net domestic Product
3. National Income
4. Personal Income
5. Disposable Personal Income
National Income
• Total amount of income earned by everyone in
the economy

• This is the total of 5 areas:
1. Wages & salaries
2. Income of Self-Employed individuals
3. Rental Income
4. Corporate Profits
5. Interest on Savings & other Investments
Macroeconomics
• There are 5 major statistics that measure
the national economy (In order of value):
1. Gross Domestic Product
2. Net domestic Product
3. National Income
4. Personal Income
5. Disposable Personal Income
Personal Income
• The total income a person makes before
all personal taxes are taken out. (Gross
Income)
• Examples of income taken out:
--Insurance, Social Security, Taxes, etc

• Examples of income put in without
production activity:
--Unemployment, Medicaid, etc.
Macroeconomics
• There are 5 major statistics that measure
the national economy (In order of value):
1. Gross Domestic Product
2. Net domestic Product
3. National Income
4. Personal Income
5. Disposable Personal Income
Disposable Personal Income
• The amount people have left to spend
after all taxes are taken out (Net Income)

• Good indicator of economic health
because it shows how much most people
have of spendable money.
Inflation
• GDP is an indicator of economic health

• However, we know GDP can sometimes
be inaccurate because of depreciation

• Another thing that skews GDP is inflation
--A prolonged rise in the general price level
of goods & services
Inflation
• When inflation occurs, it causes the true
value of currency to go down.

• \$1 bill does not equal \$1

• The Purchasing Power has dropped
--The real goods & services money can buy
--This determines the true value of money
Inflation
• This affects GDP because there will be an
increase in the amount of GDP, but there may
not be an increase of outputs

• Ex.: A Dr. Pepper cost \$1.25 last year;
This year Dr. Pepper cost \$2.00.

• The GDP will be higher, but the amount of goods
sold will stay the same, so this does not show a
true rise in economic health
Inflation
• Inflation has to be factored in to accurately
measure a nation’s economic health

• Deflation: A prolonged decline in the
general price level of goods & services

• Affects the value of GDP, but rarely
happens.
Inflation Measures
• The government uses 3 different ways to
measure inflation:

1. Consumer Price Index (CPI)
2. Producer Price Index (PPI)
3. GDP Price Deflator
Consumer Price Index (CPI)
• A measure of the change in price of a
specific group of goods & services that the
average household uses.

• Done once a month by the government

• The specific group of goods & services are
Consumer Price Index (CPI)

80,000 specific goods & services in general
categories
--Food                 --Education
--Housing              --Recreation
--Transportation       --Medical Care
--Apparel              --Personal Care
Consumer Price Index (CPI)
updated to include new products

• The Bureau of Labor Statistics (BLS) compiles
the list monthly and compares the prices to a
base year

• The base year has a value of 100.0
--The value of CPI shows the change in value
since the base year
Consumer Price Index (CPI)
• Example:

Base Year value is set at 100.0

If the new value taken by the BLS is 155.7
the average price of goods has risen
55.7% since the base year
Producer Price Index (PPI)
• Groups together several indexes &
averages the change in prices the U.S.
has charged their customers for goods &
services
--Usually includes mining, manufacturing, &
agriculture
Producer Price Index (PPI)
• PPI will usually change before CPI
because PPI is measured from goods not
sold to common people yet.

• PPI is closely watched as a hint of whether
CPI or inflation will rise.
GDP Price Deflator
• This indicator removes the effects of
inflation from GDP so the overall economy
can be compared from year to year.

• The new figure, with inflation taken out is
known as the “Real GDP”
GDP Price Deflator
• Equation:

Current GDP / Price Deflator (CPI) x 100

= Real GDP
GDP Price Deflator
• Current GDP = \$500 Billion
• CPI = 105

\$500 / 105 x 100 = \$476 Billion
Real GDP = \$476 Billion

• This can be compared to previous years to
determine how much GDP has rose or fell
Aggregates
• Economists look at how the laws of supply
& demand apply to the economy as a
whole, not just to individual businesses

• Aggregates: Summing up of all individual
parts in the economy.
--Aggregate Demand
--Aggregate Supply
Aggregate Demand
• Total quantity of goods & services in the whole
economy that all citizens will demand at a single
time

• Law of demand relates the amount demanded to
the price

• There are too many different products in an
economy; cannot relate aggregate demand to
price.
Aggregate Demand
• Aggregate Demand is related to the price

• Found by measuring from a price index.

• We can use the GDP Price Deflator & find
Real GDP (Real Domestic Output) &
compare that to the price level.
Aggregate Demand
• When we compare Real GDP against
price levels we can discover the
Aggregate Demand Curve

Price Level

Real GDP
Aggregate Demand
• Both the individual demand curve & the
aggregate demand curve have inverse
relationships

• In aggregate demand when the price level
drops, a larger level of real domestic
output is demanded
Aggregate Demand Curve
• There are 2 reasons for the Aggregate
Demand Curve to have an inverse
relationship:

2. Relative price of goods & services sold
to other countries
• Remember Purchasing Power is the true

• Inflation decreases Purchasing Power &

• When price level drops, Purchasing power
will rise & vice versa.
• It appears you have more money because you
can buy more than you could before.

• Price level drop results in an increase in the
domestic output level
Relative Prices of Goods Sold to
Other Countries
• When the price level drops, our goods
become better deals because they are
now cheaper

• Therefore, foreign countries are more
willing to purchase our goods & services
Aggregate Supply
• Just like Aggregate Demand, Aggregate
Supply is measured against the price level
& the real domestic output

• When price level rises, the producers will
offer more to be output, and therefore
aggregate supply will rise
Aggregate Supply
• Aggregate Supply shows a direct, or
positive, relationship with price level &
domestic output

Price Level

Real Domestic Output
Equilibrium Price Level
• When the Aggregate Demand &
Aggregate Supply are put on the same
graph, the equilibrium price level can be
found

• Similar to the equilibrium price with the
supply & demand curves
Equilibrium Price Level
• The point where to two graphs cross is the
equilibrium price level

Price Level                                Equilibrium Price Level

Real Domestic Output (Real GDP)
Equilibrium Price Level
• At the equilibrium price level the average
price of all goods is at a perfect place

• If price levels rise above the equilibrium
price level, inflation has occurred

• If price levels fall below the equilibrium
price level, deflation has occurred.
• Inflation will change from year to year

• Other things such as unemployment or
taxes will also change from year to year

• The ups & downs of an economy are
• These Business Fluctuations are part of

• Business Cycle: Irregular changes in the
level of total output that is measured by
Real GDP
• In economics, there is a model of this
Peak or
Boom

Recession
Expansion
Slowdown
Recovery

Growth
Growth                Trough
• At the beginning there is a large amount of
expansion & growth in the economy

• The economy rises to high levels

• This rise leads to an economic boom, or
peak.
--A period of prosperity. Highest point.
• Eventually the peak levels out and a
contraction occurs, where the economy
will begin to fall.

• This fall can be short or it can be a deep
fall which could eventually lead to a
recession.
--Recession: No economic growth for 6
months
• If a recession is deep enough, a
depression will occur.

• Many people will be out of work, & many

• At some point the economy hits a trough,
or the lowest point, and settles off.
• After a trough is hit, the economy slowly begins
to rise back up

• This new rise is known as recovery.

• New businesses open & new jobs are available.

• This continues until a peak, then the cycle starts
over.

Peak or
Boom

Recession
Expansion
Slowdown
Recovery

Growth
Growth                Trough
• The business cycle is not always as
simple as the graph shows

• However, the troughs & peaks are very
obvious
• America was in a period of a peak during
the 1920’s
--The time was called the “Roaring 20’s”

• In October, 1929, the stock market
crashed and there was a serious
recession which led to the Great
Depression
• During the Great Depression, millions lost
their jobs, banks closed down, and many

• During World War II the economy lifted
back up to a high peak

• The economy did well until the 1980’s
when it another small recession started
• The economy did well during the 1990’s

• The attacks on Sept. 11, 2001 caused a
severe recession in America

• We are still feeling the recession currently.

• Slowly, we are coming out of the
recession.
Causes & Indicators of Fluctuations
• Economists have tried to find ways to

• There are too many unpredictable factors
that can cause change in an economic
market

• There are some causes that have been
fluctuations
Causes of Fluctuations
fluctuations:

2.   Government Activity
3.   External Factors
4.   Psychological Factors
• Business will invest in labor or capital in an
effort to increase the productivity of its

• Businesses create new jobs & income for
consumer spending

• Innovations: Inventions or new production
techniques
• Innovations are used by firms to increase
production

• Other firms must begin to use an
innovation to keep competitive

• If there is a downturn, businesses cut
down on investments, which could lead to
recession.
Government Activity
• The spending trends of government
affects the economy in 2 ways:

1. Policies on Taxes & Spending

2. Control over the supply of money in an
economy
External Factors
• There are forces that occur outside the
country that can have an economic force.

• Wars can impact a nation’s economy

• Oil supply can affect the economy also
Psychological Factors
• There may be events that cause people to
spend less or more.

• Attacks on Sept. 11, 2001 had a large
psychological effect on the country & its
spending.
Economic Indicators
• Economists use different measures to try
to predict what is coming and to determine

• Economic Indicators: Statistics that
measure variables in the economy.

Ex.: Stock Market
• Indicators that point to what will possibly
happen in the future.

• Can predict an upward or downward trend

Ex.: Stock Market & Interest Rates
Lagging Indicators
• These are indicators that take longer to
Ex.: Banks begin closing, but interest rates
on loans do not change for 6 months

• Gives clues to the duration of phases in
Federal Reserve
• Central Banking System of the U.S.

• Created in 1913 by the Federal Reserve
Act

• Both a public & private bank
Federal Reserve
• It was originally intended just to address
banking issues

• Its purpose has expanded since then
Federal Reserve
• Currently its job includes:
1. Address the problem of banking panics
2. Central Bank of U.S.
3. Balance private banks & government
responsibility
4. Manage the U.S. money supply
5. Maintain economic stability
6. Provides financial services to large units
7. Strengthen U.S. standing in the world
economy.
Federal Reserve
• It is criticized as having too much power.

• Some believe we do not need a
centralized bank because it gives
government an additional power of the
people in the economy
Taxes
• Common Taxes:
--Personal Income: Percentage of income
--Social Insurance: Tax to fund Social
Security
--Estate: Tax on property owned by a person who
has passed away.
--Inheritance: Tax on inherited property
--Sales: Tax on purchases
--Property: Tax on owned property

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