University:
California State University, Northridge
Course:
ECON 500 | Survey of Economics
Academic year:

2024
Views:

322

Pages:

19
Author:

Celeste Austin

8 Introduction to Macroeconomics and Aggregate Demand Part 1 Outline ● Macro vs Micro ● Supply and Demand in Macro ● GDP Macro vs Micro ● Micro: study of the behavior of individual decision makers ♦ How do firms make production decisions? How do consumers make purchase decisions? How does P system coordinate their decisions? ● Macro: study the behavior of entire economies ♦ Overall price level, UE rate, and GDP growth Macro vs Micro ● Economic aggregate: abstraction used to describe some feature of economic life. ● Domestic product: total production in a nation’s economy. ♦ Aggregation is the process of combining real objects – cars, baseballs, ipods, hair cuts –into total domestic product. ♦ Combining many markets into 1 → ignore distinctions between different products. Macro vs Micro ● Case for Aggregation: 1. Composition of D and S in various markets is of little consequence for the economy-wide issues of growth, Π, and UE. 2. During economic fluctuations, markets tend to move up or down together. ♦ When D in the economy rises, there is greater D for potatoes, cars, ipods, movies, etc. Macro vs Micro ● ● ● Macro → details of resource allocation and income distribution are of secondary importance to the study of Π and UE. Micro → ignore Π and UE and focus on how individual markets allocate resources and distribute income. Macroeconomists care about size of “economic pie” and not what’s inside or how it’s divided. Microeconomists assume pie is right shape and size and worry about what’s inside and how it gets divided. Supply and Demand in Macro ● First, imagine Fig 1 refers to milk market. If ↑D milk → ↑P milk and ↑Q milk. ● Reinterpret Fig 1 as representing market for “domestic product.” ♦ Price now measures “price level.” ♦ D is AD or the Q of domestic product demanded at each P level. ♦ S is AS or the Q of domestic product supplied at each P level. Supply and Demand in Macro ● (Fig 1) If ↑AD → ↑P level. If AD continues to rise → economy suffers Π –a sustained ↑P level. ● (Fig 2) If ↓AD → ↓total output → recession –a period of time in which production falls. ● (Fig 3) If both AD and AS shift out over time → domestic product grows from Q0 to Q1. FIGURE 1. Two Interpretations of a Shift in the Demand Curve D1 S A E Price Price D S D P0 E P0 D1 S D Q0 Quantity (a) S D Quantity (a) FIGURE 2. An Economy Slipping into a Recession S D0 D2 Price Level E B D0 S D2 Domestic Product FIGURE 3. Economic Growth S0 D1 S1 D0 Price Level C E D1 S0 S1 D0 Q0 Q1 Domestic Product Gross Domestic Product ● GDP = the value of all final goods and services produced in the domestic economy during 1 year. ● Nominal GDP (GDP in current $) values each good and service at P it was sold during the year. ♦ Drawback: ↑P level → ↑nominal GDP even if there is no ↑ in production. ♦ Solution: calculate real GDP or GDP in constant $. ♦ Recession ⇒ a period in which real GDP declines for 2 or more quarters. What Gets Counted in GDP? ● Only goods and services produced during that year ♦ Resale houses and classic cars are excluded. ● Only final goods and services ♦ When Trader Joe’s buys After 8 Mints they are considered an intermediate good; the mints are only a final good once they are sold to customers. What Gets Counted in GDP? ● Only production within the U.S. ♦ Exclude production of U.S. workers and firms abroad and include production of foreign workers and firms inside U.S. ● Only goods that pass through organized markets ♦ Exclude illegal activities, housework, do-it-yourself repairs, and leisure because they lack a market P. GDP is Not a Measure of a Nation’s Economic Well-Being ● Includes only market activities ♦ Excludes HH activities like child care or caring for an elderly parent ● Places no value on leisure ● Counts “bads” as well as “goods” ♦ 9/11 attacks probably raised our GDP. ♦ Mobilization for war ↑GDP rapidly. GDP is Not a Measure of a Nation’s Economic Well-Being ● Does not deduct ecological costs of economic activity ♦ Production of many goods and services pollutes the environment and uses up natural resources. ♦ Almost every economic activity produces garbage which creates disposal problems. The Economy on a Roller Coaster ● Since 1870, real GDP growth rates have almost always been positive. ● Main feature of the past 140 years has been economic growth. ♦ Average annual growth rate = 3.1%. ♦ This ↑real GDP over pop growth is the source of ↑living standards in U.S. The Economy on a Roller Coaster ● Some periods of falling real GDP ♦ Recessions are a persistent feature of U.S. economic performance. ♦ Ups and downs in an economy are called “economic fluctuations” or “business cycles.” ● More Π than deflation. P level has increased about 16-fold since 1870. ● Both GDP and Π have grown in past 140 years, but neither has grown smoothly. FIGURE 4. The Growth Rate of U.S. Real GDP, 1870-2009 20 15 10 Rapid industrialization Pre–1940 Railroad prosperity World War I World War II Roaring Twenties Korean War Expansion of 1960s Expansion Boom of of 1980s 1990s 2007-09 Recession 5 0 –5 –10 –15 Depression of 1890s Postwar depression Panic of 1907 Great Depression Percentage Growth Rate of Real GDP –20 1974–75 Recession Postwar recession 1982–83 Recession Post–1950 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Year 1990–91 Recession 2009 2004