Intro.

to Economics
11. Week
The Data of Macroeconomics
 Key Questions-The Markets for the Factors of Production
• As you may recall from Chapter 2, economics is divided into two branches:
microeconomics and macroeconomics.
• Microeconomics is the study of how individual households and firms make decisions and how they
interact with one another in markets.
• Macroeconomics is the study of the economy as a whole.
• The goal of macroeconomics is to explain the economic changes that affect many
households, firms, and markets at once.

• Macroeconomists address diverse questions:

• Why is average income high in some countries while it is low in others?
• Why do prices rise rapidly in some periods of time while they are more stable in other periods?
• Why do production and employment expand in some years and contract in others?
• What, if anything, can the government do to promote rapid growth in incomes, low inflation, and
stable employment?
 Key Takeaways

• Macroeconomics is the branch of economics that studies the economy as a

whole.
• Macroeconomics focuses on three things: National output, unemployment,
and inflation.
• Governments can use macroeconomic policy including monetary and fiscal
policy to stabilize the economy.
• Central banks use monetary policy to increase or decrease the money supply,
and use fiscal policy to adjust government spending.

• In broad terms, the goal of macroeconomic policy is to provide a stable

economic environment that is conducive to fostering strong and
sustainable economic growth, on which the creation of jobs, wealth and
improved living standards depend.
 The Economy’s Income and Expenditure
• When judging whether the economy is doing well or poorly, it is natural to
look at the total income that everyone in the economy is earning.
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• That is the task of gross domestic product (GDP).

• GDP measures two things at once: the total income of everyone in the
economy and the total expenditure on the economy’s output of goods and
services.
• The reason that GDP can perform the trick of measuring both total income and
total expenditure is that these two things are really the same. For an economy as a
whole, income must equal expenditure.
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• Gross domestic product (GDP) is the market value of all final goods and services
produced within a country in a given period of time.
 GDP and Economic Well-Being
• GDP is the best single measure of the economic well-being of a society.
• GDP per person tells us the mean income and expenditure of the people in
the economy.
• Higher GDP per person indicates a higher standard of living.
• GDP is not a perfect measure of the happiness or quality of life, however.

• Some things that contribute to well-being are not included in GDP.

• The value of leisure.
• The value of a clean environment.
• The value of almost all activity that takes place outside of markets, such as the
value of the time parents spend with their children and the value of volunteer
work.
 The Unemployment Rate
• The unemployment rate tells macroeconomists how many people from the
available pool of labor (the labor force) are unable to find work.
• Macroeconomists agree when the economy witnesses growth from period to
period, which is indicated in the GDP growth rate, unemployment levels
tend to be low.
• This is because, with rising (real) GDP levels, we know the output is higher
and, hence, more laborers are needed to keep up with the greater levels of
production.

• Frictional unemployment occurs when individuals spend time searching for a job.
• Structural unemployment occurs when jobs are eliminated due to economic
structural changes.
• Cyclical unemployment occurs due to fluctuations in the business cycle.
 The Inflation
• One of the main factor macroeconomists look at is the inflation rate, or the
rate at which prices rise.
• Inflation is primarily measured in two ways:
• the Consumer Price Index (CPI) and
• the GDP deflator.
The CPI gives the current price of a selected basket of goods and services that is
updated periodically. The GDP deflator is the ratio of nominal GDP to real GDP.

• Too much inflation is also harmful if purchasing power decreases much

more than inflated prices, decreasing overall spending and devaluing the
currency.
• The target inflation rate is usually around 1% to 3%.
 What the Government can do?
• There are two ways the government implements macroeconomic policy.
Both monetary and fiscal policy are tools the government uses to help
stabilize a nation's economy.

Monetary Policy
• A simple example of monetary policy is the central bank's open market
operations. When there is a need to increase cash in the economy, the central
bank will buy government bonds (monetary expansion).

Fiscal Policy
• The government can also increase taxes or lower government spending in
order to conduct a fiscal contraction.