Summary
Introduction to Macroeconomics
- 1. One key concern of macroeconomics is the business cycle, the short-run alternation between recessions, periods of falling employment and output, and expansions, periods of rising employment and output.
- 2. The point at which expansion turns to recession is a business-cycle peak. The point at which recession turns to expansion is a business-cycle trough.
- 3. Another key area of macroeconomic study is long-run economic growth, the sustained upward trend in the economy’s output over time. Long-run economic growth is the force behind long-term increases in living standards and is important for financing some economic programs. It is especially important for poorer countries.
- 4. When the prices of most goods and services are rising, so that the overall level of prices is going up, the economy experiences inflation. When the overall level of prices is going down, the economy experiences deflation.
- 5. In the short run, inflation and deflation are closely related to the business cycle. In the long run, prices tend to reflect changes in the overall quantity of money. Because both inflation and deflation can cause problems, economists and policy makers generally aim for price stability.
- 6. Although comparative advantage explains why open economies export some things and import others, macroeconomic analysis is needed to explain why countries run trade surpluses or trade deficits. The determinants of the overall balance between exports and imports lie in decisions about savings and investment spending.
The Circular-Flow Diagram and the National Accounts
- 7. Economists keep track of the flows of money between sectors with the national income and product accounts, or national accounts. To understand the principles behind the national accounts, it helps to look at a circular-flow diagram, a simplified representation of the economy showing the flows of money, goods and services, and factors of production through the economy.
- 8. Households earn income via the factor markets from wages, interest on bonds, profit accruing to owners of stocks, and rent on land. In addition, they receive government transfers from the government. Disposable income, total household income minus taxes plus government transfers, is allocated to consumer spending (C) and private savings.
- 9. Via the financial markets, private savings and foreign lending are channeled to investment spending (I), government borrowing, and foreign borrowing.
- 10. Government purchases of goods and services (G) are paid for by tax revenues and any government borrowing.
- 11. Exports (X) generate an inflow of funds into the country from the rest of the world, but imports (IM) lead to an outflow of funds to the rest of the world. Foreigners can also buy stocks and bonds in the U.S. financial markets.
Gross Domestic Product (GDP)
- 12. Gross domestic product, or GDP, measures the value of all final goods and services produced in the economy. It does not include the value of intermediate goods and services, but it does include inventories and net exports (X − IM).
- 13. GDP can be calculated in three ways: add up the value added by all producers; add up all spending on domestically produced final goods and services, leading to the equation GDP = C + I + G + X − IM, also known as aggregate spending; or add up all the income paid by domestic firms to factors of production.
- 14. The three methods of calculating GDP are equivalent, because in the economy as a whole, total income paid by domestic firms to factors of production must equal total spending on domestically produced final goods and services.
Interpreting Real Gross Domestic Product
- 15. Real GDP is the value of the final goods and services produced calculated using the prices of a selected base year. Except in the base year, real GDP is usually not the same as nominal GDP, the value of aggregate output calculated using current prices.
- 16. Analysis of the growth rate of aggregate output must use real GDP because doing so eliminates any change in the value of aggregate output due solely to price changes. U.S. statistics on real GDP are always expressed in chained dollars.
- 17. Real GDP per capita is a measure of average aggregate output per person but is not in itself an appropriate policy goal.