Download The Macroeconomic Environment

Macroeconomic
Fundamentals
ECO 473 - Money & Banking - Dr. D. Foster
The Circular Flow
of Income and
Product
The Gross Domestic Product (GDP)
• Defined as:
 The total value of all final goods and services
produced during a given period.

Evaluated at market prices … sort of.
 Serves as a measure of an economy’s total output
and of the total income generated (to individuals).
Limitations of GDP
• Excludes nonmarket production.
• Measurement problems.
• Welfare interpretations.
• Country differences are difficult.
Components of GDP
• Consumption spending:
 Total household purchases of goods and services.
• Investment spending:
 Purchases of new capital goods (fixed I), and
 Changes in business inventories.
• Government spending:
 State/Local/Federal government expenditures.
• Net export spending:
 Exports - Imports.
Inflation Defined
A continuous rise in the general price level.
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Not a rise in some prices.
Not a one-time rise in prices.
A rise in the “general price level.” Which is…?
Measured by a price index; e.g. the CPI.
Real versus Nominal values
• Nominal GDP (aka “current dollar”) versus
Real GDP (aka “constant dollar”).
Problems Interpreting Inflation
• Compared to the CPI . . .
 you don’t buy the same things
 you don’t buy the same proportions
 you make tradeoffs between goods
• Lots of items are excluded from measurement:
 Used goods, land, stocks …
The Costs of Inflation
• If unexpected – effects on borrowers & lenders.
• If expected – inconvenience, repricing & Fed actions.
Unemployment
• Measured rate depends on:
 the population,
 the civilian population,
 the civilian population over 16 yrs. old (&…),
 the labor force,
 and whether one is looking for work.
Unemployment and the Business Cycle
• Unemployment rate:
 The % of the civilian labor force that is unemployed.
• Frictional unemployment:
 Workers are “between” jobs at any given time.
• Structural unemployment:
 Workers’ abilities/skills don’t match employers needs.
• Cyclical unemployment:
 The unemployment resulting from business-cycles.
• Natural rate of unemployment (U*):
 The frictional and structural components.
 Aka, the “full employment” level of unemployment.
Cycles in Economic Activity
• Business cycles:
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 Real GDP varies around its long-run growth path.
Recession:
 The decline in real GDP.
 lasting at least two consecutive quarters.
Trough:
 Low point in real GDP.
Expansion:
 The growth phase.
Peak:
 High point of real GDP.
Business Cycles - Theories
• External shocks.
• Population pressures.
[Malthus vs. Simon]
• Schumpeter – innovation.
• Marx – underconsumption.
• “Classical school” – erratic anomalies.
• Keynesian – W&P rigidity leads to
overproduction.
• Austrian School - Induced by
policy/credit.
Macroeconomic
Fundamentals
ECO 473 - Money & Banking - Dr. D. Foster