Download The five fundamental principles of macroeconomics: 1. The overall

The five fundamental principles of macroeconomics:
1. The overall level and growth of income and output in a nation are
determined by the interaction of households, firms, and governments as
they produce, exchange, consume, save and invest. Economic interaction
between these sectors typically takes place through markets.
2. Physical and human capital accumulation and technological advances are
the primary means by which the standard-of-living grows in modern
economies.
3. In the long-run, market prices balance supply and demand, so that
resource availability determines production and income independently of
aggregate demand.
a) Real wages and employment are determined by the scarcity of labor
and labor’s value in the production of goods.
b) Real interest rates are determined by borrowing and lending in
financial markets, and influence saving, consumption, and the
allocation of resources over time.
c) Money reduces the costs of transactions. In the long-run, the quantity
of money is neutral.
4. In the short-run, fluctuations in aggregate demand and the quantity of
money can cause recessions and unemployment owing to market
rigidities.
5. Monetary policy and fiscal policy are tools available to the government
to stabilize the economy. But expectations of policy can profoundly
influence how macro policies work.
GDP = C + I + G + NX
Y=C+S+T
GDP = Y
I = S – B-G – B-ROW
S + (T – G) = I + B-ROW
National saving = lending to domestic firms and the rest of the world
A 3-good example of GDP and real GDP
2000
A
B
C
2001
A
B
C
%change
2000
A
B
C
2001
A
B
C
%change
p
2
4
6
q
GDP
2000 4000
3000 12000
4000 24000
40000
Real
GDP
4000
12000
24000
40000
2.2 2000 4400
4.4 3000 13200
6.6 4000 26400
44000
10.00%
4000
12000
24000
40000
0.00%
p
2
4
6
Real
GDP
4000
12000
24000
40000
q
GDP
2000 4000
3000 12000
4000 24000
40000
2.2 2100 4620
4.1 3000 12300
6.2 4400 27280
44200
10.50%
4200
12000
26400
42600
6.50%