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MACROECONOMICS:
STUDY OF HOW ENTIRE INDUSTRIES,
COUNTRIES, SOCIETIES MAKE ECONOMIC
DECISIONS
(HOW DOTHEY ANSWER THE THREE BIG QUESTIONS?)
HOW DO WE MEASURE ECONOMIC SUCCESS/FAILURE?
(ECONOMIC INDICATORS)
THREE ECONOMIC
INDICATORS

Gross Domestic Product

Consumer Price Index

Unemployment
GDP

The dollar amount of all final goods and services within a
country’s borders, regardless of who owns the FoPs, in one year
(Measures goods, services, and buildings)
Not Included in GDP

Intermediate Products

Secondhand/Used goods

Do-it-yourself/Non-market transactions

Underground Economy/Black Market
Four Categories of Goods/Services

C – consumers—2/3 of GDP spending comes from households

I – Investment by firms (machines, tools, warehouses)

G – Government spending at all levels (schools, military,
highways)

Xn = Exports – Imports
 (The foreign sector) spending by ppl abroad on US-made
goods/services (X) minus spending by ppl in the US on foreignmade goods/services (N)
How to Calculate GDP

Output-Expenditure Model:

GDP = C + I + G + Xn

In 2006 (in billions of dollars):

10.04=6.81 + 1.87 + 1.75 + (1.13-1.52)
C
I
G
Xn
C or I or G
GDP
Due to a tax cut, consumers decide to buy more new cars.
Worried about an increasing budget deficit, the government decides
to buy fewer military planes.
Increasing prices in the US encourage Americans to buy more foreign
goods.
Due to a tax increase, consumers decrease purchases on vacation
travel.
Due to increased incomes, Europeans buy more US goods and
services.
A foreign government imposes a tariff that discourages its citizens
from buying goods from the US
Businesses are optimistic about the future and increase construction
of new factories.
Many more Americans decide to buy cars manufactured by Japanese
companies who operate within the US.
C or I or G
GDP
Households worry about future unemployment and decide to spend
less income.
Because interest rates increased, businesses cut back on spending for
new machinery.
Consumers feel good about the future and take out loans to buy more
durable goods such as washing machines.
Decreases in interest rates encourage businesses to take out loans to
construct more buildings.
To fight unemployment, the government decides to hire more people
to work in national parks.
Tax cuts to businesses give businesses incentives to buy more
computers.
To stimulate the economy and provide jobs, the government builds
more bridges in California.
Consumer Price Index

Measures change in prices over time

Market Basket of the first price period =
100% at base year

US CPI is calculated by finding prices of
80,000 goods across 85 geographic areas

Collected by Bureau of Labor Statistics
Calculating Inflation

General increase is price levels

Inflation Rate = (Δ Price Level
--------------------Beginning Price Level)
x 100
How to Describe Inflation

Deflation – decrease in general price





20’s recession
30’s depression
Creeping
Galloping
Hyper
Causes of Inflation

Demand-Pull – high demand pulls
prices up and leads to
shortages

Price-Push – wage demands drive prices up or a quick spike
in cost of inputs

Gov’t deficit spending – similar to demand-pull but it’s
only demand from the government

Money supply grows faster than GDP
Consequences of Inflation


The dollar buys less
Spending habits change

Durable goods purchases decrease

Increased speculation

Debtors benefit over creditors