Lecture_1_2s - TOPIC 1 MACROECONOMICS OVERVIEW(PART 1...

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TOPIC 1: MACROECONOMICS OVERVIEW (PART 1)
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C H A P T E R O U T L I N E Introduction to Macroeconomics Macroeconomic Concerns Output Growth Unemployment Inflation and Deflation The Components of the Macroeconomy The Three Market Arenas The Circular Flow Diagram The Role of the Government in the Macroeconomy Gross Domestic Product Calculating GDP The Expenditure Approach The Income Approach Nominal versus Real GDP Calculating Real GDP Calculating the GDP Deflator Limitations of the GDP Concept
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WHAT IS MACROECONOMICS? Macroeconomics is the study of economy as a whole. The goal is to explain the economics changes that affect many households, firms and markets simultaneously. Macroeconomics examines the behaviour of economic aggregates aggregate income, consumption, investment and the overall level of prices. Aggregate is used in macroeconomics to refer total. 3
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4 MACROECONOMICS VS. MICROECONOMICS Microeconomics examines the functioning of individual industries and the behaviour of individual decision- making units (typically firms & households). Microeconomists generally conclude that markets work well. They see prices as flexible , adjusting to maintain equality between quantity supplied and quantity demanded.
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5 MACROECONOMICS VS. MICROECONOMICS (CONT.) Macroeconomists observe that important prices in the economy, e.g. the wage rate – often seem “ sticky ”. Sticky prices – prices that do not always adjust rapidly to maintain equality between Q s & Q d .
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6 THE ROOT OF MACROECONOMICS Great Depression period had spurred a great deal of thinking about macroeconomic issues, especially unemployment. Great Depression – the period of severe economic contraction & high unemployment that began in year 1929 & continued throughout the 1930s.
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7 WHAT HAD HAPPENED? In 1929, 1.5 million people unemployed. By 1933, increased to 13 million people out of a labour force of 51 million, about 25%! By 1933, the U.S. produced about 27% fewer G&S that it had in 1929. In October 1929, stock prices collapsed, billions of $ of personal wealth were lost. Unemployment rate remained above 14% until 1940.
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8 MACROECONOMICS CONCERNS 3 of the major concerns of macroeconomics: 1. Inflation 2. Output growth 3. Unemployment Policy makers would like to have low inflation, high output growth & low unemployment.
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9 MACROECONOMICS CONCERNS (CONT.) Inflation is an increase in the overall price level. Hyperinflation - a period of very rapid increases in the overall price level. Examples of hyperinflation – Bolivia in 1984 & 1985. Deflation – a decrease in the overall price level. Example of deflation – Japan in 1990s.
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10 MACROECONOMICS CONCERNS (CONT.) Output growth reflects the short-term ups & downs (a.k.a. business cycle) in the economy.
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