Introduction to Macroeconomics 1.1.docx

Introduction to Macroeconomics 1.1.docx - Introduction to...

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Introduction to Macroeconomics 1.1 The focus of Macroeconomics is to capture the performance of the whole economy The key variables are: 1. Output 2. Prices 3. Unemployment In the short run AD determines output under assumption prices don’t change (therefore inflation assumed to be zero) o Short run = 18 months output determined by demand for goods o Median run = Up to 5yrs output decided by technology, capital and labour force o Long run = 5yrs+ output determined by education, research and quality of gov Keynes: “In the long run, we are all dead” The Goods Market The goods market is where aggregate level of output produced by economy is determined within o Aggregate output- measured by GDP- includes goods + services o GDP = C + I + G + (X-IM) + Inventory Investment Demand The total demand for goods can be written as Z C + I + G + X – IM o Means equation identity, and only applies under assumption that economy is closed o Therefore Z C + I + G Consumption
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