ch 4-8 notes - Economics 2006, Lecture Notes, Part 1,...

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Economics 2006, Lecture Notes, Part 1, Chapters 4-8, Hall-Lieberman 1/22/08 Chapter 4: What Macroeconomics Tries to Explain Macroeconomics is concerned with the aggregate economy. Variables of concern: (1)Aggregate (total) output, as measured by real Gross Domestic Product (GDP); (2)Aggregate employment (or unemployment); (3)Movements in dollar prices across the entire economy, as measured by the Consumer Price Index (the CPI), or by the GDP price index (a.k.a. the GDP deflator); (4)Interest rates. Consider Figure 1 from Chapter 4 which shows GDP from the 1930 to 2002. Two things to note: (1)the long run upward trend, and (2)the variations (deviations) from trend. 2 The long run trend represents long run economic growth. We will use the Classical Long Run Model to explain this trend. The deviations from trend represent business cycle activity . The Business Cycle : periodic expansions and contractions in aggregate economic activity. We will use the Keynesian Model to explain short-run fluctuations in output. As we will see, fluctuations in output are correlated with fluctuations in unemployment and aggregate prices. (See Figure 2 , a graph of unemployment and Figure 4 , a graph of inflation (% changes in aggregate prices).) We wish to xplain how these macroeconomic variables are determined. This knowledge will help us to see how a society can achieve broadly accepted economic goals: 3 Policy goals: (1)Economic Growth: Changes in economic growth can have large impacts on output over time. See problems 1 and 3 at the end of Chapter 4. (2)Full employment: Unemployment is costly so achieving full employment is a desirable goal. (3)A stable average price level:
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Inflation does not lower aggregate real income, but does redistribute income, frequently in unpredictable ways. Inflation makes it difficult for economic agents (firms, and households) to plan for the future. 4 Chapter 5: Production, Income, and Employment Measuring Aggregate Output Gross Domestic Output (GDP): A nation’s gross domestic product (GDP) is the total value of all final goods and services produced for the marketplace during a given period within the nation’s borders. Note the following: (1)By focusing on final goods double counting is avoided. See Figure 1 . (2)In general only goods and services produced for the marketplace count in any period’s GDP. Home production of goods and services, for example, does not count. (3) Within a given period means, for example, that 2004 GDP measures only those goods actually produced in 2004. (4) Within the nation’s borders means that goods produced within the borders of the US by foreigners count in GDP. (Note: Gross National Product (GNP) measures output produced by citizens of a given country.) 5 There are three approaches to measuring GDP: (1)Expenditure Approach: GDP = C + I + G + NX. (2)Value-Added Approach:
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This note was uploaded on 04/02/2008 for the course ECON 2006 taught by Professor Rdcothren during the Spring '08 term at Virginia Tech.

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ch 4-8 notes - Economics 2006, Lecture Notes, Part 1,...

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