EC1101E - Macroeconomics - Macroeconomics studies how...

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Macroeconomics studies how short-run fluctuations affect long-run economic growth. This is considered on the market level, rather than focusing on the decisions of households and firms, as is done in microeconomics. Normatively, macroeconomics questions if the government can or should intervene, and exactly how this intervention should take place. This is dependent on interactions among 1. goods, 2. labour, 3. asset markets, and 4. international economies Macroeconomics has three crucial models (1) Very long-run Measures: Growth of an economy's productive capacity Fixed: Ignores recessions, booms, and other fluctuations Variable: Historical accumulation of capital and technology (2) Long-run Measures: Potential output , or the productive capacity of the economy Fixed: Capital and technology, although shocks are anticipated Variable: Supply and demand, viz., prices and quantity Aggregate supply depends on productive capacity of economy (availability of resources) Aggregate demand depends on monetary and fiscal policy, and consumer confidence Interactions between the two determine prices HOWEVER output is determined by aggregate supply alone; consumers can do little to affect productive capacity of the economy Additionally, very high inflation rates are largely due to changes in aggregate demand, since aggregate supply only shifts mildly (3) Short-run Measures: Utilisation of productive capacity
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Fixed: Prices (horizontal aggregate supply curve) Variable: Output , a consequence of fluctuations in aggregate demand National income accounting provides data useful to all three models. Recall the interactions that macroeconomics studies On the national level, this is restricted to households and firms, both of whom affect supply and demand in the product and factor market Households supply labour and capital to the factor market; these are in demand by firms Firms supply goods to the product market; these are demanded by households In return for these labour and capital, firms pay income (or wages) to households At the same time, households make purchases and provide revenue to firms through the product market Supply Paid Demand Pay Households Labour + Capital Income Purchases Revenue Firms Goods Revenue Labour + Capital Wages Because of this circular flow , an economy's output of goods and services is approximately equivalent to the income and revenue generated in product and factor markets The GDP measures the market value of all the final goods and services produced within an economy in any given year This is also a measurement of total expenditure within an economy, viewed from the demand perspective Intermediate goods are excluded, since otherwise double-counting would occur; the price of any product already includes the cost of its components The sale of used goods is also not included, since it involves the transfer of assets rather than an addition to the economy There are three approaches to calculating national income: expenditure, income, and production
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EC1101E - Macroeconomics - Macroeconomics studies how...

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