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Lecture 1

ECON 102 Lecture Notes - Lecture 1: Economy 7, Business Cycle, Price LevelPremium


Department
Economics
Course Code
ECON 102
Professor
Robert Gateman
Lecture
1

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ECON 102 Lecture 1 What Macroeconomics is all about
1. Introduction
a. Bottom up model
i. Microeconomic foundation
1. Analyze the choices of each optimizing agent
b. Top Down Model
i. Macroeconomic aggregation
1. Analyze the behaviour of the entire group
c. Our course follows the top down approach
i. Macroeconomics
1. “The big picture” Telescope v. microscope
2. Concerned with aggregates and how G policy affects them
3. P and Q from micro become the General Price Level P and
national income or national product Y
4. Major issues are business cycles and growth of Y
5. Business cycle is FLUCTUATION of Y in medium term
6. Growth is the TREND in Y in long term
7. The study of fiscal and monetary policy
ii. Outline of notes for the 5 YUPie Variables:
1. What is it?
2. Historical experience?
3. Why it matters?
2. Key macroeconomic variables
a. Y - output and income and growth rate
i. The value of production belongs to someone
ii. By definition, national product = national income
1. Output generates Income
iii. National income: What is it?
1. Final - not “intermediate goods”; no “double counting”. = not for
resale
2. Market value - supply and demand determined
3. Of all goods and services
4. Produced in the economy
5. During a defined period of time (usually fiscal year)
6. National Income, Y, is the target at which we aim the economy
7. We use G monetary and fiscal policy to aim the arrow
8. Unemployment, U, is inversely related to growth in Y
9. Inflation, P, is directly related to growth in Y
10. Y is the primary target; U and P secondary; i and e tertiary
- Circular flow diagram
- Add: bank, government, and world
- Four circular flows
- Real flows
- Money flows
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- Output -expenditure flow
- Factor - income flow
- GDP (Y) = GDP (E) - Output generates Income
- Four economies
- Spendthrift economy
- Frugal Economy
- Governed economy
- Open economy
- GDP (Y) = W+R+i+P in Cincinnati
= flow of income
= return to factors of production
W
Wages and salaries
Return on N
R
Economic rent
Return on L
i
interest
Return on K
P
profits
Return on T, E
- GDP (E) = C+I+G+netX
= flow of expenditures
= return to flow of output
C
Consumption
Household
I
Investment
Firm
G
Gov’t Expenditure
Government
netX=
(X-M)
Exports - Imports
World
Nominal V. Real Values
- Nominal = Actual = current = money = ΔP and/or ΔQ
- Real = Constant dollar = only ΔQ, holding P constant to base year values
- Real = Nominal/Price
- Y is always Real unless otherwise stated
Output gaps
- Potential National Income = Y* = Y(FE) = maximum real output if all inputs
are used at their normal utilization rate
- Output Gap = Y - Y*
- Recessionary Gap = Y - Y* negative = Y < Y* = economy at less than
potential
- Inflationary Gap = Y-Y* positive = Y>Y* = economy at more than potential
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