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chapter 19

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Michael Ho

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Chapter 19: what macroeconomics is all about? Macroeconomics: the study of the determination of economic aggregates, such as total output, total employment, the price level, and the real economic growth. These aggregates results from activities in many different markets and from the command behaviour of millions of different decisions maker. Studying aggregates may cause us to miss important differences but it focuses on retention on some important issue for the economy as a whole Moments in economic aggregates matter for most individuals because they influence the help of the industries in which all worked and the prices of the goods that they purchase. Macroeconomics considered two different aspects of the economy: one is economists think about the short-run behaviour of macroeconomic variables such as output, employment, and inflation, and about how government policy can influence these variables. This concerns among other things, the study of business cycles. Second is economists also examine the long-run behavior of the same variables specially the long-run have of aggregate output. This is a study of economic growth and is concerned with explaining how investment and technological change affect our material living standards over long period of time A full understanding of macroeconomics acquires understanding the nature of short-run fluctuations as well as the nature of the long-run economic growth. There are two different streams of research in macroeconomics. One is researchers takes an approach to macroeconomics that is based explicitly on microeconomic foundation. These economists to build models of the economy and that are populated by workers, consumers, and firms, all of whom are assumed to be optimizers. Having explicitly modeled these agents optimization problems, and their resulting choices of work effort, consumption, an investment, economist proceed to aggregate the choices and these agents to arrive at the models value for and the employment, consumption, output, and so on. The second group of researchers builds macroeconomic models based only implicitly on these same microeconomics foundations. This economist construct their models by using aggregate relationship for consumption, investment, and employment, each of which has been subjected to extensive empirical testing and is assumed to represent the behavior of the many firms and consumers in this economy 19.1 key macroeconomic variables Output and income The most comprehensive measure of a nations overall level of economic activity is fair value of its total production of goods and services called national product. One of the most important ideas an economics is that the production of output generates income For the nation as a whole, all of the economic value that is produced ultimately belongs to someone in the form of an income me on that value. The term national income to refer to both the value of total output and the value of the income claims generated by the production of the output Aggregating total output: To measure total output, quantities of many different goods are aggregated. To construct such totals, we add up the values of the different products We begin by multiplying the number of units of each good produced by the price at which each unit sold. This yields a dollar value of production for each good, then based on these values across all the different goods produced in the economy to give us the quantity of total output measured in dollars Nominal national income: the total national income measured in current dollars. Also called current dollar national income A change in this measure can be caused by a change in either the physical quantities are the price on which it is based. Real national income: national income measured in constant (base period) dollars. It changes only when quantities change. It is also called constant-dollar national income Well national income is denoted by the symbol Y and real national income tells us the value of current output measured at constant price, the sum of the quantities of valued at prices that prevailed in the base period. Since prices are held constant mine computing meal national income, changes in their meal national income from one year to another reflects only changes in quantities. Comparing real national incomes of different years therefore provides a measure of the change in real output that has occurred during the intervening period. National income: recent history One of the most commonly used to measure of national income is called gross domestic product (GDP), this can be measured in either real or nominal term. Business cycle: fluctuations of national income around its trend value that follows a more or less wave like common A single cycle will usually include an interval of quickly growing output, followed by an interval of slowly growing or even falling output. The entire cycle may last for several years. No two business cycles are exactly the same, variation occur in duration and magnitude. Some expansions are long and drawn out. Other comes to an and before high employment and industrial capacity are reached Potential output and the output gap: National output with a sense of what the economy actually produces. An important related concept is potential output, which measures what the economy would produce its all
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