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Chapter 4

Chapter 4 - Introduction to Macroeconomics

4 Pages
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Department
Economics
Course Code
ECN 204
Professor
Thomas Barbiero

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Chapter 4: Introduction to Macroeconomics
4.1 Assessing the Health of the Economy: Performance and Policy
- In assessing the health and development of an economy, macroeconomists focus on:
oReal GDP
Real GDP measures the value of the final good and services produced
within the borders of a given country during a given time period,
typically a year
To calculate real GDP, nominal GDP must first be calculated
Nominal GDP:
The dollar value of all goods and services produced within the
borders of a given country produced within the borders of a
given country using the countrys current prices during the
year the goods and services were produced
Because nominal GDP uses current prices, it can suffer a major
problem: it can increase from one year to the next even if no
increase in output has occurred
oUnemployment
A failure of the economy to fully employ its labour force
Occurs when a person cannot get a job despite being willing to work
and actively seeking work
oInflation
An increase in the overall level of prices
Can cause decreases in the standard of living
Surprise jump in inflation reduced the purchasing power of peoples
savings
4.2 The Miracle of Modern Economic Growth
-Modern economic growth refers to an increase in output per person as compared
with earlier times in with output (but not output per person) increases. In earlier
times, output increased as population increased
-The vast differences in living standards seen today between rich and poor countries
are almost entirely the result of the fact that only some countries have experiences
modern economic growth
4.3 Savings, Investment, and Modern Economic Growth
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Description
Chapter 4: Introduction to Macroeconomics 4.1 Assessing the Health of the Economy: Performance and Policy - In assessing the health and development of an economy, macroeconomists focus on: o Real GDP Real GDP measures the value of the final good and services produced within the borders of a given country during a given time period, typically a year To calculate real GDP, nominal GDP must first be calculated Nominal GDP: • The dollar value of all goods and services produced within the borders of a given country produced within the borders of a given country using the country’s current prices during the year the goods and services were produced • Because nominal GDP uses current prices, it can suffer a major problem: it can increase from one year to the next even if no increase in output has occurred o Unemployment A failure of the economy to fully employ its labour force Occurs when a person cannot get a job despite being willing to work and actively seeking work o Inflation An increase in the overall level of prices Can cause decreases in the standard of living Surprise jump in inflation reduced the purchasing power of people’s savings 4.2 The Miracle of Modern Economic Growth - Modern economic growth refers to an increase in output per person as compared with earlier times in with output (but not output per person) increases. In earlier times, output increased as population increased - The vast differences in living standards seen today between rich and poor countries are almost entirely the result of the fact that only some countries have experiences modern economic growth 4.3 Savings, Investment, and Modern Economic Growth www.notesolution.com - To raise living standards over time an economy must devote at least some fraction of its current output to increasing future output Savings: - The accumulation of funds that results when people in an economy spend less than their incomes during a given time period - Savings fund Investment Investment: - refers to spending for the production and accumulation of capital and additions to inventories - Economists distinguish between financial investment and economic investment - Financial investment refers to the purchasing of financial assets (stocks, bonds, mutual funds) or real assets (houses, land, factories), or building such assets, in the expectation of financial gain - Economic investment has to do with the creation and expansion of business enterprises. Includes only money spent purchasing newly created capital goods Banks and Other Financial Institutions - Households are the principal source of savings, but businesses are the main economic investors - These institutions collect the savings of households, rewarding savers with interest and dividends and sometimes capital gains (increases in asset values) - The banks and other financial institutions then lend the funds to businesses, which inve
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