Chapter 19 - what macroeconomics is all about
Macroeconomics studies how the economy behaves in a broad outline. It considers economic aggregates,
like total output, total investment, total exports, price level, etc., and how gov’t policies inﬂuence these
aggregates. Gives the big picture, doesn’t dwell on little details. It is important because it a!ects the
‘health’ of industries in which people work, and the prices of goods that we purchase.
Considers 2 di!erent aspects of the economy:
Short-run ﬂuctuations of macroeconomic variables ➞ like output, employment, inﬂation, and how gov’t
policy can inﬂuence these variables. Concerns study of business cycles.
Long-run trends of the same variables ➞ concerned with explaining how investment and technological
change a!ects our material living standard in the long-run.
Key macroeconomic variables
National product ➞ the value of a nation’s total production of goods and services. All wealth produced
belongs to someone, i.e. A ﬁrm produces $100 of ice cream, that $100 ultimately becomes income for the
ﬁrm’s workers and bosses. Thus national product is equal to national income.
National income/GDP ➞ the ﬁnal market value of all goods and services produced in the economy during
a deﬁned period of time (usually from April - April). Final ➞ not double counted. Market Value ➞ what the
market will pay for it. Goods and services ➞ material goods and services like teachers teaching. Produced
in the economy ➞ must be produced in the ﬁscal year of its GDP.
Aggregating (measuring) total output
Multiplies the # of units of each good produced by the price at which each unit is sold to come up with a
dollar value of production for each good.
Adding up these values for all the di!erent goods produced gives the current dollar value of national
output (equal to total national income), aka nominal national income (NNI). NNI is a!ected by change in
quantity or price that the unit is sold for.
Real national income ➞ Measures value of current output in constant dollars using a set of prices from a
base period (speciﬁc time period used as a benchmark in measuring data). The price is held constant so
that changes in RNI from year to year reﬂect only changes in quantity. Used to ﬁgure out what percentage
of NNI change was due to quantity change.
As prices increases, the demand for money, Md increases (moves to the right) b/c you need more money
to buy the same things. Where Md = Ms is the new interest rate. Increase Md means people sell bonds to
acquire $, bidding down the price of bonds (implying a higher bond-yield, or higher i-rate). Eventually i-
rate rises to a point where ppl no longer want to sell bonds.
Increase in Ms WHEN YOU’RE ALREADY AT POTENTIAL, causes i-rates to go down, investment goes up, AE
goes up, causes AD to move right, entering an inﬂationary gap.
When you have an inﬂationary gap Y>Y*, what will happen to the SRAS? SRAS will move left, b/c workers
are being paid overtime (since they’re producing above normal), implies excessive demand for labour,
which increases wages, unit costs increase, SRAS shifts left, back to Y* at a higher price level ➞ chain back
September 2010 Econ 102 Jess Giang