Macroeconomics
• NOT prices – general price level or average price level
• NOT demand of an individual consumer – total demand for ALL goods and services in the
economy
• NOT supply of individual firms or industries – total output /supply of goods and services in the
economy
• Created to MEASURE the economy and to solve its problems
Total = Aggregate (aggregate demand and supply)
• AGGREGATE DEMAND and AGGREGATE SUPPLY of the economy are in constant change
and this causes variations in economic activity (recessions/ economic slow-down are
replaced by economic growth).
This generates changes in business cycles.
Nominal values = values measured by prices
Real Values = consider changes in prices over time (inflation)
, The Business Cycle
Business cycles = periodic changes in GDP (short-term fluctuations in the growth of real output)
- Are regular and predictable >> recessions are succeeded by economic growth
Recovery (or Expansion) = when GDP increases (expands)
- Employment of factors of productions increases and APL (Avg Price Level) increase as well
Boom/Peak = the peak of recovery period
- Lowest level of unemployment
- Highest level of inflation
- The economy is overheated
Recession (or Contraction) = 2 consecutive quarters of negative GDP growth (contraction)
- Rise in unemployment of factors of production
- However fall in APL
Trough = the lowest point of recession
- Highest level of unemployment
- GDP at its lowest point
OUTPUT GAPS
- Long-term growth is an upward trend (short-term
fluctuations are removed)
Output/Potential GDP = how much the economy
can potentially produce when all factors of
production are employed
• Negative output gap >> the economy
produces below potential output
(recession/contraction)
• Positive output gap >> the economy
produces above potential output (expansion)
Potential output = how much the economy can produce with all factors of production are fully
employed
Circular Income Flow
• NOT prices – general price level or average price level
• NOT demand of an individual consumer – total demand for ALL goods and services in the
economy
• NOT supply of individual firms or industries – total output /supply of goods and services in the
economy
• Created to MEASURE the economy and to solve its problems
Total = Aggregate (aggregate demand and supply)
• AGGREGATE DEMAND and AGGREGATE SUPPLY of the economy are in constant change
and this causes variations in economic activity (recessions/ economic slow-down are
replaced by economic growth).
This generates changes in business cycles.
Nominal values = values measured by prices
Real Values = consider changes in prices over time (inflation)
, The Business Cycle
Business cycles = periodic changes in GDP (short-term fluctuations in the growth of real output)
- Are regular and predictable >> recessions are succeeded by economic growth
Recovery (or Expansion) = when GDP increases (expands)
- Employment of factors of productions increases and APL (Avg Price Level) increase as well
Boom/Peak = the peak of recovery period
- Lowest level of unemployment
- Highest level of inflation
- The economy is overheated
Recession (or Contraction) = 2 consecutive quarters of negative GDP growth (contraction)
- Rise in unemployment of factors of production
- However fall in APL
Trough = the lowest point of recession
- Highest level of unemployment
- GDP at its lowest point
OUTPUT GAPS
- Long-term growth is an upward trend (short-term
fluctuations are removed)
Output/Potential GDP = how much the economy
can potentially produce when all factors of
production are employed
• Negative output gap >> the economy
produces below potential output
(recession/contraction)
• Positive output gap >> the economy
produces above potential output (expansion)
Potential output = how much the economy can produce with all factors of production are fully
employed
Circular Income Flow
