1
Econ 102
CH 6
Macroeconomics is the study of the behaviour of the economy as a whole, which can be
different from the sum of its parts
Macroeconomics differs from microeconomics in the type of questions it tries to answer.
Macroeconomics also has a strong policy focus: Keynesian economics, which emerged
during the Great Depression, advocates the use of monetary policy and fiscal policy to
fight economic slumps
Keynesian economics= according to Keynesian economics, a depressed economy is the
result of inadequate spending and government intervention can help a depressed economy
through monetary policy and fiscal policy
Monetary policy= changes in the quantity of money in circulation designed to alter interest
rates and affect the level of overall spending
Fiscal policy= changes in government spending and taxes designed to affect overall
spending
Prior to the Great Depression, the economy was thought to be self-regulating.
Self-regulating economy= an economy in which problems such as unemployment are
resolved without government intervention, through the working of the invisible hand, and in
which government attempts to improve the economy’s performance would be ineffective at
best, and would probably make things worse
One key concern of macroeconomics is the business cycle, the short-run alternation
between recessions, periods of falling employment and output, and expansions, periods of
rising employment and output.
Business cycle= the SR alternation between economic downturns, recessions, and
economic upturns, expansions
Recession (contraction)= a downturn in the economy when output and employment are
falling
Expansion (recovery)= a period of economic upturn in which output and employment are
rising; most economic numbers are following their normal upward trend
The point at which expansion turns to recession is a business-cycle peak. The point at
which recession turns to expansion is a business-cycle trough.
Business-cycle peak= the point in time at which the economy shifts from expansion to
recession
,2
Business-cycle trough= the point in time at which the economy shifts from recession to
expansion
Another key area of macroeconomic study is long-run economic growth
Long-run economic growth= the sustained upward trend in the economy’s output over time
Long-run economic growth is the force behind long-term increases in living standards and is
important for financing some economic programs.
- It is especially important for poorer countries.
Inflation= When the prices of most goods and services are rising, so that the overall level of
prices is going up
Deflation= When the overall level of prices is going down
In the short run, inflation and deflation are closely related to the business cycle
In the long run, prices tend to reflect changes in the overall quantity of money
Because both inflation and deflation can cause problems, economists and policy makers
generally aim for price stability.
Price stability= a situation in which the overall cost of living is changing slowly or not at all
Although comparative advantage explains why open economies export some things and
import others, macroeconomic analysis is needed to explain why countries run trade
surpluses or trade deficits.
Open economy= an economy that trades goods and services with other countries
Trade surplus= the surplus that results when the value of goods and services bought from
foreigners is less than the value of the goods and services sold to them
,3
Trade deficit= the deficit that results when the value of the goods and services bought from
foreigners is more than the value of the goods and services sold to consumers abroad
The determinants of the overall balance between exports and imports lie in decisions about
savings and investment spending.
CH 7
Economists keep track of the flows of funds between sectors with the national income and
product accounts, or national accounts.
National income and product accounts/national accounts= a method of calculating and
keeping track of consumer spending, sales of producers, business investment spending,
government purchases, and a variety of other flows of funds between different sectors of the
economy
Demand for goods and services comes from consumer spending, investment spending,
and government purchases of goods and services.
Consumer spending= household spending on goods and services from domestic and
foreign firms
Investment spending= spending on productive physical capital– such as machinery and
construction of buildings– and on changes to inventories
Government purchases of goods and services= total purchases by federal, provincial,
and municipal governments on goods and services
Exports= generate an inflow of funds into the country from the rest of the world
- Goods and services from other countries
Imports= lead to an outflow of funds to the rest of the world.
- Goods and services purchased from other countries
Gross domestic product, or GDP, measures the value of all final goods and services
produced in the economy.
Final goods and services= goods and services sold to the final, or end, user
GDP= the total value of all goods and services produced in the economy during a given
period, usually a year
- It does not include the value of intermediate goods and services, but it does
include net exports (X-IM)
, 4
Intermediate goods and services= goods and services that are inputs for production for
final goods and services
Net export= the difference between the value of exports and the value of imports
- Positive value= country is a net exporter of goods and services
- Negative value= country is a net importer of goods and services
It can be calculated in three ways:
1. Value added approach= adding up total value of all final goods and services
produced
𝑡ℎ𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑟'𝑠 𝑠𝑎𝑙𝑒𝑠 − 𝑡ℎ𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑡𝑠 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 𝑜𝑓 𝑖𝑚𝑚𝑒𝑑𝑖𝑎𝑡𝑒 𝑔𝑜𝑜𝑑𝑠 𝑎𝑛𝑑 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠
2. Aggregate expenditure approach= adding up spending on all domestically
produced goods and services
𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + (𝑋 − 𝐼𝑀)
3. Income approach= adding up total factor income earned by households from firms
in the economy
Factor incomes= types of income earned by factors of production, which includes wages,
interest, rent dividends, and profits
Non-factor payments= the difference between prices paid for final goods and services and
the amount received by factors of production, which include net indirect taxes and capital
depreciation
𝑤𝑎𝑔𝑒𝑠 + 𝑟𝑒𝑛𝑡 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 + 𝑓𝑖𝑟𝑚 𝑝𝑟𝑜𝑓𝑖𝑡𝑠
Econ 102
CH 6
Macroeconomics is the study of the behaviour of the economy as a whole, which can be
different from the sum of its parts
Macroeconomics differs from microeconomics in the type of questions it tries to answer.
Macroeconomics also has a strong policy focus: Keynesian economics, which emerged
during the Great Depression, advocates the use of monetary policy and fiscal policy to
fight economic slumps
Keynesian economics= according to Keynesian economics, a depressed economy is the
result of inadequate spending and government intervention can help a depressed economy
through monetary policy and fiscal policy
Monetary policy= changes in the quantity of money in circulation designed to alter interest
rates and affect the level of overall spending
Fiscal policy= changes in government spending and taxes designed to affect overall
spending
Prior to the Great Depression, the economy was thought to be self-regulating.
Self-regulating economy= an economy in which problems such as unemployment are
resolved without government intervention, through the working of the invisible hand, and in
which government attempts to improve the economy’s performance would be ineffective at
best, and would probably make things worse
One key concern of macroeconomics is the business cycle, the short-run alternation
between recessions, periods of falling employment and output, and expansions, periods of
rising employment and output.
Business cycle= the SR alternation between economic downturns, recessions, and
economic upturns, expansions
Recession (contraction)= a downturn in the economy when output and employment are
falling
Expansion (recovery)= a period of economic upturn in which output and employment are
rising; most economic numbers are following their normal upward trend
The point at which expansion turns to recession is a business-cycle peak. The point at
which recession turns to expansion is a business-cycle trough.
Business-cycle peak= the point in time at which the economy shifts from expansion to
recession
,2
Business-cycle trough= the point in time at which the economy shifts from recession to
expansion
Another key area of macroeconomic study is long-run economic growth
Long-run economic growth= the sustained upward trend in the economy’s output over time
Long-run economic growth is the force behind long-term increases in living standards and is
important for financing some economic programs.
- It is especially important for poorer countries.
Inflation= When the prices of most goods and services are rising, so that the overall level of
prices is going up
Deflation= When the overall level of prices is going down
In the short run, inflation and deflation are closely related to the business cycle
In the long run, prices tend to reflect changes in the overall quantity of money
Because both inflation and deflation can cause problems, economists and policy makers
generally aim for price stability.
Price stability= a situation in which the overall cost of living is changing slowly or not at all
Although comparative advantage explains why open economies export some things and
import others, macroeconomic analysis is needed to explain why countries run trade
surpluses or trade deficits.
Open economy= an economy that trades goods and services with other countries
Trade surplus= the surplus that results when the value of goods and services bought from
foreigners is less than the value of the goods and services sold to them
,3
Trade deficit= the deficit that results when the value of the goods and services bought from
foreigners is more than the value of the goods and services sold to consumers abroad
The determinants of the overall balance between exports and imports lie in decisions about
savings and investment spending.
CH 7
Economists keep track of the flows of funds between sectors with the national income and
product accounts, or national accounts.
National income and product accounts/national accounts= a method of calculating and
keeping track of consumer spending, sales of producers, business investment spending,
government purchases, and a variety of other flows of funds between different sectors of the
economy
Demand for goods and services comes from consumer spending, investment spending,
and government purchases of goods and services.
Consumer spending= household spending on goods and services from domestic and
foreign firms
Investment spending= spending on productive physical capital– such as machinery and
construction of buildings– and on changes to inventories
Government purchases of goods and services= total purchases by federal, provincial,
and municipal governments on goods and services
Exports= generate an inflow of funds into the country from the rest of the world
- Goods and services from other countries
Imports= lead to an outflow of funds to the rest of the world.
- Goods and services purchased from other countries
Gross domestic product, or GDP, measures the value of all final goods and services
produced in the economy.
Final goods and services= goods and services sold to the final, or end, user
GDP= the total value of all goods and services produced in the economy during a given
period, usually a year
- It does not include the value of intermediate goods and services, but it does
include net exports (X-IM)
, 4
Intermediate goods and services= goods and services that are inputs for production for
final goods and services
Net export= the difference between the value of exports and the value of imports
- Positive value= country is a net exporter of goods and services
- Negative value= country is a net importer of goods and services
It can be calculated in three ways:
1. Value added approach= adding up total value of all final goods and services
produced
𝑡ℎ𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑟'𝑠 𝑠𝑎𝑙𝑒𝑠 − 𝑡ℎ𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑡𝑠 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 𝑜𝑓 𝑖𝑚𝑚𝑒𝑑𝑖𝑎𝑡𝑒 𝑔𝑜𝑜𝑑𝑠 𝑎𝑛𝑑 𝑠𝑒𝑟𝑣𝑖𝑐𝑒𝑠
2. Aggregate expenditure approach= adding up spending on all domestically
produced goods and services
𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + (𝑋 − 𝐼𝑀)
3. Income approach= adding up total factor income earned by households from firms
in the economy
Factor incomes= types of income earned by factors of production, which includes wages,
interest, rent dividends, and profits
Non-factor payments= the difference between prices paid for final goods and services and
the amount received by factors of production, which include net indirect taxes and capital
depreciation
𝑤𝑎𝑔𝑒𝑠 + 𝑟𝑒𝑛𝑡 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 + 𝑓𝑖𝑟𝑚 𝑝𝑟𝑜𝑓𝑖𝑡𝑠
