PRINCIPLES OF MACROECONOMICS
1 PART GDP, GROWTH &
1 INSTABILITY
2 1. Introduction to economics &
Economy
3 2. Measuring domestic output
and national income
4 3. Economic growth
4. Business cycles,
5 unemployment and inflation
1
INTRODUCTION TO
ECONOMICS & ECONOMY
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
.
Introduction to Economics & the Economy
1. Theories, Principles, and Models
1.1 Macroeconomics and Microeconomics
1.2 Production Possibilities Model
2. The Market System and the Circular Flow
2.1 Economic Systems
2.2 The Circular Flow Model
3. Demand, Supply, and Market Equilibrium
Lesson Objectives
• After studying this lesson, students can understand:
• Economics definition
• Microeconomics vs. macroeconomics
• Production possibilities model
• Economic systems & Market system
characteristics
• The circular flow model
• Demand, Supply & market equilibrium
1-4
1. Theories, Principles, and Models
Economics Definition
• Economic wants exceed productive capacity
• Social science concerned with making optimal
choices under conditions of scarcity
• Macroeconomics || Microeconomics
• Positive Economics || Normative Economics
1-5
1.1 Macro vs. Micro
Microeconomics Macroeconomics
• Focuses on the economic • Focuses on aggregate
choices of individual economics (countries,
actors (people, firms). industries, etc.).
• is the study of decisions • Study of the economy
that people and as a whole
businesses make
regarding the allocation
of resources and prices
of goods and services
Important issues in macroeconomics
• Can governments:
• Promote economic growth?
• Reduce severity of recession?
• Is monetary or fiscal policy more effective at mitigating
recession?
• Is there a tradeoff between inflation and unemployment?
• Is anticipated or unanticipated government policy more
effective?
• Why are so many countries poor? What policies might
help them grow out of poverty?
LO2 23-7
Macro Econ measurements
GDP Unemployment & Inflation
- measures the value of - Unemployment:
final goods and services Percentage of labor
- produced within the force that are out of
borders of a given country work + willing to work
- during a period of time and looking for work
• Real GDP: Corrects for - Inflation : Increase in
price changes overall level of prices
• Nominal GDP: Uses
current prices
LO1 23-8
Performance and Policy
US Vietnam
• Output growth • Output growth
• 2.7% per year 1995- • 7.3% per year 1995-
2007 2007
• Unemployment rate • Unemployment rate
• 4.6% in 2007 • 3.5% in 2010
• Inflation rate • Inflation rate
• 2.7% in 2007 • 18.6% in 2011
LO2 23-9
U.S. Real GDP per capita
(2005 dollars)
$50,000
9/11/2001
$40,000
First
oil price
$30,000 Great shock Financial
Depression crisis
$20,000
World Second oil
War I price shock
$10,000
World War II
$0
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
U.S. Inflation Rate
(% per year)
25
World
20 War I Second
First oil price
15 oil price shock
shock
10
-5 Financial
Great crisis
-10
Depression
-15
1910
1920
1930
1940
1950
1960
1980
1990
2000
2010
1900
1970
U.S. Unemployment Rate
(% of labor force)
30
World
War I Great Second
25 First oil price
Depression
oil price shock
shock
20
15 World Oil price
War I Financial
shocks
crisis
10 World
War II
Financial
5 Great crisis
Depression
0
1900
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
1910
1.2 Economic Models
• …are simplified versions of a more complex reality
• irrelevant details are stripped away
• …are used to
• show relationships between variables
• explain the economy’s behavior
• devise policies to improve economic performance
• We will learn different models for studying different
issues (e.g., unemployment, inflation, long-run
growth).
1-13
Economic Models
• For each new model, you should keep track of
• its assumptions
• which variables are endogenous,
which are exogenous
• The values of endogenous variables are
determined in the model
• The values of exogenous variables are
determined outside the model: the model takes
their values & behavior as given.
• the questions it can help us understand, those it
cannot
1-14
Production Possibilities Model
• Illustrate production choices
• Assumptions:
• Full employment
• Fixed resources
• Fixed technology
• Two goods
1-15
Production Possibilities Table
Production Alternatives
Type of Product A B C D E
Pizzas 0 1 2 3 4
(in hundred thousands)
Industrial Robots 10 9 7 4 0
(in thousands)
Plot Points to Create Graph…
1-16
Production Possibilities Curve
14 A’
13
12 B’ Unattainable
11
A
10
Economic
Industrial Robots
B C’
9
8
C
Growth
7
6
D’
5
D
4
3 Now Attainable
2 Attainable
1 E E’
0 1 2 3 4 5 6 7 8 9
Pizzas
1-17
Production Possibilities Curve
14 A’
13
12 B’ Unattainable
11
A
10
Industrial Robots
9
B C’ Law of Increasing
8
C Opportunity Cost
7
6
D’
5
D
Shape of
4
3
the Curve
2 Attainable
1 E E’
0 1 2 3 4 5 6 7 8 9
Pizzas
1-18
Production Possibilities Model
• Opportunity cost: the opportunity cost of a choice
is the value of the best alternative forgone
• Law of Increasing Opportunity Cost: The law of
increasing opportunity costs states that as production
of a product increases, the cost to produce an
additional unit of that product increases as well.
Production Possibilities Curve
14 A’
13
12 B’ Unattainable
11
10
Industrial Robots
C’
9
8
7
6 U
D’
5
Under or
4
Unemployment
3
2
1 E’
0 1 2 3 4 5 6 7 8 9
Pizzas
1-20
The Future Economy
•Consequences of unemployment
•Economic growth
•More resources
•Better quality resources
•Technological advances
1-21
Future Possibilities
Future Future
Goods for the Future
Goods for the Future
Curve Curve
F
Current P Current
Curve Curve
Goods for the Present Goods for the Present
Presentville Futureville
1-22
2. The Market System & the Circular Flow
• An economic system: a particular set of institutional
arrangements and a coordinating mechanism to respond to
the economizing problem.
• The economic system has to determine:
• what goods are produced
• how they are produced
• who gets them
• how to accommodate change,
• and how to promote technological progress.
• Economic systems differ as to
• (1) who owns the factors of production
• (2) the method used to motivate, coordinate, and direct
economic activity.
2-23
Market System Characteristics
• Private property • Technology and capital
• Freedom of enterprise goods
and choice • Specialization
• Self-interest • Division of labor
• Competition • Geographic
specialization
• Markets and prices
• Use of money
• Active, limited
government
2-24
The Command System
• Soviet Union, Eastern Europe, China
• System was a failure
• The coordination problem
• Set output targets for all goods
• The incentive problem
• No adjustments for shortage or surplus
2-25
Circular Flow
2-26
3. Demand, Supply, & Market Equilibrium
A Market
• Interaction between buyers and sellers
• Buyers demand goods
• Sellers supply goods
• Assumptions
• Standardized good
• Competitive market
3-27
Demand & Supply
Demand & quantity Supply & quantity
demanded supplied
• Demand - D: • Supply- S:
refers to how much • represents how much
(quantity) of a product or the market can offer.
service is desired by • Quantity supplied –Qs
buyers • refers to the amount of
• Quantity demanded -QD a certain good
is the amount of a product producers are willing to
people are willing to buy supply when receiving
at a certain price a certain price
Factors affect …
quantity demanded quantity supplied
• Price of the product • Price of the product
• Consumers’ income
(normal goods & inferior
goods) • Price of inputs
• Price of related products
(substitue &
complementary) • Future expectations
• Consumers’ taste (about income or price)
• Future expectations
(about income or price)
Equilibrium
Example of a model:
Supply & demand for new cars
• shows how various events affect price and quantity
of cars
• assumes the market is competitive: each buyer and
seller is too small to affect the market price
Variables
Qd = quantity of cars that buyers demand
Qs = quantity that producers supply
P = price of new cars
Y = aggregate income
Ps = price of steel (an input)
The market for cars: Demand
demand equation: P
Price
Qd = D (P,Y ) of cars
The demand curve
shows the relationship
between quantity D
demanded and price, Q
other things equal. Quantity
of cars
The market for cars: Supply
supply equation: P
Price
Qs = S (P,PS ) of cars S
The supply curve
shows the relationship
between quantity D
supplied and price, Q
other things equal. Quantity
of cars
The market for cars: Equilibrium
P
Price
of cars S
equilibrium
price
D
Q
Quantity
of cars
equilibrium
quantity
The effects of an increase in income
demand equation:
P
Q d = D (P,Y ) Price
of cars S
An increase in income
increases the quantity P2
of cars consumers P1
demand at each price… D2
D1
Q
…which increases Q1 Q2
Quantity
the equilibrium price of cars
and quantity.
The effects of a steel price increase
supply equation:
P S2
Q s = S (P,PS ) Price
of cars S1
An increase in Ps
reduces the quantity of P2
cars producers supply P1
at each price…
D
…which increases the Q
Q2 Q1
market price and Quantity
of cars
reduces the quantity.
endogenous: P, Qd, Qs
exogenous: Y, Ps
LO5 23-37
LO5 23-38
Key Terms
• economic system • Hệ thống kinh tế
• command system • Hệ thống chỉ huy
• market system • Hệ thống thị trường
• private property • Sở hữu tư nhân
• medium of exchange • Phương tiện trao đổi
• circular flow diagram • Sơ đồ vòng chu chuyển
• resource market • Thị trường nguồn lực
• product market • Thị trường sản phẩm
• other-things-equal assumption • Giả sử các điều kiện khác cân
• Macroeconomics bằng
• monetary policy • Kinh tế vĩ mô
• fiscal policy • Chính sách tiền tệ
• Tradeoff • Chính sách tài khóa
• Output growth • Đánh đổi
• Tăng trưởng sản lượng 2-39
Key Terms
• microeconomics • Kinh tế vi mô
• positive economics • Kinh tế học chuẩn tắc
• normative economics • Kinh tế học thực chứng
• factors of production • Nhân tố sản xuất
• consumer goods • Hàng hóa tiêu dùng
• capital goods • Hàng hóa tư bản
• production possibilities curve • Đường năng lực sản xuất
• Real • Thực
• Nominal • Danh nghĩa
• Unemployment • Thất nghiệp
• Inflation • Lạm phát
• overall level of prices • Mức giá chung
• Standard of living • Tiêu chuẩn sống
• Inventory • Tồn kho
• Business cycles
• Chu kỳ kinh doanh 2-40
Key Terms
• Saving • tiết kiệm
• Consumption • tiêu dùng
• Investment • đầu tư
• Financial investment • đầu tư tài chính
• Economic investment • đầu tư kinh tế
• Banks and financial institutions • ngân hàng và tổ chức tài chính
• Uncertain • bất ổn
• Expectation • kỳ vọng
• Demand shock • cú sốc cầu
• Supply shock • cú sốc cung
• flexible prices • giá linh hoạt
• sticky prices • giá cố định
• stable prices • giá ổn định
• Recession • suy giảm
2-41
1. Macro vs. Micro
Indicate whether each statement applies to
micro economics or macroeconomics:
a. Unemployment rate in U.S was 2.4% in January
2014.
b. A U.S. software firm discharged 15 workers last
month and transferred the work to India.
c. An unexpected freeze in central Florida reduced the
citrus crop and caused the price of oranges to rise.
d. U.S. output, adjusted for inflation, grew by 2.1% in
2013.
e. Last week Wells Fargo Bank lowered its interest rate
on business loans by one-half of 1% point.
f. The consumer price index rose by 2.0% in 2012.
2. PRODUCTION POSSIBILITIES: Below is a production
possibilities table for consumer goods (automobiles) and capital
goods (forklifts)
a. Show these data graphically. Upon what specific assumptions is
this production possibilities curve based?
b. If the economy is at point C, what is the cost of one more
automobile? Of one more forklift? Explain how the production
possibilities curve reflects the law of increasing opportunity costs.
c. If the economy characterized by this production possibilities table
and curve were producing 3 automobiles and 20 fork lifts, what
could you conclude about its use of its available resources?
d. What would production at a point outside the production
possibilities curve indicate? What must occur before the economy
can attain such a level of production?
3. PRODUCTION POSSIBILITIES: Explain how
(if at all) each of the following events affects the
location of a country’s production possibilities curve:
a. The quality of education increases.
b. The number of unemployed workers increases.
c. A new technique improves the efficiency of extracting
copper from ore.
d. A devastating earthquake destroys numerous production
facilities
4. Circular flow
• With current technology, suppose a firm is producing 400
loaves of banana bread daily. Also assume that the least-
cost combination of resources in producing those loaves is
5 units of labor, 7 units of land, 2 units of capital, and 1
unit of entrepreneurial ability, selling at prices of $40,
$60, $60, and $20, respectively. If the firm can sell these
400 loaves at $2 per unit, will it continue to produce
banana bread? If this firm’s situation is typical for the
other makers of banana bread, will resources flow to or
away from this bakery good?
5. Supply and Demand model
What effect will each of the following have on the demand for
small automobiles such as the Mini Cooper and Smart car?
a. Small automobiles become more fashionable.
b. The price of large automobiles rises (with the price of small
autos remaining the same).
c. Income declines and small autos are an inferior good.
d. Consumers anticipate that the price of small autos will
greatly come down in the near future.
e. The price of gasoline substantially drops.
6. Supply and Demand model: What effect will
each of the following have on the supply of auto
tires
a) A technological advance in the methods of producing tires.
b) A decline in the number of firms in the tire industry.
c) An increase in the prices of rubber used in the production of tires.
d) The expectation that the equilibrium price of auto tires will be
lower in the future than currently.
e) A decline in the price of the large tires used for semi trucks and
earth-hauling rigs (with no change in the price of auto tires).
f) The levying of a per-unit tax on each auto tire sold.
g) The granting of a 50-cent-per-unit subsidy for each auto tire
produced..
7. Supply and Demand model
Each of the following events would tend to increase or decrease
either the demand for or the supply of electrics games and will
increase or decrease the price of these games. Use the graph to
indicate the effect on demand or supply.
a) It becomes known by consumers that there is going to be a major
sale on these games one month from now.
b) The workers in the electronic games industry receive a $3 an hour
wage increase
c) It is announced by a respected research institute that children who
play electronic games also improve their grades in school.
d) Because of an increase in productivity, the amount of labor
necessary to produce a game decreases.
e) The consumers who play these games believe that a shortage of
the games is developing in the economy
f) The federal government imposes a $5 tax per game on the
manufacturers of the electronic games
