Chapter 21 : An Overview of Macroeconomics
Introduction
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Microeconomics study the behavior of individual units of the
economy.
Macroeconomics study the behavior of aggregate (means total)
economic variables.
The Origin of Macroeconomics
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The “Invisible Hand” is a term given by Adam Smith to the
market mechanism
During the great depression, many people were unemployed so
economists had to revise their thinking.
Classical Economics
- Classical economics predicted that unemployment would cause
wages to fall until the unemployed workers were hired
Keynesiam Macroeconomics
- Keynes introduced the idea that government spending and taxes
could be used to control economic activity
- Fiscal Policy involves changes in government spending And
taxation designed to promote economic stability.
Developments Since the 1970’s
Keynesiam Economics – Economics based on the premise that total
output is determined by total spending. The demand side of the
economy is emphasized.
-
Stagflation is high inflation and high unemployment at the same
time.
The Supply Side is the production side of the economy.
There are two leading schools of economic thought:
- New Classical Economists emphasize rapid macroeconomic
adjustment
- New Keynesians emphasize why the labor market does not clear.
Great Macroeconomic Questions
-
Great macroeconomic questions are unemployment, inflation,
the business cycle, the international economy, and economic
growth.
Unemployment
- Unemployment is a situation in which people are unable to find
jobs.
Inflation
- Inflation is a sustained increase in the average level of prices
over time.
Aggregate Output
- The Aggregate Output is a measure of the total production of
goods and services.
- Business Cycles are alternative periods of ups and downs in
economic activity (total output)
- Economists hoped to fine tune the economy, or control some of
the ups and downs.
International Economy
- Over the past several years, the economies of the world have
become more interdependent then ever. Trading blocs are being
formed and countries are looking for markets outside their own
borders
Economic Growth
- Economic growth requires not only that we use our resources
efficiently, but also that we increase our productive capacity.
- Economic Growth is an increase in per capita output.
The Importance of Macroeconomics
-
Macroeconomic policy is when deliberate action is taken by the
government to achieve certain economic objectives.
Both Governments and businesses use macroeconomics in their
decision-making
The central bank implements monetary policy (manipulation of
the quantity of money and credit) in order to achieve stability.
Governments implement incomes policies (direct controls on
wages and prices) to attempt to curd inflation.
Macroeconomic Market Interaction
Households, firms, and government interact economically through:
- The Product Market where goods and services are traded.
- The Labor Market where labor services are exchanged for wages.
- The Financial Market where funds are lent and borrowed.
-
The three markets are interrelated
Corporations issue bonds and stocks in order to raise funds.
The government borrows money by selling bonds and treasury
bills.
The Circular Flow
The circular flow is the flow of income, resources, goods, and services
between economic sectors.
-
Investors receive dividends and/or interest when they lend
money in the financial market.
Transfer payments do not represent a reward for productive
services.
The circular flow shows that the spending of one sector becomes
a receipt by some other sector.
The Behaviour of the Canadian Economy
Growth of Output
- The Gross Domestic Product (GDP) is the value of all the goods
and services produced in a country during a period of time.
The Unemployment Rate
- The Canadian economy has experienced inflationary and
recessionary periods, but it has performed reasonably well.
- The Unemployment Rate is the number of people unemployed
expressed as a percentage of the labor force.
The Behaviour of the Price Level
- Price Indexes show changes in prices over a period of time.