TWO BIG MACROECONOMIC QUESTIONS

1. What determines (causes) long-run economic growth?

2. What determines (causes) short-run economic fluctuations?

Why do we have a higher “standard of living” (i.e. “more stuff”) than people in the past and in other parts of the world?

Why do we have good years and bad years?

Why has Q – real GDP – risen over time?

Why is q very uneven?

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Economics – the social science that studies mankind’s attempts to deal with ….

Supply is what we are able to have.

DEMAND SUPPLY

Demand = (is measured by) how much we will spend.

… we will always want more than we can have

… the allocation of scarce resources to satisfy alternative wants.

… how to match Supply -- the scarce resources, and Demand – the wants

The wants the available resources

PRINCIPLE 0

Supply-- the ability to produce-- the quantity, quality and prices of the factors of production

Supply determines the long run;Demand determines the short run.

Demand-- the willingness to spend-- total spending

Long-run growth can be said to be the result of:-- our ability to produce goods and services.-- the supply side of the economy.-- the quantity, quality and prices of our factors of production

Factors of Production ---------- Factor CostsLabor-------------------------------- WagesLand -------------------------------- RentCapital ------------------------------ InterestEntrepreneurship------------------- Profit(or “risk” or “human capital”)

The Factor Costs can also be described as the sources of Income

Factors of Production ---------- Factor CostsLabor-------------------------------- WagesLand --------------------------------- RentCredit-------------------------------- InterestCapital/Entrepreneurship---------- Profit

Another list

Raw MaterialsEnergyKnowledge

Another list

Learn the list on the previous page!

Short-run fluctuations are the result of demand changes; of spending changes.

Comments:1. some economists (a minority) disagree.2. The recessions of the 1970s are an exception.3. We measure spending (and production) by the most important economic statistic – Gross Domestic Product (GDP), “the dollar value of the goods and services produced in an economy during some time period.” GDP is the sum of spending by the sectors.

4. Real GDP is (nominal) GDP corrected for the effect of inflation. Real GDP is intended to measure “production” or “output” not just “spending.”

Sector ----------------------------- SpendingHousehold------------------------- Consumption (Cd)*Business --------------------------- Investment (I)Government ----------------------- Gov’t Purchases (G)The Rest of the World------------ Exports (E)(the Foreign Sector)

Who does the spending? We classify spending by breaking the economy into four sectors and the four types of spending.

* Cd stands for “domestic Consumption, spending on US-produced goods & services

We will summarize this with an important equation:X = Cd + E + I + G X (Xpenditures) stands for total spending = nominal GDP

Another important list of four is the four uses of income

Income is used for:Cd – domestic Consumption F – Imports (think “Fimports”) S – Savings T – Taxes

This is summarized by the equation:Y = Cd + E + S + T where Y stands for total National Income (think Yncome”)

The “job” of the economy is to balance DEMAND (what we want, expressed in our willingness to spend) with SUPPLY (what we are able to produce, determined by the available factors of production).

LISTS OF FOUR A summary

1a. The Factors of Production (FOPs)

1b. Payments to the FOPs =Wages + Rent + Interest + Profit = Sources of Income

2a. The SectorsHouseholds, Business, Government, Foreign

2b. Spending by the sectors X = Cd + E + I + G

3. The Uses of Income Y = Cd + F + S + T