III.
Macroeconomic Analysis III.
Macroeconomic Analysis Measuring Economic Performance Gross Domestic Product (GDP): The primary measure of an economy’s performance, GDP is the total value of all final goods and services produced on a nation’s soil in a year.
Intermediate goods are excluded to avoid double-counting.
GDP Exclusions: GDP does not count non-production transactions like purely financial transactions (stocks), public/private transfer payments (Social Security, gifts), and secondhand sales.
Approaches to GDP: Expenditures Approach: GDP = C + I + G + Xn (Consumption + Gross Investment + Government Spending + Net Exports).
Income Approach: Sums wages, rents, interest, and profits.
Nominal vs.
Real GDP: Nominal GDP is measured in current prices and is unadjusted for inflation.
Real GDP is adjusted for inflation, providing a more accurate measure of output changes over time.
The Business Cycle: The natural fluctuation of GDP, consisting of four phases: peak, contraction (recession is two consecutive quarters of declining GDP), trough, and expansion.
Unemployment: Frictional: Workers temporarily between jobs or searching for new ones.
Structural: Mismatch between workers’ skills and the skills demanded by employers, often due to technological change.
Cyclical: Caused by the contraction phase of the business cycle.
Inflation: A general rise in the price level over a sustained period.
Demand-Pull Inflation: Caused by an increase in aggregate demand that outpaces the economy’s productive capacity.
Cost-Push Inflation: Caused by an increase in the costs of production (e.g., input prices), which shifts the aggregate supply curve left.
Effects of Inflation: Unanticipated inflation hurts fixed-income recipients, savers, and creditors.
It benefits debtors and those with flexible incomes tied to a Cost-of-Living Adjustment (COLA).
National Income and Price Determination Aggregate Demand (AD): The total amount of real output that buyers (households, firms, government, foreigners) collectively desire to purchase at each price level.