Ch 23: Intro to Macroeconomics

Financial Investment

The purchase of financial asset (such as stock, bond, or mutual fund) or real asset (such as a house, land or factories) or the building of such assets in the expectation of financial gain.

What are the steps to make international comparisons of living stds?

Three adjustments: 1. Convert each country's GDP from its own currency into U.S. dollars. 2. Divide each country's GDP measured in Dollars by the size of its population. 3. Adjust per capita GDP using the Purchasing Power Parity Method. This last step is necessary b/c some goods (non-traded goods) are typically cheaper in foreign countries.

What did the Industrial Revolution do for MEG?

Ushered in factory production & automation, along with massive increases in research & development so that new and better technologies were constantly being invented.

Determining Demand Shocks

-Do prices adjust quickly or are flexible? Only prices will rise. -Do prices adjust slowly or are sticky? Demand shock will change Output. *Price Stickiness has a significant impact on Demand Shocks

Why are expectations important????

-Expectations have a strong impact on current behavior. -Firms are forced to cope with shocks in the economy.

What resulted from Modern Econ Growth?

-Higher Living Standards. -Large differences in living standards between countries is entirely because Modern Economic Growth happened in some countries and not in others.

Real Gross Domestic Product (GDP)

-Measures the Market value of all final goods and services produced within the borders of a given country using their currency during the year that they were produced. - GDP in a year divided by GDP Price Index for that year (index expressed as a decimal) - GDP adjusted for inflation

Nominal GDP

-Measures the dollar value of all goods and services produced within the borders of a given country using the currency during the year they were produced. -

Sticky Prices (Inflexible Prices)

-Product Prices that remain in place (at least for awhile) even tho supply and demand has changed. -This explains how changed in Demand lead to fluctuations in GDP & Employment (Business Cycle) -NOTE: Price Stickiness can moderate over time. Some prices remain Sticky in the Short Run.

Investment

-Spending for the production and accumulation of capital additions to inventories. -Investment happens when resources are devoted to increasing future output.

Unemployment

-State a person is in if he/she cannot get a job despite willing to work and actively seeking work. -High rates of unemployment suck because they indicate that the nation is not using a large fraction of its most important resource: the talents and skills of its PEOPLE!

Shock

-Sudden, unexpected changes in demand (aggregate demand) or supply (aggregate supply). -Economists believe that most Short Run fluctuations are the result of demand shocks.

Savings

-The accumulation of funds that results when people in an economy spend less (consume less) that their incomes during a given time period. - Savings are generated when current consumption < Current Output.

What important questions do Macroeconomic models clarify about the powers and limits of government and economic policy?

1. Can gov't promote Long Run Economic Growth? 2. Can gov't reduce the severity of recessions by smoothing out Short Run Fluctuations? 3. Are certain gov't policy tolls more effective at mitigating Short Run fluctuations than other gov't policy tools?

Why is Real GDP better for determining measures instead of Nominal GDP?

Because Real GDP measures changes in output and changes in Prices over time, whereas Nominal GDP cannot be used because it may increase without any change (or even a decrease) in real economic activity because it's measured in dollar value.

When and where did Modern Economic Growth begin?

The Industrial Revolution in England in the 1700s.

Expectations

The anticipations of consumers, firms, and other about future econ. conditions.

Inventory

Goods that have been produced, but remain unsold.

How are savings and investment connected?

Houses are principle source of savings, and businesses are the principle source of investment. Financial institutions collect savings from households and lend these funds to businesses.

Inflation

Increase in the overall level of prices

Economic Investment

Investment that only includes money spent purchasing newly created capital goods such as machinery, tools, factories, & warehouses. This is what economists mean when they refer to "investment."

Flexible Prices

Product prices that freely move upward and downward when product demand or supply changes.

Business Cycle

Recurring increases and decreases in the level of econ. activity over periods of years; consists of Peaks, Recessions, Troughs, and expansion phases.

How do you raise living standards?

An economy must devote at least some fraction of its current output to increase future output. And in order to do that, you need to SAVE and INVEST

Recession

A period of declining Real GDP, accompanied by lower real income & higher unemployment