Macroeconomics

• Scarcity


  The idea that we have unlimited wants and limited resources
• Opportunity cost


  The cost of producing something, in terms of what must be given up to produce it
• Production possibilities curve


  1. Shows the different combinations of producing two different goods using all resources

  2. Any point on the curve is efficient

  3. Any point inside the curve is inefficient

  4. Any point outside the curve is impossible given current resources
• Production possibilities curve


  • If it's a straight line, it means constant opportunity costs (similar resources)
  • If it's a bowed outline concave to the origin, it means increasing opportunity costs (resources are not very similar)
• Production possibilities curve can shift


  If there are more/less resources or better technology
• Trade between countries


  Can shift the production possibilities curve, allowing consumption beyond the original curve
• Comparative advantage

  The idea that countries should specialize in producing the product where they have a lower opportunity cost
• Absolute advantage


  Easier concept - just figure out who produces more of a product
• Terms of trade


  How many units of one product should be traded for the other product to benefit both countries
• Economic systems


  • Free market system (capitalism)
  • Command economy
  • Mixed economy
• Circular flow model


  Shows how businesses, individuals, and the government interact through product and resource markets
• Transfer payments


  When the government pays individuals, like welfare, but not to buy anything
• Subsidies


  When the government provides businesses money to produce more
• Factor payments


  Payments made by businesses to individuals for resources (rent, wages, interest, profits)
• Demand


  Downward sloping curve showing the relationship between price and quantity demanded
• Supply


  Upward sloping curve showing the relationship between price and quantity supplied
• Price does not shift the demand or supply curves, it just moves along the curves
• There are only four possible shifts: demand can increase or decrease, supply can increase or decrease
• Macroeconomic goals


  Economic growth, low unemployment, stable prices (low inflation)
• GDP (Gross Domestic Product)


  The dollar value of all final goods produced in a country in a year
• GDP per capita


  GDP divided by population
• Intermediate goods, non-production transactions, and non-market transactions are not included in GDP
• Expenditure approach to calculating GDP

  Adds up all spending on final goods and services
• Income approach to calculating GDP

  Adds up all income earned from producing final goods and services
• Business cycle


  The economy goes through phases of expansion, peak, recession, and trough over time
• Full employment


  The economy is at its potential, with no recessionary or inflationary gaps
• Unemployment rate


  The percentage of the labor force that is unemployed and actively looking for work
• Types of unemployment


  • Frictional (between jobs)
  • Structural (skills obsolete)
  • Cyclical (during recessions)
• The goal is not 0% unemployment, but the natural rate of unemployment (frictional and structural only)
• The unemployment rate has some criticisms, like not counting discouraged workers who have stopped looking for work
• Frictional unemployment


  Unemployment that occurs when people are between jobs, looking for work
• Structural unemployment


  Unemployment that occurs when there is a mismatch between the skills of workers and the skills required for available jobs
• The goal is not to have 0% unemployment, the goal is to have just frictional and structural unemployment
• In the United States, the natural rate of unemployment is around 5%
• Recessionary gap occurs when there is also cyclical unemployment in addition to frictional and structural unemployment
• Discouraged workers


  People who have stopped looking for work and are not counted in the labor force, but are still unemployed
• Part-time workers are counted as fully employed, even if they wish they were working full-time
• The unemployment rate number does not perfectly show what is happening in all situations in the economy
• Inflation


  The idea that money loses its purchasing power, requiring more money to buy the same number of goods as before
• Deflation


  When prices are falling