Macro economics

 

Micro vs. Macro Economics

Micro – focuses in organization

Macro – fiscal & monetary policy

 

Macro economics Micro vs. Macro Economics Shifts of the AD Aggregate Demand (AD) Shifts in AD Determinants of the AD Foreign output Asset values Advances in technology Others Shifts of the AS Determinants of AS Open and closed economies

 

Relavent Issues:

 

inflation

GDP

unemployment

Currency issues 

balance of payments

fiscal policy (tax and spend)

monetary policy (interest rates)

Economic Development 

 

 

Shifts of the AD

AD moves to the left

AD moves to the right

 

Aggregate Demand (AD)

- is the total or aggregated quantity of output that is willingly bought at a given level of price, other things held constant.

It refers to the total amount that different sector in the economy willingly spend in a given period.

 

AD is the desired spending in all product sectors: consumption, private domestic investment, government purchases of goods and services, and net exports.

 

The AD curve slopes downward. This implies that real spending declines as the price level rises, other things held constant.

Real spending declines with a higher price level because of the effect of higher prices on real incomes, real wealth, and the real money supply.

 

Macroeconomic AD curves differ from their microeconomic cousin because aggregate demand relates prices and output for the entire economy while the micro curve analyzes the price and quantity for a single commodity. The AD curve slopes downward primarily because of the money-supply effect, while the micro demand curve slopes down because consumers substitute other goods for the good whose price has risen.

 

 

Shifts in AD

 

Factors that change aggregated demand include:

a) Macroeconomic policies, such as monetary and fiscal policies

b) Exogenous variables, such as foreign economic activity, technological advances, and shifts in asset markets.

 

When these variables change, thy shift the AD curve.

 

Determinants of the AD

 

 

Monetary policy

Increase in money supply lowers interest rates and relaxes credit conditions, including higher levels of investment and consumption of durable goods. In an open economy, monetary policy affects the exchange rate and net exports.

 

Fiscal policy

Increases in government purchases of goods and services directly increases spending; tax reductions or increases in transfers rise disposable income and induce higher consumption. Tax incentives like an investment tax credit can induce higher spending in a particular sector.

 

Exogenous variables

Foreign output

Output growth abroad leads to an increase in net exports.

 

Asset values

Rise in stock market increases household wealth and thereby increases consumption; also, this leads to lower cost of capital and increases business investment.

 

Advances in technology

Technological advances can open up new opportunities for business investment. Important examples have been the railroad, the automobile, and computers.

 

Others

Political events, fee trade agreements, and the end of the cold war promote business and consumer confidence and increase spending on investment and consumer durables.

 

 

 

 

 

Shifts of the AS

AS moves to the left (Supply shocks)

AS moves to the right

 

Aggregated supply - refers to the total quantity of goods and services that the nation’s businesses willingly produce and sell in a given period.

 

Aggregated supply depends upon the price level, the productive capacity of the economy, and the level of cost.

 

Aggregated supply depends on the price level that businesses can charge as well as on the economy’s capacity or potential output. Potential output in turn is determined by the availability of productive inputs (labor and capital) and the managerial and technical efficiency with which those inputs are combined.

 

The AS curve tends to be vertical at potential output in the very long run but may be relatively flat in the short run.

 

Supply shocks – Is a sudden change in production costs or productivity that has a large and unexpected impact upon aggregated supply. As a result of a supply shock, real GDP and the price level change unexpectedly.

 

Determinants of AS

 

 

Inputs

Supplies of capital, labor, and land are the important inputs. Potential output comes when unemployment of labor and other resources is at noninflationary levels. Growth of inputs increases potential output and aggregated supply.

 

Technology and efficiency

Innovation, technological improvement, and increased efficiency increase the level of potential output and raise aggregated supply.

 

Production cost

 

Wages

Lower wages lead to lower production costs; lower costs mean that quantity supplied will be higher at every price level for a given potential output.

 

Import prices

A decline in foreign prices or an appreciation in the exchange rate reduces import prices. This leads to lower production costs and raises aggregated supply.

 

Other input cost

Lower oil prices or less burdensome environmental regulations lowers production costs and thereby raises aggregated supply.

 

 

 

 

 

 

 

 

 

 

Open and closed economies

 

An economy that engages in international trade is called an open economy

A useful measure of openness is the ratio of a country’s exports or imports to its GDP