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Principles of Macroeconomics Midterm
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Lecture notes covering all material leading up to the midterm. Chapters 1,19,20,21
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Midterm NotesChapter 1
What is economics?
Resources (factors of production)
Land, labour, capital
Used to produce goods and services
Goods (tangible)
Services (intangible)
Scarcity
We have limited resources creating scarcity this implies the need for choice
The cost of choice is called the opportunity cost
Different Economic Models
Traditional Economies:
An economy which behaviour is based mostly on traditions
Command Economies:
An economy in which most economic decisions are made by a central planning authority
Free market Economies:
An economic decisions are made by private households and firms (Adam Smiths invisible hand)
Mixed Economies:
An economy in which some economic decisions are made by firms and households and some by
government
Government in the modern mixed economy
Governments intervene to:
Correct market failures (monopolies)
Provide public goods (healthcare, education, crown corporations)
Offset the effects of externalities (pollution)
4 key economic problems
Microeconomics
1. How is it produced and how?
2. What is consumed and by whom?
Macroeconomics (Study of outputs and growth in industries)
1. Why are resources sometimes idle?
2. Is productive capacity growing
, Complexities of modern economies:
The market economy is self-organizing
Adam Smiths model is under the assumption that the market is efficient
Individuals will pursue their own self interest moving the market forward.
The interaction of consumers and producers can be shown by the circular flow diagram
Chapter 19
Macroeconomics:
Focuses on the performance of the economy as a whole
Concerned with long-run growth and short run fluctuations (business cycles)
1776 start of the science of economics with Adam Smith
Key variables:
1. National Product and national income:
Measure of a nations overall level of economic activity is the value of the total production of
goods and services
Total production (output) of goods and services on a national level = total income
National income refers to value of total output ad value of the income claims generated by the
production of that output
Nominal national income
Total nation income measured in current dollars (current dollar national income)
Real national income
Total nation income measured in constant (base period) dollars
Commonly used measure of national income is GDP
2. Employment, Unemployment and the labour force
When the economy is at potential output, there is full employment
The unemployment level will remain the same as labour is used at normal capacity (Natural rate
of unemployment)
Frictional unemployment happens because there is a turnover of people in jobs as well as
constant change in job opportunities
With the economy always adapting there is a difference between the labour force and available
jobs creating structural unemployment
When real GDO is less than Potential GDP it creates cyclical unemployment
Cyclical unemployment is caused when a decline in total spending while following the business
cycle
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