This is an English summary of chapter from the book: The Essentials of Economics of Krugman & Wells and The Economics of European Integration by Baldwin & Wyplosz.
The chapters included are the required readings from week 1 to 3 of the course European Economics II: Macro 2018/2019 for the midterm....
The nature of macroeconomics
Microeconomics focuses on how decisions are made by individuals and frms and
the consequences of those decisions.
Macroeconomics examines the overall behaviour of the economy, how the
actions of all the individuals and frms in the economy interact to produce a
particular economy wide level of economic performance.
Many thousands or millions of individual actions compound upon one another to
produce an outcome that isn’t simply the sum of those individual actions.
Paradox of thrift: when families and businesses are worried about the possibility
of economic hard times, they prepare by cutting their spending. depresses
economy as consumers spend less and businesses react by laying of worrers.
families and businesses may end up worse of than if they hadn’t tried to act
responsibly by cutting their spending.
Paradox because: virtuous behaviour ends up harming everyone.
When families and businesses are feeling optimistic about the future, they spend
more today. stimulates economy businesses hire more worrers further
expands economy. = profigate behaviour leads to good times for all.
Macroeconomists are concerned with questions about policy, about what the
government can do to mare macroeconomic performance better.
Before 1930s economists tended to regard economy as self-regulating:
problems such as unemployment are resolved without government intervention,
through the worring of the invisible hand.
Great depression changed that. demand for action. Led to major efort on the
part of economists to understand economic slumps and fnd ways to prevent
them.
1936: Keynes: the general theory of employment, interest and money,
transformed macroeconomics.
According to Keynesian economics: economic slumps are caused by
inadequate spending, and they can be mitigated by government intervention.
Government intervention can help depressed economy through monetary policy
and fscal policy.
Monetary policy: uses changes in the quantity of money to alter interest rates
and afect overall spending.
Fiscal policy: uses changes in government spending and taxes to afect overall
spending.
Business cycle
Real gross domestic product (real GDP): measure of the economy’s overall
output.
Recession: periods of economic downturn when output and employment are
falling.
Expansions: periods of economic upturn when output and employment are
rising.
Business cycle: short run alternation between recessions and expansions.
Business cycle peak: point at which the economy turns from expansion to
recession.
Business cycle trough: point at which the economy turns from recession to
expansion.
,Most important efect of recession is its efect on the ability of worrers to fnd
and hold jobs. Most widely used indicator of conditions in the labour marret is
the unemployment rate. Losing jobs and hard to fnd new ones, hurts the
standard of living of many families. Recessions are usually associated with rise
in number of people living below poverty line, increase in number of people who
lose their houses because they can’t aford the mortgage payments.
Long-run economic growth
Long run economic growth: sustained upward trend in the economy’s output
over time. Partly because of growing population and worrforce.
Long run growth per capita: sustained upward trend in output per person. Is the
rey to higher wages and rising standard of living.
Infation and defation
Inflation: rising overall level of prices.
Deflation: falling overall level of prices.
Supply and demand can only explain why a particular good or service becomes
more expensive relative to other goods and services. Can’t explain why the price
has risen over time in spite of the facts that production has become more
eficient and that the good has become substantially cheaper compared to other
goods.
In the short run, movements in infation are closely related to the business cycle.
When economy is depressed and jobs are hard to fnd, infation tends to fall.
When economy is booming, infation tends to rise.
In the long run the overall level of prices is mainly determined by changes in the
money supply: total quantity of assets that can be readily used to mare
purchases.
Infation discourage people from holding onto cash, because cash loses value
over time if the overall price level is rising. That is, the amount of goods and
services you can buy with a given amount of cash falls.
Defation can cause the reverse problem. If price level is falling, cash gains
value over time. The amount of goods and services you can buy with a given
amount of cash increase. Holding on to it can become more attractive than
investing in new factories and other productive assets. This can deepen
recession.
Economists regard price stability: when the overall level of prices changes
slowly or not at all, as a desirable goal.
, International imbalances
Open economy: economy that trades goods and services with other countries.
Trade deficit: when the value of goods and services bought from foreigners is
more than the value of goods and services it sells to them.
Trade surplus: when the value of goods and services bought from foreigners is
less than the value of the goods and services its sells to them.
Chapter 13
Measuring the macroeconomy
The national income and product accounts/national accounts: reep tracr
of the fows of money between diferent sectors of the economy.
Economists use this to measure the overall marret value of the goods and
services the economy produces: gross domestic product: GDP.
Final goods and services: goods and services sold to the fnal/end user.
Intermediate goods and services: goods and services bought form one frm
by another frm that are inputs for production of fnal goods and services.
GDP: total value of all fnal goods and services produced in the economy during
a given year.
One way to calculate GDP is to calculate it directly: survey frms and add up the
total value of their production of fnal goods and services.
Second way: based on total spending on fnal goods and services. Adds
aggregate spending on domestically produced fnal goods and services in the
economy.
Third way: based on total income earned in economy. Sum the total factor
income earned by households from frms in economy.
Measuring GDP as the value of production of fnal goods and services: adding up
value of all fnal goods and services produced in economy excludes the value of
intermediate goods and services. Counting the full value of each producer’s
sales would cause us to count the same items several times and artifcially
infate the calculation of GDP.
To avoid double counting is to count only each producer’s value added: value of
its sales minus the value of its purchases of intermediate goods and services, in
the calculation of GDP.
Measuring GDP as spending on domestically produced fnal goods and services:
adding up aggregate spending on domestically produced fnal goods and
services. GDP can be measured by the fow of funds into frms. Only counting
the value of sales to fnal buyers. ational account do include investment
spending by frms as a part of fnal spending.
Measuring GDP as factor income earned form frms in the economy: add up all
income earned by factors of production form frms in the economy, wages
earned by labour, interest paid to those who lend their savings to frms and
government, the rent earned by those who lease their land or structure to frms,
and dividends.
Valid measure because the money frms earn by selling goods and service must
go somewhere.
Most important use of GDP is as a measure of the size of the economy providing
us a scale against which to measure the economic performance of other years or
to compare the economic performance of other countries.
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