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The great depression

The photograph shows people lined up outside a bank during the Great Depression awaiting their relief checks.
At times, such as when many people are in need of government assistance, it is easy to tell how the economy is doing. This photograph shows people lined up during the Great Depression, waiting for relief checks. At other times, when some are doing well and others are not, it is more difficult to ascertain how the economy of a country is doing. (Credit: modification of work by the U.S. Library of Congress/Wikimedia Commons)

How is the economy doing? how does one tell?

The 1990s were boom years for the U.S. economy. The late 2000s, from 2007 to 2014 were not. What causes the economy to expand or contract? Why do businesses fail when they are making all the right decisions? Why do workers lose their jobs when they are hardworking and productive? Are bad economic times a failure of the market system? Are they a failure of the government? These are all questions of macroeconomics, which we will begin to address in this chapter. We will not be able to answer all of these questions here, but we will start with the basics: How is the economy doing? How can we tell?

The macro economy includes all buying and selling, all production and consumption; everything that goes on in every market in the economy. How can we get a handle on that? The answer begins more than 80 years ago, during the Great Depression. President Franklin D. Roosevelt and his economic advisers knew things were bad—but how could they express and measure just how bad it was? An economist named Simon Kuznets, who later won the Nobel Prize for his work, came up with a way to track what the entire economy is producing. The result—gross domestic product (GDP)—remains our basic measure of macroeconomic activity. In this chapter, you will learn how GDP is constructed, how it is used, and why it is so important.

Introduction to the macroeconomic perspective

In this chapter, you will learn about:

  • Measuring the Size of the Economy: Gross Domestic Product
  • Adjusting Nominal Values to Real Values
  • Tracking Real GDP over Time
  • Comparing GDP among Countries
  • How Well GDP Measures the Well-Being of Society

Macroeconomics focuses on the economy as a whole (or on whole economies as they interact). What causes recessions? What makes unemployment stay high when recessions are supposed to be over? Why do some countries grow faster than others? Why do some countries have higher standards of living than others? These are all questions that macroeconomics addresses. Macroeconomics involves adding up the economic activity of all households and all businesses in all markets to get the overall demand and supply in the economy. However, when we do that, something curious happens. It is not unusual that what results at the macro level is different from the sum of the microeconomic parts. Indeed, what seems sensible from a microeconomic point of view can have unexpected or counterproductive results at the macroeconomic level. Imagine that you are sitting at an event with a large audience, like a live concert or a basketball game. A few people decide that they want a better view, and so they stand up. However, when these people stand up, they block the view for other people, and the others need to stand up as well if they wish to see. Eventually, nearly everyone is standing up, and as a result, no one can see much better than before. The rational decision of some individuals at the micro level—to stand up for a better view—ended up being self-defeating at the macro level. This is not macroeconomics, but it is an apt analogy.

Macroeconomics is a rather massive subject. How are we going to tackle it? [link] illustrates the structure we will use. We will study macroeconomics from three different perspectives:

  1. What are the macroeconomic goals? (Macroeconomics as a discipline does not have goals, but we do have goals for the macro economy.)
  2. What are the frameworks economists can use to analyze the macroeconomy?
  3. Finally, what are the policy tools governments can use to manage the macroeconomy?

Macroeconomic goals, framework, and policies

The illustration shows three boxes. The first is goals, the second is framework, the third is policy tools. Within each box are factors pertaining to the box.
This chart shows what macroeconomics is about. The box on the left indicates a consensus of what are the most important goals for the macro economy, the middle box lists the frameworks economists use to analyze macroeconomic changes (such as inflation or recession), and the box on the right indicates the two tools the federal government uses to influence the macro economy.

Goals

In thinking about the overall health of the macroeconomy, it is useful to consider three primary goals: economic growth, low unemployment, and low inflation.

  • Economic growth ultimately determines the prevailing standard of living in a country. Economic growth is measured by the percentage change in real (inflation-adjusted) gross domestic product. A growth rate of more than 3% is considered good.
  • Unemployment, as measured by the unemployment rate, is the percentage of people in the labor force who do not have a job. When people lack jobs, the economy is wasting a precious resource-labor, and the result is lower goods and services produced. Unemployment, however, is more than a statistic—it represents people’s livelihoods. While measured unemployment is unlikely to ever be zero, a measured unemployment rate of 5% or less is considered low (good).
  • Inflation is a sustained increase in the overall level of prices, and is measured by the consumer price index. If many people face a situation where the prices that they pay for food, shelter, and healthcare are rising much faster than the wages they receive for their labor, there will be widespread unhappiness as their standard of living declines. For that reason, low inflation—an inflation rate of 1–2%—is a major goal.

Frameworks

As you learn in the micro part of this book, principal tools used by economists are theories and models (see Welcome to Economics! for more on this). In microeconomics, we used the theories of supply and demand; in macroeconomics, we use the theories of aggregate demand (AD) and aggregate supply (AS) . This book presents two perspectives on macroeconomics: the Neoclassical perspective and the Keynesian perspective, each of which has its own version of AD and AS. Between the two perspectives, you will obtain a good understanding of what drives the macroeconomy.

Policy tools

National governments have two tools for influencing the macroeconomy. The first is monetary policy, which involves managing the money supply and interest rates. The second is fiscal policy, which involves changes in government spending/purchases and taxes.

Each of the items in [link] will be explained in detail in one or more other chapters. As you learn these things, you will discover that the goals and the policy tools are in the news almost every day.

Questions & Answers

In some cases, barriers to entry may lead to monopoly.
Sung Reply
what is economic
Abdul Reply
what is demand
Chanda
define elasticity of demand
Shalom Reply
difference between microeconomics and microeconomics?
Angel Reply
what is the relationship between production possibility frontier and opportunity cost
Tamali
difference between microeconomics and macroeconomics ?
Angel
what is another word for international trade
Shalom Reply
what is economy society
Shalom Reply
what is law of demand
Sangita Reply
The law of demand states that quantity purchased varies inversely with the price. In other words, the higher the price the lower the demanded quantity.
what monetary policy
Suleiman Reply
what monetary policy ?
Suleiman
if demand and costfuncion of cournot duopolist is, y=20-0.p, y= y1+y2, c1=30+2y1,c2=50+10y2, then find profit function of each firms and their reaction function and also the profit of each firms
Gemeda Reply
what is answer for this question
Gemeda
what is cournot duopoly
Gemeda
It is a model of imperfect competition in which two firms with identical cost functions compete with homogeneous products in a static settling
what is elasticity of deman
Douglas Reply
this is the degree of responsiveness of demand to a little or slight Change in the price of the commodity, price of other commodity and income
Stanley
A comprehensive note on Agriculture
Ezekiel Reply
what is economics
GAME
Economics is a social science that studies human behaviour as a relationship between ends and scarce means which HV alternative uses
Jude
what do we mean price elasticity in other words
Blessed Reply
the degree of responsiveness of s slight change in price of a good at a given time
Jude
what is production possibility frontier
Tamali
adam smith views in economics
Renatus Reply
ok
Amadu
what is a market demand schedule
Blessed Reply
what is budget
Balla
A budget is a plan you make on how you spend your money 💰🤑 either for the month or a year
Blessed
is a scheduled of a consumer, which wisely determind , the commodities and the cost of price in a market
Theophilus
What is demand curve
mohamed Reply
Types of demand curve
mohamed
demand curve is a showing the aggregate of demand whether falling from right to the left in the table above
BULAMA
demand curve is the graphical representation of various quantities of a commodity bought at various prices
Blessed
What is demand
mohamed
demand curve , is a graphical presentation of a demand goods and prices
Theophilus
demand curve is the graphical representation of various quantities of a commodity bought at various prices
Shalom

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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