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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

opportunity cost means the lose of other alternatives when the alternative is chosen
saad Reply
is the benefits that you loose by not selecting a certain alternative.
EDWINY
individual wants maybe unlimited, but means to satisfy them are limited there one has to forgo some alternative in order to acquire other alternative and it must according priority, that is when scale of preference set in for individuals to make choice
Rhaiymornd
hello everyone
Aliyu
Next best alternative forgiven
Shoaib
demand is the amount of goods and services that consumer is willing and able to purchase at a particular prices over given period of time
Rhaiymornd Reply
yep
Abraham
what's demand?
labi Reply
What customers want the most...
Abraham
not only what customers wants, want is just mere desire but demand is backed by purchasing power, ability and willingness
Rhaiymornd
thanks
Abraham
What's opportunity cost?
Abraham
what are the differences between demand and supply
Zakariyah Reply
who is called lender of the last resort
Divyanshu Reply
Hi
Linda
hlw
Karishma
Central bank
Majeed
hy
Karishma
Hello
Majeed
hy
Karishma
How are you
Majeed
Am gud
Linda
fine
Karishma
Am gud
Linda
hello
Chandra
Well! what's going on
Majeed
r u study in economics
Karishma
anybody there?
Chandra
r u study in economics
Karishma
the central bank
Sessay
Has completed already
Majeed
hey
neha
yes
Abigail
Yesss
Majeed
ok
Karishma
hey
Doctor
yh
Abigail
more questions
Sessay
how ar you
Doctor
split the price effect into income effect and substitution effect
Karishma
fine and u
Abigail
Hi
Godwin
hi
Hey, I am new here. Hope, discussion on Economics will clear our concepts more.
yasir
yes
Abigail
do u speak hindi or english
Karishma
how to consumer equlibrium through ic
Karishma
consumer equilibrium demand equals supply
Kenneth
the consumer is in equilibrium when the indifference curve is tangential to the budget line. or when the BL and IC intersect
Sessay
reasons indifference curve slopes downwards?
Kenneth
fine Abby any good,
Doctor
ur lost
Doctor
hey. im new year. economics teacher how we can discuss some thing interesting.
EDWINY
which one
Doctor
what do u understand the concept of poverty cycle.
EDWINY
hey
Ebong
I'm New here
Ebong
hi
ian
just new here guy's and also an Economics fresher of Kogi State University Anyigba
nelson
wxup
Ayegba
who can tell the laboratory of economic?
Amara
, Dennis Weissman Associates, LLC Laboratory Economics is the monthly business newsletter that gets behind the headlines and press releases.
Ayegba
sooo teah me what an LLC
Emmanuel
what's the topic
Adamsvictor Reply
economic systems
gracious
hello
Antonio
market
aba
hello where can I find the diagrams
Manu
Hello I am totally out ,I am not understanding why we are here. can someone help me out?
Amara
why Economic is not a pure science can someone help me out
Mohamed
because economics like science put forth a some hypotheses and then do experiments to prove them
Anwesh
but these experiments are not completely controlled
Anwesh
Hello
Comfort
hey
suraj
hi people can you help me out on "demand and supply"
Milton
Am not understanding can someone enlighten me pls
Bertilla
hi people can you help me out on "demand and supply"
Sessay
hello. if Mr.Patrick's income is #900.00 while that of Mr.Shodawe is #1300.00 if Mr.Patrick and Shodowe pay #90.00 and #130.00 as taxes,the tax system is?
Benjamin
I need the answer please
Benjamin
regressive tax system
shaikh
OK thanks
Benjamin
Isn't this called proportional tax rate because the rate stays the same - 10%? Tell me if I'm wrong
Ioan
Supply is perfectly elastic and demand increases.
kishore Reply
whose there
Waseem
show the demand curve
Hameed Reply
it slopes downward from left to right
Ama
how resources are allocated in a free economy
Charlotte Reply
explain how discriminating Monopoly increase profits
Charlotte
factors responsible for the emergence of monopoly situation
adelakun Reply
total output produced by a country over a given period of time .... can someone give me the term plz
TMM Reply
GDP
Anjorin
thaks man
TMM
Woman. 👍👍
Anjorin
gross domestic products
janet
GDP
Bertilla
GDP
Prof
GDP
Bertilla
gross domestic product
gross domestic product
GDp
Mohamed
gdp
agboola
what is recession pertaining to GDP
Prince
what is recession pertaining to GDP
Prince
what is recession
Prince
law of demand and supply
Zakariyah
All thing been equal
Temple
no i think recession is pertaining to GNP
owolabi
gross national production
Abraham
what is embago
Peter
all things being equal
Raphael
embargo restriction on trade by government of a country
owolabi
an official ban on trade or other commercial activity with a particular country.
Ayegba
Embargo.....an order by a common carrier or publ regulatory agency prohibiting or restric freight transportation
Ayegba
it's a complete band on important n export
Bertilla
who is Really Good in Mathematics. put me Through. Let Do Group Reading; am Preparing to Write Jamb this Year.
Andrew
Hi. C+I+G+x-m
Shoaib
Gdp aggregate demand are bit same
Shoaib
Dpd = c+i+g+(x-m) is aggregate demand
Shoaib
Gdp=c+i+g+(x-m) is aggregate demand
Shoaib
GDP= c+i+s+g+(x-m)
Saboor
Topic ended waiting for next topic
Shoaib
What is Terms of Trade (TOT)?
DADA
At what point a Terms of Trade can be favorable?
DADA
What is long run supply curve of a industry
Rashika Reply
enlightened
Ernest
all on board am here
Ernest Reply
am late I missed alot
Ernest
A mixed economy is the best type of an economy.Discuss
Tawanda Reply
Agreed Mixed economics is d combination of both capitalist and socialist economy, it give room for both individual and government to make decisions whereby giving room to a rapid development of d economy.
Anjorin
?
Andres
agreed
Ernest
Explain more about the Macroeconomics
Lizzy Reply
what is macroeconomic
Ekye
macro economics has to do with the of study economics at national level i.e the study of national economy as a whole. While micro is concerned with the study at individual, group or company level.
Andres
Andres explain
Ernest
ok
Ernest
what topic is capitalist economy based on
ADIBE
pls am not really understanding
Bertilla
pls can u explain more
Bertilla

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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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