Summary of Key Macroeconomic Concepts

Sep 22, 2024

Introductory Macroeconomics Lecture Summary

Overview

  • Lecture by Jacob Clifford, ACDC Econ
  • Aimed at preparing students for introductory macroeconomics and AP macroeconomics classes
  • Focus on key concepts, not comprehensive teaching
  • Advertisement for the Ultimate Review Pack for further learning

Basic Economic Concepts

Scarcity and Opportunity Cost

  • Scarcity: Unlimited wants vs. limited resources
  • Opportunity Cost: Every decision has a cost

Production Possibilities Curve (PPC)

  • First graph in economics
  • Points on the Curve: Efficient use of resources
  • Points Inside the Curve: Inefficient
  • Points Outside the Curve: Impossible
  • Shapes of the Curve:
    • Straight Line: Constant opportunity cost (similar resources)
    • Concave to Origin: Increasing opportunity cost (dissimilar resources)

Comparative Advantage and Trade

  • Comparative Advantage: Specialization in goods with lower opportunity costs
  • Absolute Advantage: Who produces more (easier to calculate)
  • Terms of Trade: Units of products traded between countries

Economic Systems and Circular Flow Model

  • Overview of different economic systems (capitalism, command, mixed)
  • Circular Flow Model: Interaction of businesses, individuals, and government
    • Product Market: Businesses sell products
    • Resource Market: Individuals sell resources

Key Terminology

  • Transfer Payments: Government payments to individuals (e.g., welfare)
  • Subsidies: Government payments to businesses to increase production
  • Factor Payments: Payments for resources sold by individuals

Unit 1: Demand and Supply

Demand

  • Downward sloping curve: Law of Demand
  • Price Effect: Price increase leads to lower quantity demanded

Supply

  • Upward sloping curve: Law of Supply
  • Price Effect: Price increase leads to higher quantity supplied

Equilibrium

  • Price does not shift the curve; it moves along the curve
  • Shortages: Occur when price is too low
  • Surpluses: Occur when price is too high

Shifts in Demand and Supply

  • Four possibilities: Demand up/down, Supply up/down

Unit 2: Macroeconomic Measures

Economic Goals

  1. Economic Growth
  2. Low Unemployment
  3. Price Stability

Gross Domestic Product (GDP)

  • Definition: Dollar value of all final goods produced in a year
  • GDP per Capita: GDP divided by population
  • Not Included in GDP: Intermediate goods, non-production transactions, non-market transactions
  • Two methods to calculate GDP: Expenditure and Income approach

Unemployment

  • Definition: Percentage of people in labor force actively looking for work
  • Types of Unemployment:
    • Frictional: Between jobs
    • Structural: Skills obsolete
    • Cyclical: Due to recession
  • Natural Rate of Unemployment: Approximately 5% (frictional + structural)

Inflation

  • Definition: Decrease in money's purchasing power
  • Types: Demand-pull, cost-push, and quantity theory of money
  • Consumer Price Index (CPI): Measures price changes over time
  • GDP Deflator: Nominal GDP/Real GDP x 100

Unit 3: Aggregate Supply and Demand

Aggregate Demand (AD)

  • Downward sloping curve:
    • Wealth Effect: Higher prices reduce purchasing power
    • Interest Rate Effect: Higher prices increase interest rates
    • Foreign Trade Effect: Higher prices reduce net exports

Aggregate Supply (AS)

  • Short-run: Upward sloping
  • Long-run: Vertical at full employment GDP
  • Stagflation: Inflation and declining output

Fiscal Policy

  • Change in government spending and taxes
  • Expansionary: Increase spending/cut taxes
  • Contractionary: Decrease spending/increase taxes
  • Spending Multiplier: 1/Marginal Propensity to Save (MPS)

Unit 4: Monetary Policy

Money Supply

  • M1 Money Supply: Currency + demand deposits
  • Fractional Reserve Banking: Banks loan out a portion of deposits
  • Money Market Graph: Shows supply and demand for money

Federal Reserve (FED)

  • Controls money supply and interest rates
  • Shifters of Money Supply: Reserve requirements, discount rate, open market operations

Loanable Funds

  • Demand and supply for loans determines real interest rates
  • Crowding Out: Government borrowing increases interest rates, reducing private investment

Unit 5: International Trade and Foreign Exchange

Balance of Payments

  • Current Account: Trade in goods and services
  • Financial Account: Inflows and outflows of financial assets

Foreign Exchange

  • Appreciation/Depreciation: Value of currency relative to others
  • Net Exports: Affected by currency value changes

Exchange Rate Determinants

  • Taste and preferences, income, inflation, interest rates
  • Floating vs. Fixed Exchange Rates: Allow market forces to set rates vs. government intervention

Conclusion

  • Emphasis on understanding these key concepts for AP tests and final exams
  • Encouragement and best wishes for students preparing for exams.