Introductory Macroeconomics - Overview

Lecture Introduction

• By: Jacob Clifford
• Purpose: Quick review for introductory macroeconomics/AP macroeconomics class, helpful before AP test or final exam.
• Ultimate Review Packet: Practice questions and hidden videos for detailed learning.

Basic Economic Concepts

Scarcity and Opportunity Costs

• Scarcity: Unlimited wants vs. limited resources.
• Opportunity Costs: Everything has a cost; producing one good means giving up another.

Production Possibilities Curve (PPC)

• Graph: Shows various combinations of two goods using all resources.
• Efficiency: On the curve = efficient, inside = inefficient, outside = impossible.
• Shapes:
  • Straight Line: Constant opportunity costs, similar resources.
  • Bow Shaped: Increasing opportunity costs, dissimilar resources.
• Shifts in PPC: Due to changes in resources, technology, or trade.

Comparative Advantage and Trade

• Comparative Advantage: Specialize in goods with lower opportunity costs.
• Absolute Advantage: Produce more of a good with the same resources.
• Terms of Trade: Mutually beneficial trade agreements.

Economic Systems

• Types: Free market (capitalism), command economy, mixed economy.
• Circular Flow Model: Interactions between businesses, individuals, and government.
  • Market Types: Product market (goods/services) and resource market (factors of production).
  • Key Concepts: Transfer payments (e.g., welfare), subsidies, and factor payments.

Demand and Supply

Demand

• Law of Demand: Price ↑ → Quantity Demanded ↓; Price ↓ → Quantity Demanded ↑.
• Equilibrium: Where supply meets demand.
• Shifts in Demand: Can move left or right due to factors like preferences, income.
• Shortages and Surpluses: Price effects when not at equilibrium (too low = shortage, too high = surplus).

Supply

• Law of Supply: Price ↑ → Quantity Supplied ↑; Price ↓ → Quantity Supplied ↓.
• Shifts in Supply: Factors like production costs, technology.
• Equilibrium: Price where supply meets demand, can result in shortages/surpluses.

Macroeconomic Goals and Measures

Goals

• Three Main Goals: Economic growth, low unemployment, stable prices.

Economic Growth

• GDP (Gross Domestic Product): Dollar value of all final goods produced within a country's borders annually.
  • GDP Per Capita: GDP divided by population.
  • Not Included in GDP: Intermediate goods, non-production transactions, non-market transactions.
  • Calculating GDP: Expenditures approach (C + I + G + Xn) and income approach (rent, wages, interest, profits).

Unemployment

• Types: Frictional, structural, cyclical.
• Natural Rate of Unemployment: Frictional + structural, typically around 5%.
• Labor Force Participation Rate: People who are able and willing to work, excluding certain groups.
• Criticisms: Discouraged workers, part-time employment.

Inflation

• Concept: Money losing purchasing power, requiring more money to buy the same goods.
• Nominal vs Real: Nominal not adjusted for inflation, real adjusted.
• Consumer Price Index (CPI): Measurement of price level changes relative to a base year.
• GDP Deflator: Broader measure compared to CPI, includes all goods/services.
• Inflation Causes: Demand-pull, cost-push, and printing too much money.
• Quantity Theory of Money: MV = PY.

Aggregate Supply and Demand

Aggregate Demand (AD)

• Concept: Total demand for all goods/services in an economy at different price levels.
• Shifters: Consumer spending, investment, government spending, net exports.

Aggregate Supply (AS)

• Short-run vs Long-run: Short-run is upward sloping, long-run is vertical at full employment.
• Shifters: Resource prices, technology, regulations, taxes/subsidies.

Long-term Equilibrium and Adjustments

• Concept: Adjustments back to full employment from short-run disruptions.
• Economic Growth: Rightward shifts in LRAS due to investment, technology.

Phillips Curve

• Short-run: Inverse relationship between inflation and unemployment.
• Long-run: No relationship, vertical curve.

Fiscal Policy

• Types: Expansionary (increase spending/lowering taxes), contractionary (decrease spending/raising taxes).
• Multipliers: Spending multiplier = 1/MPS; tax multiplier is smaller.
• Issues: Deficit spending, debt accumulation, crowding out.

Money and Banking

Functions of Money

• Types: Commodity (intrinsic value) vs fiat money (no intrinsic value).
• Functions: Medium of exchange, unit of account, store of value.

Money Supply

• Definitions: M1 includes currency and demand deposits.
• Fractional Reserve Banking: Banks hold a fraction of deposits and loan out the rest.
• Money Multiplier: 1/reserve requirement ratio.

Money Market Graph

• Concept: Shows supply and demand for money, affecting nominal interest rates.
• Shifters of Money Supply: Reserve requirements, discount rate, open market operations.
• Monetary Policy: Expansionary (increase money supply) vs contractionary (decrease money supply).

Loanable Funds Market

• Concept: Supply and demand for loans; sets real interest rates.
• Crowding Out: Government borrowing increases demand for loans, increases interest rates, reduces private investment.

International Trade and Finance

Balance of Payments

• Accounts: Current account (trade balance, investment income, transfers), financial account (financial assets).

Exchange Rates

• Appreciation/Depreciation: Changes in currency value relative to others.
• Effects on Net Exports: Appreciated currency → decreased exports, depreciated currency → increased exports.
• Graphing Exchange Rates: Demand and supply for currency.
• Determinants: Tastes/preferences, income, inflation, interest rates.
• Exchange Rate Systems: Floating (market-determined) vs fixed (government-determined).