Introductory Macroeconomics Review

Jul 14, 2024

Introductory Macroeconomics Review

Lecture by Jacob Clifford

Purpose

  • Prepare students for an AP Macroeconomics exam or final.
  • Review key concepts quickly.

Key Resources

  • Ultimate Review Pack: Contains practice questions and hidden videos.

Fundamental Economics Concepts

Scarcity

  • Unlimited wants vs. limited resources.
  • Leads to the idea of opportunity cost: The cost of the next best alternative when a decision is made.

Production Possibilities Curve (PPC)

  • Shows efficient combinations of two goods using all resources.
    • Efficient: Points on the curve.
    • Inefficient: Points inside the curve.
    • Impossible: Points outside the curve.
  • Shapes of PPC:
    • Straight line: Constant opportunity costs.
    • Bowed-out: Increasing opportunity costs.

Shifts in the PPC

  • Factors: More/less resources, better technology, trade.

Comparative and Absolute Advantage

  • Absolute advantage: Ability to produce more of a good.
  • Comparative advantage: Lower opportunity cost of production.

Terms of Trade

  • Trade benefits when countries specialize per their comparative advantage.
  • Determines how much of one good should be traded for another.

Economic Systems

  • Free market (capitalism)
  • Command economy
  • Mixed economy

Circular Flow Model

  • Interaction between businesses, individuals, and government.
  • Product market: Where goods are sold.
  • Resource market: Where resources are sold.

Key Terms

  • Transfer payments: Government payments not for goods/services (e.g., welfare).
  • Subsidies: Government payments to businesses.
  • Factor payments: Payments for the use of factors of production (rent, wages, interest, profits).

Demand and Supply

Demand

  • Downward sloping curve: Price vs. quantity demanded.
  • Law of Demand: Price up, demand down; price down, demand up.

Supply

  • Upward sloping curve: Price vs. quantity supplied.
  • Law of Supply: Price up, supply up; price down, supply down.

Market Equilibrium

  • Where supply and demand curves intersect.
  • Shifts in Curves:
    • Demand/supply can shift left or right.
    • Price changes: Movement along the curve.
    • Shortage: Price below equilibrium.
    • Surplus: Price above equilibrium.

Macroeconomic Measures

Economic Goals

  1. Economic growth
  2. Low unemployment
  3. Stable prices

Growth

  • Measured by GDP (Gross Domestic Product).
  • GDP: Dollar value of all final goods/services produced within a country.
    • Nominal GDP: Not adjusted for inflation.
    • Real GDP: Adjusted for inflation.
    • Per Capita GDP: GDP divided by population.

Expenditure Approach to GDP

  • Equation: GDP = C + I + G + Xn
    • C: Consumer spending
    • I: Investment (business spending)
    • G: Government spending
    • Xn: Net exports (exports - imports)

Business Cycle

  • Cyclical phases: Peak, recession, trough, expansion.
  • Indicators:
    • Full employment: Ideal economic condition.
    • Recession: High unemployment.
    • Inflationary gap: Overspending causing high inflation.

Unemployment

  • Types of Unemployment:
    • Frictional: Between jobs.
    • Structural: Skills not needed.
    • Cyclical: Due to economic downturns.
  • Natural Rate of Unemployment: Frictional + structural (around 5% in the US).
  • Critiques: Discouraged workers, part-time workers affecting stats.

Inflation

  • Inflation: General increase in price levels.
  • Deflation: Decrease in price levels.
  • Disinflation: Slowdown in the rate of inflation.

Key Inflation Concepts

  • Consumer Price Index (CPI): Measurement of price changes using a