Introduction to Macroeconomics

Overview

• Video by Jacob Clifford for AC/DC Econ.
• Focus on key concepts for introductory and AP Macroeconomics.
• Aimed at quick review before exams.
• Encouragement to purchase the Ultimate Review Pack for additional resources.

Key Concepts in Economics

Scarcity and Opportunity Cost

• Scarcity: Unlimited wants vs. limited resources.
• Opportunity Cost: Cost of producing one good over another; every decision has a cost.

Production Possibilities Curve (PPC)

• Definition: Graph showing combinations of two goods produced with all resources.
• Points on the Curve:
  • On the curve: Efficient use of resources.
  • Inside the curve: Inefficient use.
  • Outside the curve: Impossible production with current resources.
• Shapes:
  • Straight line: Constant opportunity costs.
  • Concave to origin: Law of increasing opportunity costs.
• Shifts in the Curve:
  • Increased resources or technology can shift the curve outward.
  • Trade can allow consumption beyond the PPC.

Comparative Advantage

• Definition: Countries should specialize in goods with lower opportunity costs.
• Absolute Advantage: Producing more with the same resources.
• Terms of Trade: Units traded between countries that benefit both.

Economic Systems Overview

• Types of Economies:
  • Free Market (Capitalism)
  • Command Economy
  • Mixed Economy
• Circular Flow Model: Interaction of businesses, individuals, and government.
  • Markets:
    • Product Market: Businesses sell products.
    • Resource Market: Individuals sell resources.

Demand and Supply Basics

• Demand Curve: Downward-sloping; higher prices decrease quantity demanded.
• Supply Curve: Upward-sloping; higher prices increase quantity supplied.
• Equilibrium: Interaction of demand and supply.
• Shifts in Demand/Supply:
  • Demand can increase or decrease based on factors.
  • Supply can shift due to changes in production costs.

Unit One Summary

• Difficulty: 5/10.
• Focus on understanding PPC, supply and demand, and basic economic terms.

Macroeconomic Measures (Unit Two)

Economic Goals

1. Economic Growth: Increasing GDP over time.
2. Limiting Unemployment: Keeping unemployment low.
3. Price Stability: Controlling inflation.

Gross Domestic Product (GDP)

• Definition: Dollar value of all final goods produced within a country's borders in a year.
• GDP per capita: GDP divided by population.
• Not Included in GDP:
  • Intermediate goods
  • Non-production transactions
  • Non-market transactions
• Calculating GDP:
  • Expenditure Approach: C + I + G + Xn.
  • Income Approach: Sum of rent, wages, interest, and profits (factor payments).
• Nominal vs. Real GDP:
  • Nominal is not adjusted for inflation; Real is adjusted.

Business Cycle

• Phases: Peak, recession, trough, expansion.
• Full Employment: Economy is operating at potential GDP.

Unemployment

• Definition: People actively looking for work but not employed.
• Labor Force Participation Rate: Percentage of working-age population in the labor force.
• Types of Unemployment:
  • Frictional: Short-term transitions.
  • Structural: Skills mismatch.
  • Cyclical: Related to economic downturns.
• Natural Rate of Unemployment: 5% in the U.S.; includes only frictional and structural unemployment.

Inflation

• Definition: Increase in general price levels, reducing purchasing power.
• Types of Inflation:
  • Demand-pull
  • Cost-push
  • Hyperinflation
• Consumer Price Index (CPI): Measures price changes over time.
• GDP Deflator: Measures overall price level changes relative to base year.

Unit Two Summary

• Difficulty: 4/10.
• Key concepts: Understanding GDP, types of unemployment, and inflation.

Aggregate Demand and Supply (Unit Three)

Aggregate Demand (AD)

• Definition: Total quantity of goods demanded at different price levels.
• Downward Sloping: Due to wealth effect, interest rate effect, and foreign trade effect.
• Shifts in AD: Caused by factors affecting consumer preferences and spending.

Aggregate Supply (AS)

• Short-run AS: Upward sloping; production increases with higher prices.
• Long-run AS: Vertical; no relation between price level and output in the long run.
• Shifts in AS: Can occur due to changes in production costs.
• Stagflation: High inflation, low output.

Phillips Curve

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

Fiscal Policy

• Definition: Changes in government spending and taxes to influence the economy.
• Types:
  • Expansionary: Increase spending/cut taxes.
  • Contractionary: Decrease spending/increase taxes.
• Spending Multiplier: Total change in spending resulting from an initial change in spending.

Unit Three Summary

• Difficulty: 8/10.
• Focus on understanding aggregate demand, supply, fiscal policy, and Phillips Curve.

Money and Banking (Unit Four)

Money Supply

• Definition: Medium of exchange, unit of account, and store of value.
• M1 Money Supply: Cash and demand deposits (checking accounts).

Banking System

• Fractional Reserve Banking: Banks hold a portion of deposits as reserves.
• Money Multiplier: 1 divided by the reserve requirement.

Monetary Policy

• Definition: Fed's actions to control the money supply and interest rates.
• Tools of Monetary Policy:
  • Reserve requirement
  • Discount rate
  • Open market operations
• Interest Rates: Set by the Fed; impact on loans and spending.

Loanable Funds Market

• Demand for Loans: By borrowers, influenced by interest rates.
• Supply of Loans: By lenders; higher government borrowing increases demand for loans.

Unit Four Summary

• Difficulty: 8/10.
• Key concepts: Understanding money supply, banking, and monetary policy.

International Trade and Foreign Exchange (Unit Five)

Balance of Payments

• Components: Current account (balance of trade, investment income, net transfers) and financial account (inflows/outflows of money).

Foreign Exchange Markets

• Currency Appreciation and Depreciation: Impact on net exports.
• Graphing Supply and Demand: Understand shifts in currency demand.
• Shifters of Exchange Rates:
  • Tastes and Preferences
  • Income levels
  • Inflation
  • Interest Rates
• Floating vs. Fixed Exchange Rates: Mechanisms of currency value determination.

Unit Five Summary

• Difficulty: 6/10.
• Importance of understanding exchange rates and their impact on the economy.

Conclusion

• Encouragement for success on AP tests and finals.
• Reminder of the importance of foundational economic concepts.