Learning Principles of Macroeconomics

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Macroeconomics

 

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Principles of Macroeconomics

 

Rationale

Macroeconomics is a sub-field of economics that examines the behavior of the economy as a whole, once all of the individual economic decisions of companies and industries have been summed. Economy-wide phenomena considered by macroeconomics include Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels.

In contrast, microeconomics is the study of the economic behaviour and decision-making of individual consumers, firms, and industries.

Macroeconomics can be used to analyze how to influence government policy goals such as economic growth, price stability, full employment and the attainment of a sustainable balance of payments.

Macroeconomics is sometimes used to refer to a general approach to economic reasoning, which includes long term strategies and rational expectations in aggregate behavior.

 

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Introduction

Tutorials

 

Supply and Demand I: How Markets Work

Tutorials

 

Supply and Demand II: Markets and Welfare

Tutorials

 

The Data of Macroeconomics

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The Real Economy in the Long Run

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Money and Prices in the Long Run

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Reading

A monetary system is anything that is accepted as a standard of value and measure of wealth in a particular region.[1]

However, the current trend is to use international trade and investment to alter the policy and legislation of individual governments. The best recent example of this policy is the European Union's creation of the euro as a common currency for many of its individual states. Modern currencies are not linked to physical commodities (silver or gold) and are not a contract to deliver a good or service. As such, the value of a currency fluctuates based on politics, credit worthinesss, perception, and emotion in addition to monetary policy.

 

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External links and further reading

Velde, Francois R. "Following the Yellow Brick Road: How the United States Adopted the Gold Standard" Economic Perspectives. Volume: 26. Issue: 2. 2002. also online here

 

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1] When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.[2][3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.[4]

Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions),[5] and encouraging investment in non-monetary capital projects.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.[6] Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.[7][8]

Today, most mainstream economists favor a low steady rate of inflation.[9] Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy.[10] The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.[11]

 

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The Macroeconomics of Open Economies

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Short-Run Economic Fluctuations

 

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An open economy is an economy in which there are economic activities between domestic community and outside, e.g. people, including businesses, can trade in goods and services with other people and businesses in the international community, and flow of funds as investment across the border. This contrasts with a closed economy in which international trade and finance cannot take place.

The act of selling goods or services to a foreign country is called exporting. The act of buying goods or services from a foreign country is called importing. Together exporting and importing are collectively called international trade.

There are a number of advantages for citizens of a country with an open economy. One primary advantage is that the citizen consumers have a much larger variety of goods and services from which to choose. Additionally, consumers have an opportunity to invest their savings outside of the country.

In an open economy, a country's spending in any given year need not to equal its output of goods and services. A country can spend more money than it produces by borrowing from abroad, or it can spend less than it produces and lend the difference to foreigners.[1]

 

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Recommended Text

 

Principles of Macroeconomics,
Canadian Edition
2nd Edition

N. Gregory Mankiw
Harvard University
Ronald D. Kneebone Associate Professor
University of Calgary
Kenneth J. McKenzie Associate Professor
University of Calgary
Nicholas Rowe
Carleton University

Published by Nelson Canada
© 2002
ISBN/ISSN: 0-03-034059-4

 

Economics, 6e

Macroeconomics, 6e
by Roger A. Arnold

 

Foundations of International Macroeconomics

Foundations of International Macroeconomics
by Maurice Obstfeld, University of California at Berkeley
Kenneth Rogoff, Harvard University

 

 

 

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A GRAPH REPRESENTATION OF A BASIC MACROECONOMIC SCHEME: THE IS-LM MODEL