chapter 5 Flashcards
Macroeconomics
analyzes the performance of the whole Canadian economy and the global economy; the combined outcomes of all individual microeconomic choices
Fallacy of Composition
what is true for one is not true for all; the whole is greater than the sum of the individual parts
Sometimes a choice made by one person produces a different outcome from when the same choice is made by many people
Paradox of Thrift
attempts to increase saving cause total savings to decrease because of falling employment and incomes
The macroeconomic connection
macroeconomics focuses on the connections between input and output markets and how those connections can break
The microeconomic connection
microeconomics focuses on the interaction of demand and supply in input markets alone or in output markets alone
Fundamental Macroeconomic Question
if left alone, do markets quickly self-adjust?
Say’s Law
supply creates its own demand
Market failure
market outcomes are inefficient or inequitable and fail to service the public interest
Government failure
government policy fails to serve the public interest
Markets Self-adjust Perspective
- usually believed by conservatives and libertarians in Canada, republicans in the US
- they believe that, if left alone by government, markets will produce the miracle of the continuous, ever-changing production of the products and services we want, producing rising standards of living, full employment, and stable prices
Markets Left Alone Often Fail Perspective
- usually believed by politicians on the left of the political spectrum
- Argue that, if left alone by government, the self-adjusting mechanisms of market economies are often slow and weak which, as a result, business cycles, long periods of unemployment that reduce living standards, and rising/falling prices happen often → argues for a hands-on role for the government
Macroeconomic Agreements: all macroeconomists agree that
- There is some role for government (setting the rules of the game), but differ on how big a role there should be for fiscal and monetary policy
- Prices and markets adjust, but differ on how long the adjustments take (how quick is “quickly”?)
- Business cycles happen even without government failure, but differ in focusing on the relatively steady growth of the market economies in the long run (self-adjust), or focusing on correcting the ups and downs of business cycles in the short run (not self-adjust)
3 Key Macroeconomic Outcomes
- GDP
- Unemployment
- Inflation
Gross Domestic Product (GDP)
the value of all final products and services produced annually in a country → the higher the GDP, the more products and services there are to satisfy our wants
Unemployment
Someone is willing and able to work but can’t find a job → more unemployment is bad and less unemployment is good
Inflation
the rise in the average level of all prices in an economy → higher and unpredictable inflation is bad and lower and predictable inflation is good
Macroeconomic players
- Households as consumers
- Businesses
- Government
- Rest of the world
Households as consumers
- individuals in households supply labor and other inputs in input markets, and use the income they earn to buy products and services in output markets
- consumers can either spend or save money and buy products and services produced in Canada or imported frm other countries
Businesses
hire labor and other inputs from consumers in input markets, and sell the products and services produced with those inputs in output markets
Government
besides setting the legal rules of the game for all economic activity, can choose to interact or not, in any aspect of the economy
Government choices
fiscal and monetary policy
Fiscal policy
government purchases and taxes/transfers to achieve macroeconomic outcomes of steady growth, full employment, and stable prices
Monetary policy
the Bank of Canada changes interest rates and the supply of money to achieve the macroeconomic outcomes of steady growth, full employment, and stable prices
Rest of the World
countries in the rest of the world can choose to buy Canadian products and services (exports from Canada) or not, and sell their products and services to Canada (imports to Canada)
Why You Should Think Like a Macroeconomist
Reason 1: Your personal economic success is affected by the macroeconomic performance of the economy – GDP, unemployment, and inflation
Reason 2: As a citizen, you vote for governments whose policy decisions influence our economy’s performance – GDP, unemployment, and inflation
