News headlines frequently report the status of the nation’s economic conditions, but to many citizens the information is confusing or incomprehensible. This chapter acquaints you with the basic language of macroeconomics and national income accounting. GDP is defined and explained. Then, the differences between the expenditure and income approaches to determining GDP are discussed and analyzed in terms of their component parts. The income and expenditure approaches are developed gradually from the basic expenditure income identity, through tables and figures.
The importance of investment is given considerable emphasis, including the nature of investment, the distinction between gross and net investment, the role of inventory changes, and the impact of net investment on economic growth. On the income side, non-income charges–consumption of fixed capital (depreciation) and taxes on production and imports–are covered in detail because these usually cause the most trouble.
Other measures of economic activity are defined and discussed, with special emphasis on using price indexes. The purpose and procedure of deflating and inflating nominal GDP are carefully explained and illustrated. Finally, the shortcomings of current GDP measurement techniques are examined. Global comparisons are made with respect to size of national GDP and size of the underground economy.
What are some of the damaging effects deflation has on an economy? What would be a monetary policy prescription to reduce or eliminate deflation? How would deflation affect your business or a business you are familiar with?
This chapter discusses the business cycle, unemployment, and inflation and the business cycle is introduced in a historical perspective.
While hinting at various business cycle theories, the authors of the text stress the general belief that changes in aggregate spending, especially durable goods and investment spending are the immediate cause of economic instability – more discussion to follow. Non-cyclical fluctuations are also treated briefly before the analysis of unemployment and inflation.
In the section on unemployment, the various types of unemployment–frictional, structural, and cyclical–are described. Then the problems involved in measuring unemployment and in defining the full employment unemployment rate are considered. The economic and non-economic costs of unemployment are presented, and finally an international comparison of unemployment rates.
Inflation is accorded a rather detailed treatment from both a cause and an effect perspective. International comparisons of inflation rates in the post-1992 period are given while demand pull and cost push inflation are described. Considerable emphasis is placed on the fact that the redistributive effects of inflation will differ, depending on whether inflation is anticipated or unanticipated. The chapter ends with historical cases of hyperinflation to remind everyone that inflationary fears have some basis in fact.
Will Bury’s Price Elasticity Scenario
Read: Will Bury’s Price Elasticity Scenario.
Business Cycle Article Search
As a business person, it is important to be aware of the current state of the economy. Watching or reading the news can help keep you informed. Locate an article written within the last week from the popular press or reputable blog that discusses the economy’s current stage in the business cycle. Summarize the main ideas of the article.