MACROECONOMICS

Macroeconomics

Macroeconomics

Macroeconomics is the study of (1) what deter-mines the levels of employment, output, interest rates, and prices and (2) policy methods for manipulating those levels.

GDP (Gross Domestic Product)

GDP represents the volume of all goods and services produced within a country during one year. Because there is no single unit of volume measure for the wide variety of products produced within the country, the Commerce Department (DOC) first determines the total actual (current) market value of the nation's output. The DOC then effectively deflates this total current market value to what it would have been if prices currently had been at the level that prevailed in some previous (arbitrarily chosen) base year (presently 2005). The DOC accomplishes this by dividing every year's total current market value of output by a price index (that measures the ratio of that year's actual prices on average to base year prices). The resulting number is what we call the GDP. That price-adjusted number will change only as the volume of output changes from year to year. It is unaffected by changes in the actual current level of prices.

APE (Aggregate Planned Expenditure)

APE (for aggregate planned expenditures) represents the total demand coming from all sectors for the goods and services in the nations output (the GDP). {8} Whereas APE is restricted to demand for domestic output only (no output from abroad) - because the GDP includes only production within the country - the Department of Commerce “throws us a curve” by including imports from abroad when it measures the purchases! For instance, it defines consumption as the household sector's demand for current output, both domestic and from abroad. Similarly, it defines investment as the business sector's demand for current output, both domestic and from abroad. The government sector's purchases are similarly defined. Fortunately, the Commerce Department also publishes figures on total imports of all current output from abroad.

ASF (Aggregate Supply of Funding)

The velocity of money is the average number of times that a dollar of money is used in a year's time to fund purchases of current domestic output. We shall represent this magnitude with the symbol V.

The aggregate supply of funding (ASF) is the upper limit upon the volume of annual purchases of current domestic output that is imposed by the existing money supply (M), the prevailing velocity of money (V), and the level of prices (p).

ASF = (M x V) / p

The relationships in the GDP column of Table 2-1 map out a vertical line standing at the current level of GDP. It is vertical, because there is no direct impact upon GDP from a change in the level of interest rates. That vertical GDP line will move to the right (left) as the level of GDP increases (decreases) and will move horizontally by the amount of the GDP change. The vertical line will not move if the level of prices changes, because a price level change has no direct impact upon the level of ...