ACC818-Module7

ACC 818 — Module 7: What Macroeconomics is All About

The macro half of the course begins here. Microeconomics studies individual decisions in specific markets; macroeconomics studies the economy as a whole — through aggregate variables like GDP, inflation, and unemployment.

Learning Outcomes

• Define output and income
• Explain why national income matters
• Understand employment, unemployment, and labor force
• Discuss productivity
• Associate inflation, the price level, and interest rates
• Define exchange rate and net exports

Topic 1: Business Cycles and GDP

Nominal GDP — total value of all final goods and services produced in a period, measured at current prices.

• Worked example: 2 ice creams × $10+3books\times$20 = $80.

Problem: a higher nominal GDP year-over-year could mean more output OR just higher prices.

Real GDP — same calculation but using base-year prices, which strips out inflation. A rise in real GDP truly means more goods and services were produced.

Business cycle — pattern of expansion → peak → recession → trough → expansion. Real GDP follows this oscillation. Understanding what drives it is the central macro question.

Topic 2: Price Index

A statistical measure of the average price level for a basket of goods.

Construction steps:

1. Choose a market basket (which goods, in what quantities).
2. Choose a base year.
3. Compute basket cost in base year.
4. Compute basket cost in current year.
5. Price Index = (Current cost / Base cost) × 100.

Common indexes:

• CPI (Consumer Price Index) — typical consumer’s basket. Most cited.
• PPI (Producer Price Index) — wholesale/producer prices.
• GDP deflator — implicit price index for everything in GDP.

Topic 3: Inflation and Unemployment

• Phillips curve — short-run negative relationship between unemployment and inflation. Lower unemployment → higher inflation, and vice versa.
• Long-run Phillips curve — vertical. No permanent trade-off; inflation in the long run is driven by money growth.
• Natural rate of unemployment — the long-run rate; cannot be reduced by demand-side stabilization policy.
• Frictional unemployment — from job search / information asymmetry. Reducible via better labor-market info.
• Structural unemployment — from skill mismatches. Reducible via retraining.
• Cyclical unemployment — from short-run downturns. Target of stabilization policy.

Caveat for policymakers: well-intentioned interventions can backfire. Generous unemployment benefits, for example, can raise frictional unemployment by extending search times.

Key Terms

Real vs. Nominal GDP · GDP Deflator · CPI · PPI · Business Cycle · Phillips Curve · Natural Rate of Unemployment · Frictional / Structural / Cyclical Unemployment