Economic Summary Every economy has its ups and downs at one point or another called business cycles. Government and private institutions focuses and creates tools to deal with the growth and contraction of an economy. In the following paragraphs, I will briefly summarize the different frame works that economist generally use to analyze macroeconomics. In addition, I will also explain, how two separate group of economist define and create concepts of why an economy contracts and how it grows. Prior to the great depression, economist focused on supply or Long Run growth.
During this period of time, classical economist believed that short run problems where a temporary glitch and that the economy could self regulate through the invisible hand. As a result of the great depression, a new for of thinking emerged. The Keynesian economics evolved. Keynesian focused on spending as away to push the economy out of the depression. There are two frame works of economic studies. First is the Long Run framework also known as Supply Side Economics, which focuses on growth issues.
Moreover, the key is that by necessitating businesses whether is wrought tax brake or other form of incentives, business will hire work force to promote and increase supply, which in turn will create growth, capital accumulation and technological advancement. The second is the Short Run framework, which emphasizes business cycles as a way to best study economics. Also known as demand economics, the key is aggregate expenditures. Meaning, in order to support economic growth, government and businesses must focus in consumer spending.
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Economist use real GAP (Real Gross Domestic Production) to measure the health of an economy and determine at what stage off business cycle is the economy in. GAP is defined as the market value of final goods and services in a giving year. Business cycles happen due to periods of fast economic growth and stagnation. A business cycle is the upward or downward movement of economic activity, or real GAP, that occurs around the growth trend. The cycle consists of four stages known as peak, downturn, trough, and upturn. At peak, the economy it's at the highest point, mostly everyone has a Job.
It is a prosperous time. During the downturn, real out puts begins to fall, which in turn causes unemployment and can lead to a recession or to a depression. At the trough, the economy is hits the bottom, usually called a recession. Throughout time economist have developed ways to measure the health off an economy. They are average workweek, unemployment claims, new orders for consumer goods, vendor performance, consumer expectations, number of new building and housing permits, stock prices, interest rate and money supply.
Although, unemployment has not always been the root cause for business cycles, economic cycles are directed tied to unemployment. There are four categories of unemployment. Structural Unemployment consists of people not fit for a type of work hat requires specials skills or education. Frictional Unemployment it is cause by some members of society entering and quitting the Job market. Seasonal Unemployment, consist of people working only for a period of time each year. By carhop unemployed by the number of people in the labor for (those in the economy 16 year or order mentally and physically able to work) multiple times 100.
Since inflation is a price increase six months in a roll, economists use several ways to measure inflation. The consumer price index (ICP) measures the prices of fixed basket of consumer goods, weighted according to each component's share of an average consumer's expenditures. The personal consumption expenditure (PACE) deflator is a measure of pries of goods that consumers buy. The producer price index (PIP) is an index of prices that measures average change in the selling prices. When inflation occurs, a redistribution of income happens from people who do not raise their prices to people who do raise their prices.
The single most important tool of economic measure is gross domestic product. Two ways of measuring GAP are expenditure and aggregate income. In the expenditure way, GAP contains four different categories called expenditures. These re: house hold spending, government spending, business investments and spending on goods and services produced in the united states that foreigners buy. The most important is household consumption. In the aggregate income, GAP is measured by analyzing compensation to employee, rent, interest rate and profits.
Two important aspects to remember about GAP are: One, GAP represents a flow. Two, GAP represents the markets value of final output. It is important to make sure not double count final sales and services. One way is by calculating final output (expenditures approach) or by using the value added approach. Value added is the increase in value that a firm contributes too product or service. Distinguishing the difference between microeconomic supply and demand curves and macroeconomic aggregate demand and supply is crucial in economics.
The AS/ADS models are based on the aggregate demand curve, the short run aggregate supply curve, and the long run aggregate supply curve. The aggregate demand (AD) curve is a curve that shows how a change in the price level will change aggregate expenditures on all goods and services in an economy. When prices are low people buy more. The money people hold is worth more, making people richer. If interest rate are low people will tend to spend more and producers will produce more.
Aggregated demand can shift due to foreign income, exchange rate and costumer expectations. The goal of economics is to have the supply and demand aligned. When the economy is in a recession gap, the price level will fall. As a result, the aggregate supply will shift down until output rises to potential. On the other hand, when the economy is in an inflationary gap, the price level will rise and the aggregate supply will shift up until output falls to potential. Through fiscal policy, government can control desired level of output.
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