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Economics: Micro vs. Macro economics

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Microeconomics
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the study of how individual households and firms make decisions, interact with one another in markets
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Macroeconomics
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the study of the economy as a whole: Aggregate- statistical norms (TOTAL)
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Income and Expenditure
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-gross domestic product (GDP) measures total income of everyone in the economy -GDP also measures the total expenditure (spending) on the economy’s output of g & s (goods and services)
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The Circular Flow Diagram
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Firms which then lead to Markets for factors of production (wages, rent and profit=GDP/ land, labor, capital), leads to income (=GDP) Households: -own the factors of production, sell/rent them to firms for income -buy and consume goods and services which are goods and services bought spending, which lead to markets for goods and services (goods and services sold/revenue)
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Gross Domestic Product (GDP)
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the market value of all final goods and services produced within a country in a given period of time -all goods are measured in the same units (dollars in the U.S.) -things that don’t have a market value are excluded (housework you do for yourself)
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The components of GDP
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-recall: GDP is total spending -Four components: -Consumption (C) -Investment (I) -Government purchases (G) -Net exports (NX) *These components add up to GDP (denoted Y) Y= C + I + G + NX
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Consumption (C)
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-is total spending by households on g & s (goods and services) -note on housing costs: -For renters, consumption includes rent payments
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Investment (I)
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-is total spending on goods that will be used in the future to produce more goods -includes spending on: capital equipment (machines and tools) -structures (factories, office buildings, houses) -inventories goods produced, but not yet sold) NOTE: investment does not mean the purchase of financial assets like stocks and bonds
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Government Purchases (G)
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-is all spending on the g & s purchased by gov’t at the federal, state and local levels
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Net Exports (NX)
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-NX = exports – imports -exports represent the other nations spending on the economy’s g & s
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GDP and Economic Well-Being
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*Then why do we care about GDP?* -having a large GDP enables a country to afford better schools, a cleaner environment, health care, etc. -many indicators of the quality of life are positively correlated w/ GDP for example… 1. Afford Doctors, Hospitals, Health Care 2. Gov’t Purchases: raise the living standards of the poor 3. Better Diets 4. Leisure lowers stress
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GDP does not value
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-the quality of the environment -leisure time -non-market activity, such as the child care a parent provides to his/her child at home -an equitable distribution of income
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Bigger income gaps lead to deterioration
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with… 1) social relations: -child conflict, homicide, imprisonment, social capital, trust 2) Income differences before tax: -increase company democracy, employee ownership, promote more directors from within companies 3) Human Capital: -child well-being, high school drop outs, math and literature scores, social mobility, and teenage birth 4) Taxes & Benefits: -stop tax avoidance, end tax havens and make taxation progressive again 5) Health: -drug abuse, infant mortality, life expectancy, mental illness, obesity 6) SUSTAINABILITY NEEDS GREATER EQUITY