Questions & Answers: Economics - Macroeconomics

Discuss consumer behavior as defined in macroeconomics.
Marginal propensity to consume defines the tendency of consumers to increase spending in conjunction with increases in income. In general, individuals with greater income will buy more. As individuals increase their income through job changes or growth of experience, they will also increase spending.
Utility is a term that describes the satisfaction experienced by a consumer in relation to acquiring and using a good or service. Providers of goods and services will stress utility to convince consumers they want the products being presented.

Define macroeconomics and gross domestic product.
Macroeconomics examines economies on a much larger level than microeconomics. While microeconomics studies economics on a firm or industry level, macroeconomics looks at economic trends and structures on a national level. Variables studied in macroeconomics include:
· Output
· Consumption
· Investment
· Government spending
· Net exports
The overall economic condition of a nation is defined as the Gross Domestic Product, or GDP. GDP measures a nation’s economic output over a limited time period, such as a year.

Explain entrepreneurial income.
Entrepreneurial income consists of two forms. Proprietor’s Income is income that comes back to the entrepreneur himself. Corporate Profit is income that goes back into the corporation as a whole. Corporate profit is divided by the corporation into corporate profits taxes, dividends, and retained earnings. Two other figures must be subtracted in the incomes approach. These are indirect business taxes, including property and sales taxes, and depreciation.

Review how to calculate GDP.
There are two major ways to measure the Gross Domestic Product (GDP) of a country.
The expenditures approach calculates the GDP based on how much money is spent in each individual sector.
The income approach calculates based on how much money is earned in each sector.
Both methods yield the same results and both of these calculation methods are based on four economic sectors that make up a country’s macro economy:
· Consumers
· Business
· Government
· Foreign sector
Several factors must be considered in order to accurately calculate the GDP using the incomes approach. Income factors are:
· Wages paid to laborers, or Compensation of Employees
· Rental income derived from land
· Interest income derived from invested capital
· Entrepreneurial income

Discuss the ideal balance to be obtained in an economy.
Ideally, an economy functions efficiently, with the aggregate supply, or the amount of national output, equal to the aggregate demand, or the amount of the output that is purchased. In these cases, the economy is stable and prosperous.

However, economies more typically go through phases. These phases are:
· Boom—GDP is high and the economy prospers
· Recession—GDP falls, unemployment rises
· Trough—the recession reaches its lowest point
· Recovery—Unemployment lessens, prices rise, and the economy begins to stabilize again
These phases happen often, in cycles that are not necessarily predictable or regular.

What are some things that can affect a nation’s GDP?
Changes in population can affect the calculation of a nation’s GDP, particularly since GDP and GNP are generally measure per capita. If a country’s economic production is low, but the population is high, the income per individual will be lower than if the income is high and the population is lower. Also, if the population grows quickly and the income grows slowly, individual income will remain low or even drop drastically.
Population growth can also affect overall economic growth. Economic growth requires both consumers to purchase goods and workers to produce them. A population that does not grow quickly enough will not supply enough workers to support rapid economic growth. Populations are studied by size, rates of growth due to immigration, the overall fertility rate, and life expectancy. For example, though the population of the United States is considerably larger than it was two hundred years ago, the rate of population growth has decreased greatly, from about three percent per year to less than one percent per year.

What are some factors that can increase unemployment in certain sectors?
Forms of Unemployment

1. Frictional—when workers change jobs and are unemployed while waiting for a new job.
2. Structural—when economical shifts reduce the need for workers.
3. Cyclical—when natural business cycles bring about loss of jobs.
4. Seasonal—when seasonal cycles reduce the need for certain jobs.
5. Technological—when advances in technology result in elimination of certain jobs.
Any of these factors can increase unemployment in certain sectors.

Review demand and surplus.
When demand outstrips supply, prices are driven artificially high, or inflated. This occurs when too much spending causes an imbalance in the economy. In general, inflation occurs because an economy is growing too quickly.
When there is too little spending and supply has moved far beyond demand, a surplus of product results. Companies cut back on production, reduce the number of workers they employ, and unemployment rises as people lose their jobs. This imbalance occurs when an economy becomes sluggish.
In general, both these economic instability situations are caused by an imbalance between supply and demand. Government intervention is often necessary to stabilize an economy when either inflation or unemployment becomes too serious.

Review the economic policy options for a government.
When an economy becomes too imbalanced, either due to excessive spending or not enough spending, government intervention often becomes necessary to put the economy back on track. Government Fiscal Policy can take several forms, including:
· Monetary policy
· Contractionary policies
· Expansionary policies
Contractionary policies help counteract inflation. These include increasing taxes and decreasing government spending to slow spending in the overall economy. Expansionary policies increase government spending and lower taxes in order to reduce unemployment and increase the level of spending in the economy overall. Monetary policy can take several forms, and affects the amount of funds available to banks for making loans.

Review the rates of inflation.
Inflation
Inflation is classified by the overall rate at which it occurs.

1. Creeping inflation—an inflation rate of about one to three percent annually.

2. Galloping inflation—a high inflation rate of 100 to 300 percent annually.

3. Hyperinflation—an inflation rate over 500 percent annually. Hyperinflation usually leads to complete monetary collapse in a society, as individuals become unable to generate sufficient income to purchase necessary goods.

Review international trade options.
International trade can take advantage of broader markets, bringing a wider variety of products within easy reach. By contrast, it can also allow individual countries to specialize in particular products that they can produce easily, such as those for which they have easy access to raw materials. Other products, more difficult to make domestically, can be acquired through trade with other nations.
International trade requires efficient use of native resources as well as sufficient disposable income to purchase native products and imported products. Many countries in the world engage extensively in international trade, but others still face major economic challenges.

Explain the Fed’s use of bonds.
The Federal Reserve System can also expand or contract the overall money supply through Open Market Operations. In this case, the Fed can buy or sell bonds it has purchased from banks, or from individuals. When they buy bonds, more money is put into circulation, creating an expansionary situation to stimulate the economy.
When the Fed sells bonds, money is withdrawn from the system, creating a contractionary situation to slow an economy suffering from inflation. Because of international financial markets, however, American banks often borrow and lend money in markets outside the US. By shifting their attention to international markets, domestic banks and other businesses can circumvent whatever contractionary policies the Fed may have put into place in order to help a struggling economy.

Review some of the characteristics of a developing nation.
Characteristics of a Developing Nation

1. Low GDP

2. Rapid growth of population

3. Economy that depends on subsistence agriculture

4. Poor conditions, including high infant mortality rates, high disease rates, poor sanitation, and insufficient housing

5. Low literacy rate

Developing nations often function under oppressive governments that do not provide private property rights and withhold education and other rights from women. They also often feature an extreme disparity between upper and lower classes, with little opportunity for lower classes to improve their position.

Describe some of the modern trends in international business.
There have been many trends in international business. Much of the manufacturing has moved internationally to areas where the cost of labor is lower. China has emerged as a significant exporter, with many of the goods in the United States and other countries coming from there. Multinational businesses have a great impact on the growth and health of the economy, especially given their size. They add a lot to the growth of the GDP.
Trade also plays a large part in economic growth, both in the United States and other countries. There have also been some trends in the United States. The country has increased the importation of oil. Approximately half of the oil import originates from the Western Hemisphere. Also, the United States currently has a negative balance of trade, also known as a trade deficit. This means the United States is importing more than it is exporting.

Review the influence of governments on the economies of developing nations.
Developing nations typically struggle to overcome obstacles that prevent or slow economic development. Major obstacles can include:
· Rapid, uncontrolled population growth
· Trade restrictions
· Misused resources, often perpetrated by the nation’s government
· Traditional beliefs that can slow or reject change.

Corrupt, oppressive governments often hamper the economic growth of developing nations, creating huge economic disparities and making it impossible for individuals to advance, in turn preventing overall growth. Governments sometimes export currency, called capital flight, which is detrimental to a country’s economic development. In general, countries are more likely to experience economic growth if their governments encourage entrepreneurship and provide private property rights.

Explain the difficulties and options for developing nations to move on to higher stages of economic growth.
Economic development occurs in three stages that are defined by the activities that drive the economy:
· Agricultural stage
· Manufacturing stage
· Service sector stage
In developing countries, it is often difficult to acquire the necessary funding to provide equipment and training to move into the advanced stages of economic development. Some can receive help from developed countries via foreign aid and investment or international organizations such as the International Monetary Fund or the World Bank. Having developed countries provide monetary, technical, or military assistance can help developing countries move forward to the next stage in their development.

Review some of the problems with fast industrialization.
Rapid growth throughout the world leaves some nations behind, and sometimes spurs their governments to move forward too quickly into industrialization and artificially rapid economic growth. While slow or nonexistent economic growth causes problems in a country, overly rapid industrialization carries its own issues.
Four major problems encountered due to rapid industrialization are:
· Use of technology not suited to the products or services being supplied
· Poor investment of capital
· Lack of time for the population to adapt to new paradigms
· Lack of time to experience all stages of development and adjust to each stage