Prelude to Macroeconomics

globeAfter a long journey with all of you in Microeconomics, we have finally reached the first steps of the our next challenge: Macroeconomics! And I must say that it’s been a hell of a ride for all of us, including me as well. Before I introduce Macroecons to you, just let me say a word of thanks to all of you because you have helped grow the popularity of Thank you for sharing what we have to many others out there so that we can all learn and benefit together. Even as I produce these video tutorials, I am learning more about economics and it is really helping me in the way I study and tackle newer and more challenging subjects. For that, I thank you for giving me this opportunity. I will continue to do my utmost best to be your support and work hard along with you to achieve our academic goals. As we conclude microeconomics, do take note of my upcoming EMPOWERING MICROECONS WORKSHOP as I will be giving special prices to my Quickienomics subscribers. Do your friends a favor by sharing this website with them. I’m sure they will benefit as much as you have.

Here’s some good news about Macroeconomics. It’s freakin’ interesting! Here’s why: ever find yourself lost and puzzled about what newspaper articles are saying about the US economy, the European crisis, monetary policy, recessions, inflation, deflation, etc? I can guarantee that you will never look at global news the same way again. You will start to understand what people mean by decreasing interest rates to grow the economy, quantitative easing, why prices are raising, etc. You will also see an introduction of international economics where economies import and export from one another. How does this affect the GDP, money supply and price levels in an economy? I think it’s pretty cool to be able to understand what these bleedy journalist are saying because I used to feel so damn dumb everytime I read the papers. lol!

Before I give you an overview on macroeconomics, here’s something important to ponder about. Imagine an island where only you and I live there; A 2 person “economy”. I “own” a coconut tree and I can sell you coconuts for 3 dollars a piece. The value of my coconut is $3. When you buy a coconut from me, you give me $3. So besides the simple process of buying something from me in this simple example, there’s a lesson to learn. Your EXPENDITURE of $3 (worth of coconut) is also my INCOME of $3. So let’s say you own a banana tree and you can sell a bunch for $5, my EXPENDITURE of $5 would give you an INCOME of $5 too!

So, from this simple example, we can clearly see that EXPENDITURE=INCOME in an economy like this. When we add up all the EXPENDITURE, we call that AGGREGATE EXPENDITURE. Therefore, AGGREGATE EXPENDITURE would become TOTAL INCOME at equilibrium (At equilibrium basically means that all money have been paid up and stuff).

Stay with me, we’re almost coming to an end to this expenditure thing. Since the GROSS DOMESTIC PRODUCT (GDP) is the total value of all the goods and services produced in an economy, it also refers to all the coconuts and bananas we produce and sell! Another word for that would be OUTPUT. And since whatever OUTPUT we produce and sell translates into INCOME, we get the following:

AE = Y = Y = Y

AE will now represent AGGREGATE EXPENDITURE. In textbooks, it is represented by Z. Now you won’t get confused.
INCOME, OUTPUT and GDP will be represented by Y. All 3 are the same thing.

Okay, that will be enough for you to begin learning macroeconomics. There will be more to come but not to worry, as we work together, I am sure you will understand the new concepts with ease!

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  1. […] 60% of the GDP is tabulated from household consumption alone. Remember what we discussed in the Prelude to Macroeconomics? What we spend becomes somebody’s income! Therefore, the more we spend, the more we earn! […]

  2. bhavya says:

    it was easy i got the concept just reading once.