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Reading 16  Aggregate Output, Prices, and Economic Growth Introduction
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In the field of economics, microeconomics is the study of the economic activity and behavior of individual economic units, such as a household, a company, or a market for a particular good or service, and macroeconomics is the study of the aggregate activities of households, companies, and markets. Macroeconomics focuses on national aggregates, such as total investment, the amount spent by all businesses on plant and equipment; total consumption, the amount spent by all households on goods and services; the rate of change in the general level of prices; and the overall level of interest rates.

Macroeconomic analysis examines a nation’s aggregate output and income, its competitive and comparative advantages, the productivity of its labor force, its price level and inflation rate, and the actions of its national government and central bank. The objective of macroeconomic analysis is to address such fundamental questions as:

  • What is an economy’s aggregate output, and how is aggregate income measured?

  • What factors determine the level of aggregate output/income for an economy?

  • What are the levels of aggregate demand and aggregate supply of goods and services within the country?

  • Is the level of output increasing or decreasing, and at what rate?

  • Is the general price level stable, rising, or falling?

  • Is unemployment rising or falling?

  • Are households spending or saving more?

  • Are workers able to produce more output for a given level of inputs?

  • Are businesses investing in and expanding their productive capacity?

  • Are exports (imports) rising or falling?

From an investment perspective, investors must be able to evaluate a country’s current economic environment and to forecast its future economic environment in order to identify asset classes and securities that will benefit from economic trends occurring within that country. Macroeconomic variables—such as the level of inflation, unemployment, consumption, government spending, and investment—affect the overall level of activity within a country. They also have different impacts on the growth and profitability of industries within a country, the companies within those industries, and the returns of the securities issued by those companies.

This reading is organized as follows: Section 2 describes gross domestic product and related measures of domestic output and income. Section 3 discusses short-run and long-run aggregate demand and supply curves, the causes of shifts and movements along those curves, and factors that affect equilibrium levels of output, prices, and interest rates. Section 4 discusses sources, sustainability, and measures of economic growth. A summary and practice problems complete the reading.

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