Overview: Connections

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A central theme of macroeconomics is that because the various sectors of the economy are interrelated, what happens in one part can have effects in other parts that at first glance seem to have nothing in common. This group of readings shows two ways of illustrating these connections among the various parts of the economy. The first is with national income accounting, the source of GDP statistics. Introductory textbooks have traditionally stressed this method because it meshes nicely with the Keynesian multiplier model, which dominated macroeconomics from the 1940s until the 1980s and has undergone a revival since 2008. The second and more flexible way involves a method with roots far back in the 19th century, in what is known as Say's Law.

Understanding interdependence forms a starting point in the search for reasons for inflation and unemployment. The causes of inflation, a result visible in markets for goods and services, and of unemployment, a result visible in markets for labor services, may lie in places that seem at first glance unrelated. A disturbance pushing one sector out of equilibrium forces other sectors to adjust to restore system equilibrium. If only one sector does not adjust readily, the whole economic system may adjust slowly. Thus, as we look through the various parts of the economy to find the sources of disturbances, we will also be asking whether we can expect that sector to adjust quickly or slowly to disequilibrium.

After you complete this unit, you should be able to:

  • Explain the two ways in which GDP can be broken down into components and list and define these components.
  • Define a transfer payment and give an example.
  • Define Net National Product, National Income, Personal Income, and Disposable Income.
  • Explain the budget constraint that the economy faces.
  • Summarize the debate between the underconsumptionists and the developers of Says' Law in the early 19th century.
  • Explain why the planned expenditures and sources of income of transactors should sum to zero, and how this lets one talk about interdependence among markets.
  • Define Walras' Law.
  • Explain why economists aggregate so much in macroeconomics.
  • List the four aggregated markets most commonly used in macroeconomics.
Copyright Robert Schenk