Macroeconomics: the economy from 10,000 meters and from the policy desk.

GDP explained

Gross domestic product measures the market value of final goods and services produced inside a country during a period. The olympiad trap is to treat GDP as well-being. It is not. GDP misses leisure, informal work, environmental costs, and distribution, yet it remains powerful because it gives a common scale for output.

The expenditure identity is Y = C + I + G + (X - M). Consumption tracks household demand, investment tracks capital formation and inventories, government spending captures public purchases, and net exports adjust for foreign demand.

Key takeaway: GDP is a production measure, not a happiness measure. Always ask whether a change is nominal, real, final, or intermediate.

Inflation and price indices

Inflation is a sustained rise in the general price level. Students should separate a one-time price jump from continuing inflation. CPI follows a consumer basket, GDP deflator covers domestically produced output, and core measures remove volatile items to reveal trend pressure.

Demand-pull inflation comes from excess spending; cost-push inflation comes from supply shocks; expected inflation can become self-fulfilling through wage and price setting.

Unemployment

Unemployment is not one thing. Frictional unemployment is search time, structural unemployment is skill or location mismatch, cyclical unemployment follows recessions, and natural unemployment remains even near potential output. Good analysis compares actual output with potential output and explains whether policy can help without overheating demand.

Fiscal and monetary policy

Fiscal policy uses spending, taxes, and transfers. Expansionary fiscal policy can lift aggregate demand, but it may raise debt or crowd out investment when resources are already tight. Monetary policy changes interest rates, reserves, and expectations. Lower rates usually increase investment and consumption; higher rates cool inflation but can slow output.

Exchange rates and open economy logic

An appreciation makes imports cheaper and exports less competitive; a depreciation does the reverse. Exchange rates respond to interest differentials, inflation expectations, trade balances, and confidence. In small open-economy questions, always track both the goods market and capital flows.

IS-LM and AD-AS models

IS-LM is a short-run model of goods and money market equilibrium. IS shifts with fiscal policy, investment confidence, and net exports; LM shifts with money supply and liquidity preference. AD-AS then translates demand shocks and supply shocks into output and price-level outcomes.

Diagram discipline matters: label axes, mark original equilibrium, show the shift, identify the new equilibrium, and write the economic story in one sentence.

Economic growth and recessions

Long-run growth comes from labor, capital, human capital, technology, institutions, and productivity. Recessions occur when spending falls, financial conditions tighten, or supply is disrupted. Stabilization policy can reduce the pain, but sustainable growth requires capacity, not only stimulus.