Short-run aggregate output increases because of: Declining input prices (nominal wages, raw materials, and energy) – lower input prices reduce production costs. Expectations for higher prices in the future – Businesses increase supply in anticipation of higher profit margins in the future.
It will cause upward pressure on the price level in the economy. This condition we call “inflationary gap.”
Macroeconomic equilibrium occurs when the aggregate output curve intersects the aggregate demand curve. A decrease in aggregate demand can cause economic contraction. In this situation, the short-run aggregate output is below its potential output. As a result, total output and price levels incline to decrease. We call this condition the “deflationary gap.”
The long-run refers to situations where input prices are variable. The long-run aggregate output represents the potential output of an economy. Sometimes we also call it full employment, that is, when the economy uses all its resources in full.
Economic theory differentiates aggregate output into the short-run and long-run. The short-run is when some input costs, such as nominal wages are fixed.
Aggregate output is the total value of goods and services produced in the economy during a certain period, usually one year. Economists typically use the gross domestic product (GDP) as its measure. The statistical bureau calculates it by adding up all the values of the final goods and services produced in one quarter or one year.
The statistical bureau calculates it by adding up all the values of the final goods and services produced in one quarter or one year. Alternatively, we can also do the measurement by adding the added values at each stage of the production and distribution process .
These factors include household wealth, consumer and business expectations, capacity utilization, monetary policy, fiscal policy, exchange rates, and foreign GDP.
The aggregate demand curve is downward sloping because a rise in the price level reduces wealth, raises real interest rates, and raises the price of domestically produced goods versus foreign goods.
When the level of GDP in the economy is below potential GDP, such a recessionary situation exerts downward pressure on the aggregate price level. When the level of GDP is above potential GDP, such an overheated situation puts upward pressure on the aggregate price level. Stagflation, a combination of high inflation and weak economic growth, ...
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.
GDP is the market value of all final goods and services produced within a country in a given time period.
The short-run supply curve will shift because of changes in potential GDP, nominal wages, input prices, expectations about future prices, business taxes and subsidies, and the exchange rate. The business cycle and short-term fluctuations in GDP are caused by shifts in aggregate demand and aggregate supply.
From an investment perspective, macroeconomic analysis and forecasting are important because business profits, asset valuations, interest rates, and inflation rates depend on the business cycle in the short to intermediate term and on the drivers of sustainable economic growth in the long term.