Chapter 5 - Introduction to Macroeconomics WMN

INTRODUCTION TO MACROECONOMICS

• Macroeconomics studies the aggregate behaviour of the entire economy.

• Macroeconomics studies the overall price level as compared to microeconomics which studies individual prices.

• Macroeconomics analyses overall employment in the economy.• Aggregate refers to the sum total of behaviour of all individuals

in the economy.

1.0 MICROECONOMICS VS MACROECONOMICS

Studies on individual income

Analyzes demand for and supply of labour

Deals with household and firms decisions

Studies on individual prices

Analyzes demand and supply of goods

Studies on national income

Analyzes total employment in the economy

Deals with aggregate decisions

Studies overall price level Analyzes aggregate

demand and aggregate supply

MACROECONOMICSMICROECONOMICS

1.0 MICROECONOMICS VS MACROECONOMICS

FOUR MAJOR GOALS

Full Employment

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Equitable Distribution of Income

2.0 MACROECONOMIC GOALS

2.0 MACROECONOMIC GOALS• Full Employment

• Full employment of all available factors of production; labour, land, capital and entrepreneurs.

• Resources needed to be efficiently used in order to attain maximum output.

• The more resources are employed, the higher the output of goods and services.

2.0 MACROECONOMIC GOALS• Price Stability

• Controlling inflation – keep national inflation rate as low as possible.

• Inflation occurs when there is an increase in the overall price level.

• Inflation can reduce purchasing power of consumers – the qty of goods and services purchased will be less in inflation is high.

2.0 MACROECONOMIC GOALSEconomic Growth

• Economy must be operating at maximum capacity to achieve economic growth.

• It is an increase in the full production output level of a nation overtime.

• Economic growth will experience ups and downs which is called as business cycle.

2.0 MACROECONOMIC GOALSEquitable Distribution of Income

• Most of the nations try to narrow the gap between the higher income and the lower income groups.

• This is to ensure that all people are equal in terms of standard of living.

• Taxation , subsidies, transfer payments and providing education scholarship are among methods that are used to achieve equitable distribution of income.

Fiscal Policy

Monetary Policy

Growth Policy

3.0 GOVERNMENT POLICIESGovernment plays an important role in the realization of

macroeconomic goals. Government manages the economy by implementing 3

kinds of policies:

Fiscal Policy3.0 GOVERNMENT POLICIES

Refers to the government policies concerning taxes and expenditure.

Government collects taxes from households and firms and use these funds on public expenditure such as for building of school, highways, clinic and so on.

Purpose: to stabilise the economy.

Fiscal Policy3.0 GOVERNMENT POLICIES

Two types of fiscal policies:I. Contractionary Fiscal Policy.

• Government can use this policy to bring the economy out of inflation by increasing taxes and decreasing government expenditure.

• This measure slows down growth.II. Expansionary Fiscal Policy

• Implemented to get the economy out of a slump.• Government implements this policy by reducing taxes and

increasing government expenditure.• This measure will increase the disposable income which

will, in turn, lead to an increase in consumption.

Monetary Policy3.0 GOVERNMENT POLICIES

Refers to tools used by the Government through the central bank to control the supply of money.

Purpose: to maintain the overall price level, to achieve higher economic growth, to remove fluctuations in production and to achieve full employment.

3.0 GOVERNMENT POLICIES

Two types of monetary policies:I. Contractionary Monetary Policy.

• Government can use this policy to curb inflation where the amount of money supplied will be reduced.

II. Expansionary Monetary Policy• This policy is implemented when there is deflation or

recession wherein the government will increase the supply of money.

Monetary Policy

Growth Policy3.0 GOVERNMENT POLICIES

also known as supply side policy.It is a growth policy started by the government that focus on stimulating aggregate supply.

Government will implement the measures on improving productivity of production factors and the performance of firms.

4.0 COMPONENTS OF MACROECONOMICS

Firms

Household

Rest of the world

Government

4.0 COMPONENTS OF MACROECONOMICS Household

Household own all factors of production.

Household provide the service of factors of production to firms and government and receive payments in the form of rent, wages, interest and profit.

4.0 COMPONENTS OF MACROECONOMICS Firms

A firm is an organisation that buys factors of production from households and then produce and sells goods and services.

Firms will sell goods and services to household and the government and earn revenue from sales.

4.0 COMPONENTS OF MACROECONOMICS Government

Government collects taxes from household and firms.

Government revenue will be spent on development and for operational purposes.

4.0 COMPONENTS OF MACROECONOMICS

Rest of the worldRefers to the foreign

sector which is involved in the import and export of goods and services.

4.0 COMPONENTS OF MACROECONOMICS

GOVERNMENT

Supply of Factor of Production

Payment for Factor of Production

Payments for goods and services

Purchase of goods and services

TaxesTaxes

Payments

Transfer payment,

wages

Import

Export

Import

Export

• Aggregate demand refers to the total quantity of output demanded at alternative price levels in a given period of time, ceteris paribus.

• Aggregate demand is the total demand for goods and services.

• Aggregate supply refers to the total quantity of output supplied at alternative price levels in a given period of time, ceteris paribus.

• Aggregate supply also refers to the total supply of goods and services.

5.0 AGGREGATE DEMAND & AGGREGATE SUPPLY

5.0 AGGREGATE DEMAND & AGGREGATE SUPPLY

AGGREGATE DEMAND

- Refers to the total quantity of output demanded at alternative price levels during a given time period, ceteris paribus.

Overall Price Index

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Aggregate output

AGGREGATE SUPPLY

- Refers to the total quantity of output supplied at alternative price levels during a given time period, ceteris paribus.

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