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Topic Introduction to

1 Macroeconomics

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define macroeconomics;
2. Elaborate on the policies and goals of macroeconomics; and
3. Analyse the economic phases in a business cycle.

INTRODUCTION
Macroeconomics is the study of a nations economic growth and also the policies
used to enhance economic performance. Macroeconomists are interested in the
factors that contribute to a countrys economic growth because if a countrys
economy expands, it will create more job opportunities, goods and services, thus
enhancing the peoples standard of living. Macroeconomics has the potential to
expand because it tests the theory of how the economy functions as a whole, in
which a theory can be used to predict the effects of a certain policy or event.

1.1 MACROECONOMICS
What is macroeconomics and how would you define it? Economists define
macroeconomics as a field that is related to aggregate variables such as income,
employment, price and money. This means that macroeconomics studies the
functions of an economy as a system, in other words, how the levels of supply
and demand of goods, services and resources are measured and the factors that
affect them.

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2 TOPIC 1 INTRODUCTION TO MACROECONOMICS

1.1.1 Issues in Macroeconomics Studies


Now, let us look at some of the issues in macroeconomics studies. Among them
are:

(a) Economic Growth and Standard of Living


Since the last century, developed nations have achieved a high rate of
economic growth, thus elevating their citizens standard of living.
Macroeconomics studies the source of rapid economic growth in a
developed nation and tries to understand why the growth rate is different
between countries.

(b) Productivity
The average labour productivity or output of an employee is important in
determining the standard of living. Macroeconomics will look into the
factors that determine the growth rate of productivity.

(c) Economic Decline and Expansion


An economy will experience decline and expansion. In relation to this,
macroeconomics will study the sources that contribute to economic change
and government policies that can be applied to overcome certain economic
problems.

(d) Unemployment
Unemployment is a situation where a person desires to work but is unable
to gain employment. It will rise during an economic decline. However,
unemployment exists even if the economy is good. Macroeconomics studies
the sources of unemployment, types of unemployment and methods to
overcome this problem.

(e) Inflation
Inflation occurs when there is a rise in the general price level, which is
usually measured against a standard index of purchasing power. The usual
question arising from the study of macroeconomics is why the inflation rate
varies over a given period of time and why it is different for every country.

ACTIVITY 1.1

What do you understand about macroeconomics? Try to explain in


your own words and post it on myINSPIRE.

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TOPIC 1 INTRODUCTION TO MACROECONOMICS 3

1.2 MACROECONOMIC POLICIES


The study of macroeconomics is related to the economic growth of a country.
Even though many factors contribute to economic expansion, government
policies play a vital role. Hence, understanding the effects of various policies and
developing better policies are a vital purpose of the study of macroeconomics.

There are two main types of macroeconomic policies as shown in Figure 1.1.

Figure 1.1: Two types of macroeconomics policies

Let us now study each type of policy.

(a) Monetary Policy


Monetary policy changes the total supply of money in an economy.
Economists believe that changes in the supply of money will affect other
important macroeconomic variables such as the national output, labour
force, interest rate, inflation, share price and foreign exchange rate.
Monetary policy is controlled by a government institution known as the
central bank (in Malaysia, it is managed by Bank Negara Malaysia).

(b) Fiscal Policy


Fiscal policy refers to decisions relating to the determined government
expenditure, which includes the total and composition of government
expenditure and government revenue. The balance between the
government expenditure and government revenue is an important aspect of
the fiscal policy. When a government spends more than its tax revenue, it
will experience a deficit budget. However, if the government revenue
exceeds the expenditure, the government will experience a surplus budget.

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4 TOPIC 1 INTRODUCTION TO MACROECONOMICS

ACTIVITY 1.2

What are the differences between monetary policy and fiscal policy?
List the differences in a table.

1.3 MACROECONOMIC OBJECTIVES


What are the objectives of macroeconomics? Among the important objectives
are:

(a) Full Employment


Full employment does not mean that there is no unemployment or zero
unemployment in a country. Basically, economists agree that unemployment
can still exist despite a country being in a state of full employment. You
will learn more about the concept and issue of unemployment in Topic 8.

(b) Price Stability


Generally, price stability is a situation where the average price level in the
economy remains stagnant or changes very slowly. This means that prices
of certain goods may rise, whereas some others may decline. When prices
can be stabilised, inflation can be prevented.

(c) Satisfying Economic Growth


Another important objective of macroeconomics is to satisfy economic
growth, which is defined as an increase in real income per capita from year
to year.

ACTIVITY 1.3

Based on your Internet research, what were the inflation and


unemployment rates in Malaysia in 2015?

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TOPIC 1 INTRODUCTION TO MACROECONOMICS 5

1.4 BUSINESS CYCLE

ACTIVITY 1.4

Before we discuss the definition of a business cycle, think for a moment


what is meant by economic boom and economic recession.

A business cycle refers to the long term increase or decrease in economic


activities. Generally, this cycle is felt in every country and around the globe,
affecting almost every economic activity, not merely employment and
productivity rates.

1.4.1 Analysis of Economic Phases


Economic activities can be divided into two main phases, which are the
expansion phase and contraction phase. Let us study each of the phases now.

(a) Expansion Phase


Expansion phase is a phase when the economic activities are rising, which
is reflected in the total economic productivity.

(b) Contraction Phase


Contraction can be divided into two types; namely depression and
recession.

(i) Depression
Depression happens when there is severe economic contraction. Even
though there is no formal definition for depression, during this phase
there is a sudden decline in a countrys total output, followed by a
massive unemployment rate within a period of less than a year.

(ii) Recession
Recession occurs when there is moderate economic contraction,
which involves a decline in total output and employment, and the
timeline is at least six months.

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6 TOPIC 1 INTRODUCTION TO MACROECONOMICS

Figure 1.2 depicts a business cycle that shows the movement of economic
activities along a long-term growth trend line.

Figure 1.2: Business cycle

Recession will start after the preceding economic expansion exceeds the peak,
and is followed by the trough stage, which is the lowest phase. The economy will
expand after suffering a downturn, followed by a recovery to another peak stage.
A complete cycle is formed from a peak stage to another peak stage, and it also
applies from one trough stage to another.

ACTIVITY 1.5

In your opinion, is Malaysias economy at the expansion stage?


What do you understand by recession, trough and recovery?

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TOPIC 1 INTRODUCTION TO MACROECONOMICS 7

1.5 MICROECONOMICS AND


MACROECONOMICS
Economics can be divided into two branches, namely microeconomics
and macroeconomics (micro and macro are derived from the Greek words for
small and large). By analogy, macroeconomics tools are telescopes, while
microeconomics tools are microscopes. Using another analogy, macro involves
the study of the forest while micro focuses on the individual tree.

1.5.1 Microeconomics
Microeconomics can be described as follows:

(a) Focuses on the detailed behaviour of a specific player in an economy such


as households, firms or industries.
(b) Studies how individuals like consumers, owners of production and
business firms make decisions in the market, and allocate resources, and
how relative prices, outputs and income distribution are determined.
(c) It studies how rational consumers maximise satisfaction; how suppliers
maximise profits or minimise costs.
(d) Among the major goals that dominate micro policy are efficiency and
optimisation.

1.5.2 Macroeconomics
In general, macroeconomics can be described as follows:

(a) Analyses economic activities as a whole or aggregately.


(b) Involves the study of the entire society where the sum of sets of micro
variables yields aggregate (macro) variables. For example, the number of
workers employed by various firms contributes to national employment.
(c) Focuses on aggregate variables relevant to an entire economy or even, the
world economy. These include the general price level, consumption,
investment, government expenditure, export, import, unemployment and
inflation, and economic growth.
(d) Common normative goals of macro policy include high employment (or
low unemployment rate); stability of general price level (or low inflation
rate); and economic growth.

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8 TOPIC 1 INTRODUCTION TO MACROECONOMICS

EXERCISE 1.1
Essay Question

1. State the differences between microeconomics and


macroeconomics.

Microeconomics Macroeconomics

(a) (a)

(b) (b)

(c) (c)

Multiple Choice Questions

1. Macroeconomics approaches are the study of economics from the


viewpoint of:

A. Individual firms

B. Individual consumer

C. The entire economy

D. Governmental units

2. Which of the following is a macroeconomic statement?

A. The price of sugar decreased by only 5% last year.

B. Perodua profits increased in 2009.

C. Productivity of TNBs workers has increased by 10%.

D. The general price level has increased by 4% last year.

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TOPIC 1 INTRODUCTION TO MACROECONOMICS 9

3. In a typical business cycle:

A. Economists describe the period from a trough to a peak as


an expansion.

B. Output and employment grow during a contraction.

C. The trend growth line has a negative slope.

D. The peak of a new cycle is lower than the peak of the


previous cycle.

4. Decision on government tax and expenditure are called


_________.

A. Monetary policy

B. Fiscal policy

C. Supply-side policy

D. Trade policies

5. Major concerns of macroeconomics are __________, __________


and _________.

A. Budget surplus; recession; expansion.

B. Growth; unemployment; inflation.

C. Money supply; interest rate; stock price.

D. National income; employment; product price.

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10 TOPIC 1 INTRODUCTION TO MACROECONOMICS

Macroeconomics studies the relationship between the aggregate variables


and the functions of an economy as a system.

Macroeconomics focuses on the nations economic growth, which is


measured based on the national income.

The two most important macroeconomic policies are monetary policy and
fiscal policy, which are used to achieve the objectives of macroeconomics, for
example, full employment, price stability and satisfying economic growth.

Economic change that relates to output expansion and contraction can be


depicted as a business cycle.

A normal business cycle consists of two vital phases, which are expansion
and contraction. It can also be viewed in more precise detail, including the
peak, recession, trough, recovery and expansion phases.

Aggregate output Monetary policy


Equilibrium Productivity
Fiscal policy Unemployment
Inflation

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