ECONOMICS

AND
PUBLIC POLICY II

PROFESSOR PHYU PHYU EI

Department of Applied Economics
Yangon Institute of Economics

MACROECONOMICS
REFERENCES
1.

2.

3.

4.

N. Gregory Mankiw. 2013. Macroeconomics, 8th

ed., Worth Publishers, New York.
Karl E. Case and Ray C. Fair. 2004. Principles of
Macroeconomics. 7th ed., Pearson, New Jersey.
Paul Krugman and Robin Wells. 2006.
Macroeconomics, Worth Publishers, New York.
Any standard text on macroeconomics
available.

MACROECONOMICS

Eighth Edition
N. Gregory Mankiw
3

PART I
Introduction

Chapter One

The Science of
Macroeconomics

ECONOMICS
The scientific study of people and their
institutions from the point of view of how they
go about producing and consuming goods and
services and how they face the problem of
making choices in a world of scarce resources.

Why Study ECONOMICS?

1. To better understand the profound effect that
economic issues have on the world
2. To understand what politicians are advocating,
be they great or mad, we must understand the
economic theory upon which they are acting
(the effects that economic ideas and theories
have on world leaders)
3. To better understand how the world and its
people function

Microeconomics
Microeconomics is concerned with the production
and consumption decisions of consumers and
producers and with the allocation of scarce
resources among industries. It focuses on how
decisions are made by individuals and firms and the
consequences of thoseversus
decisions.

Macroeconomics

Macroeconomics,the area of economics that

focuses on the behavior of the economy as a whole,
examines the aggregate behavior of the economy
how the actions of all the individuals and firms in
the economy interact to produce a particular
economy wide level of economic performance.
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WHAT MACROECONOMISTS STUDY

Rapid growth
Absolute poverty
Rate of inflation / Stable price
Economic experience recession / depression
Falling income / rising unemployment
Public policy to reduce the severity
The state of the economy affects everyone
macroeconomic issues plat a central role in the
national political debates

HOW ECONOMISTS THINK

Study politically charged issues
Has its own set of tools - terminology, data, and way
of thinking
Models based on Microeconomic theory
Models have two kinds of variables
1. Endogenous variables that a model tries to
explain
2. Exogenous variables a model takes as given
(How the exogenous variables affect the endogenous
variables )

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TWO JOBS OF MACROECONOMICS

1.
2.

explaining how the economy works

formulating economic policy

Macroeconomics is concerned with the behavior of the

economy as a whole with booms and recessions, the
economys total output of goods and services and the growth of
output, the growth of inflation and unemployment, the balance
of payments, and the exchange rates.
Macroeconomics deals both with long-run economic growth
and with the short-run economic fluctuations that constitute
the business cycle.
Macroeconomists collect data, formulate general theories. They
cannot conduct controlled experiments. Instead, they must make
use of the data that history gives them.
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THE ROOTS OF MACROECONOMICS

Great Depression was a period of severe
economic contraction and high unemployment
that began in 1929 and continued throughout
the 1930s.
Classical economists applied microeconomic
models, or market clearing models, to
economy-wide problems.
However, simple classical models failed to
explain the prolonged existence of high
unemployment during the Great Depression.
This provided the impetus for the development
of macroeconomics.
The

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12

THE ROOTS OF MACROECONOMICS

In

1936, John Maynard Keynes published

The General Theory of Employment,
Interest, and Money.
Keynes believed governments could
intervene in the economy and affect the
level of output and employment.
During periods of low private demand, the
government can stimulate aggregate
demand to lift the economy out of
recession.
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13

MACROECONOMIC
CONCERNS
Three

of the major concerns of

macroeconomics are:
Inflation
Output

growth
Unemployment

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INFLATION AND
DEFLATION
Inflation

is an increase in the overall price

level.
Hyperinflation is a period of very rapid
increases in the overall price level.
Hyperinflations are rare, but have been
used to study the costs and consequences of
even moderate inflation.
Deflation is a decrease in the overall price
level. Prolonged periods of deflation can be
just as damaging for the economy as
sustained inflation.
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OUTPUT GROWTH:
SHORT RUN AND LONG RUN
business cycle is the cycle of short-term
ups and downs in the economy.
The main measure of how an economy is doing
is aggregate output:
Aggregate output is the total quantity of
goods and services produced in an economy
in a given period.
The

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OUTPUT GROWTH:
SHORT RUN AND LONG RUN
A recession is a period during which aggregate
output declines. Two consecutive quarters of
decrease in output signal a recession.
A prolonged and deep recession becomes a
depression.
Policy makers attempt not only to smooth fluctuations
in output during a business cycle but also to increase
the growth rate of output in the long-run.

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UNEMPLOYMENT
unemployment rate is the
percentage of the labor force that is
unemployed.
The unemployment rate is a key indicator
of the economys health.
The existence of unemployment seems to
imply that the aggregate labor market is
not in equilibrium. Why do labor markets
not clear when other markets do?
The

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GOVERNMENT IN THE
MACROECONOMY
There

are three kinds of policy that

the government has used to
influence the macroeconomy:
Fiscal policy
2. Monetary policy
3. Growth or supply-side policies
1.

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GOVERNMENT IN THE
MACROECONOMY
Fiscal

policy refers to government policies

concerning taxes and spending.
Monetary policy consists of tools used by the
Federal Reserve to control the quantity of
money in the economy.
Growth policies are government policies that
focus on stimulating aggregate supply instead
of aggregate demand.

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THE COMPONENTS OF
THE MACRO ECONOMY

circular flow
diagram shows the
income received and
payments made by each
sector of the economy.

The

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THE COMPONENTS OF
THE MACROECONOMY

Everyones
expenditure is
someone elses
receipt. Every
transaction must
have two sides.

The circular flow

diagram shows the
income received and
payments made by
each sector of the
economy.

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3 MAJOR STATSTICS IN
MACROECONOMICS

Measuring the overall performance of the economy

(GDP)

Measuring the cost of living (CPI)

Measuring joblessness (Unemployment Rate)

I.

II.

III.

The Gross Domestic Product (GDP) is the market

value of all final goods and services produced within
an economy in a given period of time.
The consumer price index (CPI) measures the
general level of prices.
The unemployment rate tells us the fraction of
workers who are unemployed.
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THATS ALL

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THANK YOU