DPB2023 MACROECONOMIC

Topic 1: Introduction to
Macroeconomic

What is
macroeconomics?

What is macroeconomics?
Macroeconomics considers the
performance of the economy as a whole.
We try to understand changes in
The rate of economic growth
The rate of inflation
Unemployment
Our trade performance with other
countries
Macroeconomics also includes an
evaluation of the relative success or
failure of government economic policies

What is macroeconomics?
Microeconomics studies
individual economic units such
as households, firms and the
government in detail .
Macroeconomics studies the
aggregate behaviour of the entire
economy.

Examples of microeconomic and macroeconomic concerns

Microeconomics

Macroeconomics

Production

Prices

Income

Employment

Production/Output
in Individual
Industries and
Businesses

Price of Individual
Goods and Services

Distribution of
Income and Wealth

How much steel

How many offices
How many cars

Price of medical
care
Price of gasoline
Food prices
Apartment rents

Wages in the auto

industry
Minimum wages
Executive salaries
Poverty

Employment by
Individual
Businesses &
Industries
Jobs in the steel
industry
Number of
employees in a firm

National
Production/Output

Aggregate Price
Level

National Income
Total wages and
salaries

Employment and
Unemployment in
the Economy

Total Industrial
Output
Gross Domestic
Product
Growth of Output

Consumer prices
Producer Prices
Rate of Inflation

Total corporate
profits

Total number of
jobs
Unemployment rate

Differences Between Microeconomics and

Macroeconomics
Microeconomics

Macroeconomics

Studies individual income

Studies national income

Analyzes demand for and

supply of labour

Analyzes total employment

in the economy

Deals with households and

firms decisions

Deals with aggregate

decisions

Studies individual prices

Studies overall price level

Analyzes demand and

supply of goods

Analyzes aggregate demand

and aggregate supply

Example
Micro & Macro
Microeconomics
Recession in the tourist industry
due to the global downturn
A government subsidy to steel
producers
A recession in the textiles
industry

Example
Micro & Macro
Macroeconomics
Strong economic growth arising
from high levels of consumer
spending
A fall in exports because of a
recession in leading European
markets
Higher interest rates to curb
inflationary pressure

Goal of economic policy

What are the governments main
economic Goal?

Macroeconomics Goals

The four major economic goals are as

follows:
1) Full Employment
2) Price Stability
3) Economic Growth
4) Equitable Distribution of Income

Macroeconomics Goals
1. Full Employment
One of the macroeconomic goals is
achieving full employment of all
available factors of production i.e of
labour, land, capital and
entrepreneurs.
An economy should use all its available
resources more efficiently to attain
maximum output. Therefore, if more
resources are employed, the higher the
output of goods and services.

Macroeconomics Goals
2. Price Stability
. maintaining price stability or controlling inflation
is another macroeconomics goal.
. The objectives of the nation is to keep its
inflation rate as low as possible. Inflation occurs
when there is an increase in the overall price
level.
. Inflation can reduce the purchasing power of
powers.

Macroeconomics Goals
3.
.

Economic Growth
To achieve economic growth, which is another
macroeconomic goal, the economy must be operating
at maximum capacity. In other words, economic growth
refers to an increase in the full production output level
of a nation over time.

Economic growth can only be realized over the years.

However, the economic growth of a nation does not
move constantly but will experience short-term ups
and downs. This is called the business cycle. In a
business cycle, economic growth is measured by the
aggregate output and the unemployment rate. There
are 4 phases in a business cycle: peak, recession,
trough and recovery.

Macroeconomics Goals
4.
Equitable Distribution of Income
Most of the nation try to narrow the gap between the
higher and the lower income groups. This is to ensure
that all people are equal in terms of the standard of
living. Disparities in income will create social friction and
bring about many problems.
Taxation is one method of achieving an equitable
distribution of income. When taxes are imposed, the
higher income groups pay a higher tax to the
government.
An expenditure policy narrows the gaps between the two
income groups. Through this policy, income is more
evenly distributed with the government providing
subsidies, making transfer payments and providing
education scholarship for the lower income group.

THE CONFLICTING MACROECNOMIC

To achieve full employment and
maintain price stability.

To achieve economic
growth and a equilibrium
in balance of payments.

To achieve economic
growth and maintain
price stability.

Conflicting Macroeconomics
goals
1. Economy growth and price stability
Government encourage investment by reducing interest
rate and increase government spending.
Rise in investment level will create more job opportunity
and increase aggregate output.
When consumer spending exceeds the ss, there are
tendency for price to rise n lead to inflation.
So to keep price stable, government increase interest
rate and reduce government spending.
So this will restrict economic growth.

Conflicting Macroeconomics
goals
2. Full employment vs price stability
To achieve full employment, government use
expansionary policy, interest rate, tax and
government spending. This policy reduce
unemployment rate and increase the wages.
Increase in wages rate, impact overall price level.
So the price will increase and lead to inflation.
To curb inflation, government interest rate and
tax, government spending.
Consequently, consumer spending and investment .
Therefor unemployment level will increase.

Conflicting Macroeconomics
goals
3. Economic growth vs a balance of
payments
As an economy grows, import spending
is stimulated relative to export revenue.
As the consumers income increases the
preference for imported goods higher
than local goods. Therefore value for
import > export (deficit)
Possible way to the government to
adjust a deficit is lowering the economic
growth

Government Policies
1.

Fiscal Policy
Fiscal policy refers to the government policy
concerning taxes and expenditure
There are two types of fiscal policies : contractionary
fiscal policy and expansionary fiscal policy

Contractionary
Curb Inflation
By
TAX

Governm
ent
Expendit
ure

Expansionary
Out from
slump
Governm
ent
Expendit
ure
TAX

Government Policies
2. Monetary Policy
Monetary policy refers to the tools used by
the government through the central bank
to control the supply of money.
Monetary policy is to maintain the overall
price level, to achieve higher economic
growth, to remove fluctuations in production
and to achieve full employment.

Government Policies
There are two types of monetary policies
a) Contractionary Monetary Policy
The government can use this policy to
curb inflation where the amount of money
supplied will be reduced.
b) Expansionary Monetary Policy
This policy is implemented when there is
deflation or recession wherein the
government will increase the supply of
money

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

The Components of
the Macroeconomics

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

Aggregate Supply and

Aggregate Demand
Aggregate demand is
the total demand for
goods and services in
an economy.
Aggregate
supply is the total
supply of goods and services in an
economy.

Aggregate supply and demand

curves are more complex than
simple market supply and demand
curves.

Expansion and Contraction:

The Business Cycle
An expansion, or
boom, is the period in
the business cycle from
a trough up to a peak,
during which output
and employment rise.
A contraction, recession, or slump
is the period in the business cycle
from a peak down to a trough, during
which output and employment fall.