CHAPTER 1

MACROECONOMICS, WHAT IS IT?

Macroeconomics Defined
The study of macroeconomics covers the
whole array factors that are external to the
firm but nevertheless affect the firm. And, as
we know, the factors that affect the firm affect
everyone. Hence, macroeconomics is an
important field to study by both the firm and
the household and by the government.

Macroeconomics Defined
Macroeconomics may be defined as a branch of
learning that specializes on the study of
economics activities on the aggregate level. In
other words, It is a study of the behavior of the
economy as a whole. Thus, its concerns include:

1. Total Output
2. Total income
3. General Level of Employment
4. General Price Level

Macroeconomics Defined
In order to effectively analyze and evaluate its various
concerns, macroeconomics looks at the relevant economic
factors and studies their patterns of behavior so that their
effect on its above stated concerns may be accurately
predicted in order to afford decision makers at the level of the
firm, the household and the government make wise decisions.
The economic factors being referred to are principally interest
and inflation. These two factors are the main influences that
determine the performance of an economy.

The Birth of Macroeconomics

Macroeconomics is a younger kin of
microeconomics. Its name was not even invented
before the end of Second World War.

The seven-year (1929-1936) great depression

period completely revolutionized economic
thinking from the micro-based classical thoughts
to a broader macro-based perspective

The Birth of Macroeconomics

The great depression started in the United States
with the fall of the New York Stock Exchange in
October 1929. And, due to the sheer size of the U
economy and its concomitant huge participation
in international trade, the economic depression
quickly spread to Europe and other parts of the
world.
At its lowest ebb (1933), total production in the
US fell 50% compared to 1929 level and
unemployment went up to about 26%.

The Birth of Macroeconomics

At the beginning of the great depression, economists at that time,
sticking to their classical orientation, saw the phenomenon as a
natural thing that should happen n the course of the recurring
business cycle, therefore, would be self-correcting. This premised
on the classical view that after prosperity, the economy has to
experience a downturn due to overproduction, but would be selfcorrecting.
They argued that as the economy declines, demand for labor will
also decline which would bring wage rate down. They saw the
forthcoming wage cut as the signal that will induce producers to
hire more workers that would eventually increased both demand
and output, starting altogether a new cycle of recovery and higher
level of prosperity. But the wait is lingered and the expected
recovery was not forthcoming.

The Birth of Macroeconomics

At the other side of Atlantic, during these same times,
a Cambridge professor, John Maynard Keynes was
putting together a book that would later on explain the
theoretical framework of the great depression and
what should be done about it.
The book was released in 1936 and was entitled The
General Theory Employment, Interest and Money.
This book explained the interrelationship of the various
functions of the economy, from production to
consumption including everything between them,

The Birth of Macroeconomics

The book revolutionized economic thought because it
clearly outlined how the government can intervene in
the economy to counterpart the erstwhile recurring
business cycle through the implementation of its Fiscal
Policy (Taxation and Government Expenditure).
Through it, accumulating government surpluses during
prosperity and creating fiscal deficits during recession
can smoothen the ups and downs in the economy out.
From then on, the so-called Depression in the course of
the business cycle had been a thing of the past.

Problems of Macroeconomics
After the publication of the General Theory of Employment, Interest
and Money, the problem of macroeconomics has been primarily a
government concern.
These problems include:
1.
2.
3.
4.
5.
6.

Unemployment
Inflation
Growth and Development
Interest Policy
Level of Taxation and Government Budget
International Trade Policy

The primary tools that used by the government in addressing these

problems are monetary and fiscal policies.

Exercise 1.1
Answer the following questions.
1.
2.
3.
4.
5.
6.
7.

Long before 1930s John Maynard Keynes had been formulating macroeconomic
models but had been continuously ignored by different economists. What
triggered the U.S. Government to believe in his models?
What macroeconomic tool is used when you need to expand your tax base?
When interest rates fluctuate freely and rates are based on the situation of
financial market, such policy is an example of what macroeconomics tool?
It is believed that macroeconomic problems are primarily government concern.
What are the two most important tools used to address this concern?
Classical theory views the phases of business cycle as a self-correcting
mechanism in the economys imbalance. What does John Maynard Keynes
macroeconomic theory states about the same?
The working of the fiscal policies is to see it that targets are met. If revenue
target are not met, what is likely to happen in out economic operations?
Employment provides income to our people. In the absence of opportunity to
get employment, what are the visible effects?

Exercise 1.2
Identify whether the given data need microeconomic analysis or
macroeconomic analysis.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

The functioning of the household and firm.

Deflate the 2002 deficit to 130 B.
The entry of china in World Trade Organization.
Stagnant agricultural income of many farms.
Aggressive foreign investment influx In Subic.
Increase of general price.
Suspension of the release of pork barrel fund does to some query.
Effects of prolong recession.
11.78% unemployment rate in our country.
Real income of Mr. Mando Maestro after getting a promotion in his
office.

Exercise 1.3
Choose the appropriate analysis based on the given situation: Why it is
micro, or why it its a macro in nature? If the answer is micro, transform it
to micro; likewise, if the answer is macro, transfer it to micro.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

550 workers of KULAS Limited Inc.

Consumption summation of year 2001
Profit and loss of May Oban Sia Enterprises
3.5% economic growth brought about by companies.
Increase in the total export of agricultural products.
Transportation expenses of Hintoka household
Role of unemployment every quarter of a year.
Budget allotment of Veterans pensioner.
Interest rates modulation.
Imported chocolates affecting Cho-Nut supply