MACROECONOM

ICS
BAFB1033

Topic
1

Introduction
to
Macroecono
mics

Content
Definition of
Macroeconomics
The Roots of
Macroeconomics
Macroeconomic
Concerns
Government in the
Macro Economy
The components of the
Macro Economy
Business Cycle
Key Terms
2

Definition of Macroeconomics
Is the study of the performance of the national
economy and the global economy.
It deals with the economy as a whole.
It studies the aggregates behavior of the entire
economy such as aggregate income, consumption,
investment, and the overall level of prices.
Microeconomics

Macroeconomics

Studies individual price

Studies overall price level

Studies household income

Studies national income

Analyzes demand for labor in

a particular industry

Analyzes overall the

employment in the country

Introduction to Macroeconomics

Definition of
Macroeconomics
Connections to microeconomics:
Thus, Macroeconomic behavior is the sum of all
the microeconomic decisions made by
individual households and firms.
We cannot understand the former without
some knowledge of the factors that influence
the latter.

Introduction to Macroeconomics

Definition of Macroeconomics
When we study macroeconomics we are
looking at topics such as:
Economic growth
National Income
Unemployment
Inflation
International trade
Interest rate

Introduction to Macroeconomics

The Roots of Macroeconomics

The Great
Depression was
a period of severe
economic
contraction and
high
unemployment
that began in
1929 and
continued
throughout the
1930s.

Introduction to Macroeconomics

The Roots of Macroeconomics

Classical economists applied
microeconomic models, or market
clearing models, to economy-wide
problems.
The failure of simple classical models to
explain the prolonged existence of high
unemployment during the Great
Depression provided the impetus for the
development of macroeconomics.

Introduction to Macroeconomics

Macroeconomic Concerns
and Goals
Three of the major concerns of
macroeconomics are:
Inflation
Slow Output growth
Unemployment

Introduction to Macroeconomics

(1) Inflation
Inflation is an increase in the overall price
level i.e. increase on the average prices
It reduces the purchasing power of
consumers
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.

Introduction to Macroeconomics

(2) Slow Output Growth

Slow output growth indicate the economy
is not operating at maximum capacity
The economic growth does not move
constantly, but will experience shortterms ups and downs called business
cycle.
The business cycle is the cycle of shortterm ups and downs in the economy.

Introduction to Macroeconomics

(2) Slow Output Growth

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.

Introduction to Macroeconomics

(2) Output Growth

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.
The size of the growth rate of output over a
long period is also a concern of
macroeconomists and policy makers.

Introduction to Macroeconomics

(3) Unemployment
The unemployment rate is the
percentage of the labor force that is
unemployed.
The unemployment rate is a key indicator
of the economys health.
High unemployment indicates inefficiency and
a waste of resources

full employment does not mean that 100%

of labor force is employed.

Introduction to Macroeconomics

(3) Unemployment
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?
This is because thre are always dome people
who are voluntarily unemployed as a result of
being unsatisfied with their current job and
resigning to find another job.

Introduction to Macroeconomics

Macroeconomic Concerns
and Goals
Macroeconomics
Concerns

Macroeconomics
Goals

Inflation

Price Stability

Slow output growth

Economic growth

Unemployment

Full employment

15

Government in the
Macroeconomy

Policy efforts undertaken to reduce the

severity of recessions and inflation are
called stabilization policy.
One type of stabilization policy is
monetary policy contractionary
& expansionary
The second type of stabilization
policy is fiscal policy
contractionary & expansionary
Introduction to Macroeconomics

Government in the
Macroeconomy
Fiscal policy refers to
government policies concerning
taxes and expenditures.
Monetary policy consists of
tools used by the central
bank/Federal Reserve/ Bank
Negara Malaysia to control the
money supply.
Introduction to Macroeconomics

The Components of
Macroeconomics
Macroeconomics focuses on 4
sectors:
Households
Firms
Government
International sectors /rest of the world

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The Components of
Macroeconomics
The circular flow diagram shows
the income received and payments made by
each of this sector to the economy.
The economic interaction between the four
sectors of the economy

Introduction to Macroeconomics

The Components of
Macroeconomics
Everyones
expenditures go
somewhere.
Every
transaction must
have two sides.

The Components of
Macroeconomics
Households, firms, the government, and the rest
of the world all interact in the goods-andservices, labor, and money markets.

The Components of
Macroeconomics
Households and the government purchase
goods and services (demand) from firms in
the goods-and services market, and firms
supply to the goods and services market.
In the labor market, firms and government
purchase (demand) labor from households
(supply).
The total supply of labor in the economy
depends on the sum of decisions made by
households.

Introduction to Macroeconomics

The Components of
Macroeconomics

In the money marketsometimes called

the financial markethouseholds purchase
stocks and bonds from firms.
Households supply funds to this market in
the expectation of earning income, and
also demand (borrow) funds from this
market.
Firms, government, and the rest of the
world also engage in borrowing and
lending, coordinated by financial
institutions.
Introduction to Macroeconomics

Business Cycle
Economic fluctuations are irregular
and unpredictable.
Fluctuations in the economy are often
called the business cycle.

Most macroeconomic variables

fluctuate together.

Introduction to Macroeconomics

Business Cycle
Most macroeconomic variables
fluctuate together.
Most macroeconomic variables that
measure some type of income or
production fluctuate closely together.
Although many macroeconomic
variables fluctuate together, they
fluctuate by different amounts.

Introduction to Macroeconomics

Business Cycle
Peak

n
tio

Ex
pa
ns
ion

ac

Trough

ntr

o
cti
tra

Ex
pa

Co

n
Co

ns
ion

Peak

Expansion
During a period of expansion:
Wages increase
Low unemployment
People are optimistic and spending
money
High demand for goods
Businesses start
Easy to get a bank loan
Businesses make profits and stock prices
increase

Introduction to Macroeconomics

Peak
When the economic cycle peaks:
The economy stops growing (reached
the top)
GDP reaches maximum
Businesses cant produce any more or
hire more people
Cycle begins to contract

Introduction to Macroeconomics

Contraction
During a period of contraction:
Businesses cut back production and
layoff people
Unemployment increases
Number of jobs decline
People are pessimistic (negative) and
stop spending money
Banks stop lending money
Introduction to Macroeconomics

Trough
When the economic cycle reaches a
trough:
Economy bottoms-out (reaches lowest
point)
High unemployment and low spending
Stock prices drop

But, when we hit bottom, no where to go

but up!
UNLESS.
Introduction to Macroeconomics

Who Cares?????
Why should you care about the
business cycle and economy?
Lots of reasons!

Introduction to Macroeconomics

Dont quit that job!

If the economy is going into a
contraction, jobs will become more
scarce. If you quit, you may not find
another job!
But, if the economy is in a period of
expansion, jobs are readily available. It
may be a good time to switch careers.
Introduction to Macroeconomics

Should I make a big

purchase?
Only if you know that you wont lose
your job in a contraction. So, buy
your house during an expansion.
HOWEVER,
When the economy starts to slow
down (contraction), interest rates will
decrease. Wait to buy a house until
the rates drop to a low point, if you
are sure you wont lose your job.
Introduction to Macroeconomics

The End

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