Macroeconomics

Microeconomics

• Analyses the economic behaviour of any individual decision making unit such as a household or a firm.
• Studies the behaviour of individual decision making unit with regard to fixation of price and output and its reactions to the changes in demand and supply conditions.
• How households and firms make decisions and how they interact in specific markets
• Consumer behavior, product and factor pricing
• Hence, microeconomics is also called price theory

Macroeconomics

• Macroeconomics looks at the economy as a whole.
• Economy-wide phenomena, including inflation, unemployment, and economic growth

Deals with the economic behavior of the whole economy or its aggregate such as government, business, unemployment, inflation and the like.

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Refers to management of income, expenditures, wealth or resources of a nation.

Microeconomics vs. Macroeconomics

• Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets.
• Macroeconomics is the study of the economy as a whole with respect to output, price level, employment, and other aggregate economic variables.

Microeconomics vs. Macroeconomics

• Macroeconomics is the study of the behavior of the economy as a whole. It examines the forces that affect firms, consumers, and workers in the aggregate.
• It contrasts with microeconomics, which studies individual prices, quantities, and markets.

Macroeconomics

• Two central themes will run through our survey of macroeconomics:
• The short-term fluctuations in output, employment, financial conditions, and prices that we call the business cycle
• The longer-term trends in output and living standards known as economic growth

What is Economic Growth?�

• Economic growth is a broad term that describes the process of increasing a country’s real gross domestic product (GDP).
• The growth can be measured as an expansion of real GDP or gross national product (GNP) over a given period.
• The rate of economic growth refers to the percentage change of real GDP from one year to another.
• With an increase in GDP or otherwise, the value of goods and services produced, people in a country can afford to consume more.
• To increase goods and services, countries must increase their capacity to produce.
• Economic growth and the expansion of production capacity result from technological change and capital accumulation.
• Therefore, in a deeper sense, economic growth involves the analysis of variables that lead to sustained expansion of production capacity.

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Understanding Economic Growth�

• Economic growth exerts a direct impact on the quality of the people’s standard of living.
• As production capacity rises, incomes increase, and consumers can buy more goods and services.
• With higher incomes and more production, they together work to increase productivity.
• The cycle continues as productivity in the factors of production rapidly grows real GDP.
• Consumers may benefit from more job opportunities, and the government can use tax revenues to spend on public services. They are just a few examples of the significant influence of economic growth on the standard of living.

Sources of Economic Growth

• Economic growth and the expansion of production capacity come from technological change and capital accumulation.
• If a country puts all its resources to produce goods and services and none of its resources to accumulate capital, its production capacity will not change.
• There is essentially a tradeoff between more production now or economic growth in the future.
• For a country to achieve increased future consumption, they must decrease the production of goods and services.
• The forgone current consumption is the opportunity cost of economic growth.

Technological Change�

• Technological change involves innovating and finding more efficient ways of production. As new technologies are adopted, a company can produce more output at a lower cost. With lower cost techniques, companies are likely to provide either lower prices or a greater quantity.
• Any advances in technology for a company come with an increase in capital.

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Capital Accumulation

• Capital accumulation refers to the growth of capital resources, such as human capital and physical capital.
• Human capital is the skill and knowledge held by an individual. It may result from education or work experience. As millions of individuals learn and become more productive, human capital will grow significantly.
• Physical capital may include additions in equipment, machines, or buildings. It leads to larger amounts of capital per worker, which results in increased productivity. The accumulation of physical capital is fundamental to economic growth and important in all areas of the economy, from a factory to a shopping mall.

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• The Economic Growth Rate
• The rate of economic growth refers to the percentage change of real GDP from one year to another. To calculate the growth rate, the following formula is used:

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• Economic Growth Rate
• Example of Economic Growth

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• Consider the following as an example of the sources of economic growth. Both Country A and Country B are two different countries. Country A’s production capacity is five times that of Country B. Country A dedicates only one-fourth of its resources to capital accumulation. Meanwhile, Country B dedicates one-third of its resources to capital accumulation.

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• While both countries are experiencing economic growth, Country B would experience a quicker expansion in production capacity than Country A. Country B experiences faster economic growth than Country A.

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• If Country B continues to dedicate its resources to capital accumulation, it may be able to catch up to Country A’s level of production capacity over time. Rapid economic growth sustained over a few years can transform a developing country into a developed one.

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Basic Business-Cycle Concepts

Business cycles are recurrent up and down movements in economic activity

A recession occurs when economic activity declines and real GDP per person falls

Which is usually longer – expansions or recessions?

Three central questions of macroeconomics�

1. Why do output and employment sometimes fall, and how can unemployment be reduced?

• All market economies show patterns of expansion and contraction known as business cycles.
• The latest business-cycle recession in the United States occurred after a severe financial-market crisis that began in 2007.
• Housing and stock prices fell sharply, and banks tightened credit and lending.
• As a result, output and employment fell sharply.
• Political leaders around the world used the tools of monetary and fiscal policy to reduce unemployment and stimulate economic activity.
• Macroeconomics studies the sources of persistent unemployment and high inflation. Having considered the symptoms, macroeconomists suggest possible remedies, such as using monetary policy to alter interest rates and credit conditions or using fiscal instruments such as taxes and spending.

2. What are the sources of price inflation, and how can it be kept under control?

• A market economy uses prices as a yardstick to measure economic values and conduct business.
• When prices are rising-a phenomenon we call inflation-the price yardstick loses its value.
• Macroeconomic policy has increasingly emphasized low and stable inflation as a key goal.
• Many countries set "inflation targets" for their economic policy, with targets range from 1 to 3 percent per year.
• Macroeconomics can suggest the proper role of monetary and fiscal policies, of exchange rate systems, and of an independent central bank in containing inflation.

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3. How can a nation increase its rate of economic growth ?

• The single most important goal of macroeconomics concerns a nation's long-term economic growth. This refers to the growth in the per capita output of a country. Such growth is the central factor in determining the growth in real wages and living standards.
• Most countries of North America and Western Europe have enjoyed rapid economic growth for two centuries, and residents in these countries have high average incomes.
• Over the last five decades, Asian countries such as Japan, South Korea, and Taiwan produced dramatic gains in living standards for their peoples. China's growth has similarly been outstanding in recent years. A few countries, particularly those of sub-Saharan Africa, have suffered declining per capita output and living standards.

OBJECTIVES AND INSTRUMENTS�OF MACROECONOMICS

• Objectives
• Output: High level and rapid growth of output
• Employment: High level of employment with low involuntary unemployment
• Stable prices
• Instruments
• Monetary policy: Buying and selling bonds, regulating financial institutions
• Fiscal policy:
• Government expenditures
• Taxation

GDP

• The most comprehensive measure of the total output in an economy is the gross domestic product (GDP).
• GDP is the measure of the market value of all final goods and services produced in a country during a year.
• There are two ways to measure GDP.
• Nominal GDP is measured in actual market prices.
• Real GDP is calculated in constant or invariant prices (where we measure the number of cars times the prices of cars in a given year such as 2000) .
• Real GDP is the most closely watched measure of output; it serves as the carefully monitored pulse of a nation's economy.

the growth rate of real GDP

The growth rate is defined as

Economic Growth

Despite the short-term fluctuations seen in business cycles, advanced economies generally exhibit a steady long-term growth in real GDP and an improvement

in living standards; this process is known as economic growth.

Potential GDP

• Potential GDP represents the maximum sustainable level of output that the economy can produce.
• When an economy is operating at its potential, there are high levels of utilization of the labor force and the capital stock. When output rises above potential output, price inflation tends to rise, while a below-potential level of output leads to high unemployment.
• Potential output is determined by the economy's productive capacity, which depends upon the inputs available (capital, labor, land, etc.) and the economy's technological efficiency.
• Potential GDP tends to grow steadily because inputs like labor and capital and the level of technology change quite slowly over time.