CHAPTER 1

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CHAPTER 1
INTRODUCTION TO
MACROECONOMICS
Introduction to Macroeconomics
• The difference between microeconomics and
macroeconomics.
• Issues related to macroeconomics (output
growth, unemployment, inflation and
deflation)
• Public policies in solving macroeconomic
problems.
 Microeconomics: examines the functioning of individual industries and
the behavior of individual decision making units – firms and
households
 Macroeconomics: the study of how the whole economy works.
Macroeconomics deals with aggregates such as aggregate C and I, and
looks at the overall level of prices instead of individual prices.
 Economic issues:
 Current issues
 Economic growth (Gross Domestic Product = National Income) / reducing
the unemployment rate.
 Deflation and unemployment
 Control inflation and price stability
 General price level (CPI) – a measure of inflation
 Public policies to reduce certain problems in the
economy
 External Economy: (X & M)
• Public policies & Tools to reduce economic
problems.
– Fiscal policy: deals with government spending, G and
taxes, T
– Monetary policy: deals with money supply (Ms) and
bank rate (r).
– Direct controls: focus directly on the cause of the
problem – controlling prices by setting controlled items,
controlling wages, increasing AS by improving the
productivity, giving subsidies.
– International trade policy: related to exports (X) and
imports (M)
• control foreign exchange for balance trade stability.
Macroeconomic objectives:
1.Full employment or reducing the unemployment rate.
Unemployment rate = the % of people in the labor force
who are without jobs and are actively seeking jobs.
Full employment does not mean that 100 per cent of
the labour force is employed. This is because there are
always some people who are voluntarily unemployed as
a result of being unsatisfied with their current job and
resigning to find another job.
2. Control inflation or maintaining price
 The objective of the nation is to keep its inflation rate
as low as possible.
 inflation = an increase in the general price level in the
economy. Inflation will reduce the value of money or
the purchasing power of money.
 The quantity of goods and services purchased will be
less if inflation is high.
3. Achieving a steady rate of economic growth:
rate of economic growth = the % increase in the real
output over a 12 month period.
In a business cycle, economic growth is measured by the
aggregate output and the unemployment rate. There are
four phases in a business cycle : peak, recession, trough
and recovery.
Economic growth is also measured by evaluating the full
production output per capita. If the growth rate of output
is greater than the growth rate of the population, it
shows an increase in the amount of goods and services
produced per person. Therefore, on average, people
would be better off.
4. Better quality of life
 an increase in the amount of goods and services
as well as a better living environment (less
pollution, more green, less flood, less crime).
5. A balance in the balance of payment
 to maintain the external value of the country’s
currency and economic stability.
 A country will try to get an overall surplus balance
of payment. If we have deficit, this means that the
country will have to borrow from abroad or attract
deposits from abroad. This paying high interest
rate and increasing country’s debt.
“ Success is no accident, it is hard work,
perseverance, learning, studying, sacrifice
and most of all, love of what you are doing.”
― Pele
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