AGBU 1006
Semester two January to May 2011
 Students should be able to:
 Develop a basic understanding of some major
macroeconomic variables which will be dealt with
later in the course.
 Draw and explain the Business Cycle.
 Explain and represent the Circular Flow of Income
on a diagram.
 Macroeconomics is the study of the determination
of economic aggregates and averages such as total
output, total employment, the general price level
and the rate of economic growth.
 Microeconomics is the study of the allocation of
resources and the distribution of income as they
are affected by the working of the price system
and by the policies of central authorities.
 Microeconomics looks at the economy in single
detailed units or individual components dealing
with individuals’ choices, individual markets, and
individual industries.
 Macroeconomics looks at the economy as a whole
dealing with issues such as the total amount of
goods and services produced in a country, overall
productivity, total imports and total exports.
 Economic Growth is the positive trend in the nation’s
total real output or GDP over the long term.
 Put simply it occurs when the amount of goods and
services(output) a country produces increases.
 It usually arises because of an increase in resource
supplies or an improvement in technology.
 It is represented by a rightward shift of the Production
Possibility Frontier.
 A persistent increase or positive rate of growth in
the general price level.
 Erodes the value of the relevant currency experiencing
inflation.
 Failure to use all available economic
resources to produce goods and
services; failure of an economy to
employ its labor force fully.
 Unemployed persons: Persons who
are part of the labor force , are actively
looking for a job and can not get one.
 Unemployed resources :loss of output
to society.
 Price paid for the use of money or for the use of
capital.
 Cost to borrowers of money.
 Revenue to lenders of money.
 Productivity refers to output per unit of input
employed.
 Increasing productivity: getting more output for any
given amount of input, is a central target for most
governments as this fosters economic growth.
 Labor productivity: output per worker, output per hour
worked.
Fluctuations in the general level of activity in an
economy that affect many sectors at roughly the same
time, though not necessarily to the same extent. Used
to be known as trade cycles.
Stages in the Business Cycle:
 Recession
 Trough/Depression
 Recovery
 Peak/Boom
 A sustained drop in the level of economic activity for
two consecutive quarters.
 Negative economic growth for two consecutive
quarters.

Consumption declines.

Many investments suddenly become unprofitable
and new investment decreases.

Production falls.

Employment falls.

Profits fall. Some businesses fail.

Recession can turn into severe depression.

High unemployment.

Lower consumer demand.

Unused capacity in production.

Prices stable, or even falling.

Business profits low.

Business confidence in the future low.

Investment picks up.

Employment rises.

Consumer spending rises.

Profits rise.

Business confidence grows.

Prices stable, or slowly rising.

Consumer spending rising fast.

Output capacity reached: labor shortages occur.

Output can only be increased by new labor- saving
investment.

Investment spending high.

Increases in demand now stimulate price rises.

Business profits high.
 Potential GDP is the level of national output that would be
produced if the economy was operating at its normal
capacity, of full-employment level.
 Actual GDP is the total amount of goods and services
actually produced in an economy.
 The GDP or output gap is the difference between actual
GDP and its potential level.
 When potential GDP is greater than actual GDP ,
this is known as a recessionary gap, since more
output could have been produced relative to what
was actually produced.
 When actual GDP exceeds potential GDP this is
known as an inflationary gap since the demand for
factors of production increases driving their
prices up. Actual GDP may exceed potential GDP
when factors of production are employed for
longer hours example employees might work
additional hours.
Domestic
households
Financial
System
Abroad
Government
Domestic
producers