Spring 2009
Aisha Khan
Section F & G
ECO 121
MACROECONOMICS
Lecture One

Aisha Khan



Office: Centre for Research in Economics and Business (CREB)
Email: aisha@lahoreschool.edu.pk
Office hours:



Mondays 9:00- 10:30 am
Tuesdays 11:00-12:30 pm
Teaching Assistants:
 Section
F: Taha Ahmed V4ever85@hotmail.com
 Section G: Nida Zahid nida_zahid1@hotmail.com
Classroom Etiquette

Cell phones must be turned off during class hours.

Quizzes and Assignments will not be retaken.

Cheating in exams/quizzes and any form of plagiarism will be penalized.
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
Five absences are allowed for the term after which attendance marks will
be affected.
Attendance will be taken in the first half and after the break. If you miss
either half of the session, you will be marked absent for the entire session.
If you would like to meet at a time other than the office hours, email in
advance to setup up an appointment.
Assessment
(tentative)
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
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Final Examination
Mid Term Examination
Quizzes (best 3 out of 4)
Assignments (2)
Review Paper/ Presentation
Class Attendance
35%
25%
15%
10%
10%
5%
Syllabus
Introduction: Macroeconomic Issues
National Income and Output
Money, Banking and Monetary Policy
I.
II.
III.
Core Reading List:
II.
McConnell and Brue, Economic Principles, Problems and Policies
Lipsey, An Introduction to Positive Economics

Course Pack: Available at the Photocopier
I.
What is Economics?

What is the economy? Economics?

Scarcity
 Resources
of individuals
 Resources of countries

Opportunity Costs

Positive economics
 Focuses

on facts, description, theory development
Normative economics
 Incorporates
value judgments- what the economy should
be like (policy economics)
Macro vs. Micro




Allocation decisions take place at various levels
Two different points of observation
Macroeconomics  total output of a nation,
allocation of land, labor, capital
Microeconomics  similar issues but at the level of
individuals and firms
Macroeconomics

Economic measures of the macro economy
 Monitor
the production of the nation
 Help determine inputs to the production process
 Examples


Total output/income of a nation (GDP)
Population
 Workforce
(labor)
 Unemployment

Prices
 CPI,
WPI
 Inflation

Savings
 Investment
 new capital
Production Process

Production function
 Inputs:
Land/Capital, Labor
 Other factors are assumed to be fixed (technology etc)
Y
=f(K,L)
Y=f(K,L)
Y
K, L

Shape?

Diminishing marginal productivity
 As
inputs increase initially, output increases by a large
factor
 As inputs increase in the latter half, output increases but
at a decreasing rate
Population




All ages make up the entire population
Ages 15-65 constitute the working force  can be
employed as labor
Unemployment?
Large numbers unemployed as is taking place in the
US today  what significance does it hold?
Prices

Measuring prices
Consumer Price index (basket of consuemr goods)
Wholesale Price Index

Inflation


 Percentage
change in prices
Savings



Portion of income saved(not consumed)
Investment
Leads to greater capital accumulation
 Helps
increase production
 Helps the economy grow
State Bank of Pakistan (SBP) report –
First Quarterly Report 2008-09
Global Inflationary Trends
Economic Growth and Instability

M&B- Chapter 8

What is Economic growth? (define)

Why is it important for economic growth to take
place?
Economic Growth

An increase in real GDP occurring over some time
An increase in real GDP per capita occurring over
some time period

“Growth lessons the burden of scarcity”

A goal for countries?


“Growth lessons the burden of scarcity”

A goal for countries?
Rule of 70


Mathematical approximation of the effect of
growth
Approximate number of years required to double
GDP = 70/ (annual percentage rate of growth)
Sources of Growth
1.
2.

Increasing its inputs of resources
Increasing productivity of inputs
Productivity (real output per unit of input) rises by
increasing health, sanitation, training, education,
motivation
The Business Cycle

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Does growth take place persistently?
Case of Pakistan: episodic growth between 20002005
Now?
Phases of economic growth/ activity are
characterized as business cycles


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Peak: temporary maximum in activity
Recession: a period of decline in employment, trade,
income
Trough: bottom lowest in the temporary cycle
Recovery: rise in output and employment towards
full employment

Causes of business cycles
 Changes


in productivity
changes in spending levels
Growth trend is the overall trend of the business
cycles
 Expansionary
 Contractionary

Who is affected the most through a cycle?
 Capital
goods/ consumer durables can be put off to a
later date e.g. car industry in the US

Whereas,
 Non-durable
consumer goods (services) harder to
remove oneself from e.g. medical, legal services
Unemployment

Those part of the labor force which are not
employed
 must
be actively seeking work to be considered
unemployed

Calculate
Types of unemployment
1.
Frictional


2.
Structural

3.
In search of employment
In between jobs, fresh graduates
Changes in consumer preferences, demand and in
technology e.g sewing
Cyclical

Caused by changes in spending , less demand and
less income causes higher unemployment e.g. Credit
Crunch 2008
Full Employment


The maximum population that can be employed at
a time (considering only structural and frictional
unemployment)
Natural Rate of Unemployment (NRU)
 unemployment
rate at full employment level
Economic cost of unemployment

Large unemployment has costs
 Causes
a GDP gap
 The
amount by which actual GDP falls short of potential
GDP (at full employment levels)
 Okun’s law: for every 1percentage point unemployment rises
above NRU a GDP gap of 2 percent occurs

Cost of unemployment is unequally distributed
 Different
rates
groups experience different unemployment

Unemployment varies by
Occupation
 Age
 Race and ethnicity
 Gender
 Education
 Duration


Non-economic costs:

depression, socio-political unrest, lowering morale, poverty,
ethnic and racial tension
Inflation

Rise in the general level of prices

Measuring inflation
 Price
indices
 Calculate

Types of inflation
 Demand-pull
inflation
 Cost-push inflation
Types of Inflation

Demand-pull
 Excess
demand for goods, can push up prices
 “too much spending chasing too few goods”

Cost-push
 Rising
per-unit production costs
 Reduces profits and thus reduces output
 Prices rise
 Also known as supply shocks