MACROECONOMICS BEB1043

Topic 1 Introduction to Macroeconomics

Introduction to Macroeconomics

Definition of Macroeconomics Three Big Macroeconomics Questions Government Policy Key Terms

Introduction to Macroeconomics

Definition of Macroeconomics The study of the performance of the national economy and the global economy. Example 1: Why did production and jobs shrink in 1998? Example 2: How would an increase in tax have an effect on government revenue? Example 3: What was the level of world unemployment last year? Looking things in aggregation form. Using a pie metaphor
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Introduction to Macroeconomics
Microeconomics What type of pie? What are the ingredients? Who get to eat it?
Macroeconomic What is inside the pie? How to divide among the dinner guests?

Introduction to Macroeconomics

Many macroeconomics issues appear in the press and on the evening news on a daily basis. When we study macroeconomics we are looking at topics such as: Economic growth Unemployment Inflation International trade Interest rate
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Introduction to Macroeconomics

Definitions Economic growth: the expansion of the economys production possibilities. Unemployment: a phase where people fit to work and willing to work do not get work after due efforts. Inflation: a situation where there is inordinate, sustained increase in the general price level. International trade: a trade (X & M) between the nationals of two countries or more. Interest rate: A rate which is charged or paid for the use of money
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Three Big Macroeconomics Questions

Three (3) Big Macroeconomics Questions What determines the standard of living? What determines the cost of living? Why does our economy fluctuate?

Three Big Macroeconomics Questions

1. What determines the standard of living? Standard of living is the level of consumption that people enjoy on average Close tie between income and consumption Measured by looking at income per capita or GDP per capita What is the average income for Malaysia ?

Three Big Macroeconomics Questions

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What determines the cost of living? The cost of living is a measure of the amount of money needed to buy the goods and services of the typical household The value of a ringgit is always changing over time What can we buy with RM1 in 1950 compares with what can we buy with RM1 now The value of money is falling over time, and we need macroeconomics to understand why Inflation occurs whenever cost of living is rising, while deflation occurs whenever cost of living is falling
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Three Big Macroeconomics Questions

3. Why does economy fluctuate?

The economy on average grows, but it does not grow at the same speed every year The growth follows an up-and-down pattern called a business cycle An expansion is an up swing in the business cycle A recession is a down swing in the business cycle We will study the causes and effects of these cycles
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Government Policy

Government through its economic policies, aims to improve the economic welfare of the country as a whole. Government policy is called macroeconomic policy. Macroeconomic policy tools are divided into two broad categories: Fiscal Policy (Topic 5) Monetary Policy (Topic 6)

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Government Policy

Objectives of Macroeconomic Policy: Full employment Price stability A high, but sustainable rate of economic growth Keeping the Balance of Payments in equilibrium

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Objectives of Macroeconomic Policy

Full employment is a situation whereby all resources are fully utilized and the unemployment rate is less than 4 percent.

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Objectives of Macroeconomic Policy

Price Stability Internal stability : keeps prices at a stable level without wide fluctuations

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Objectives of Macroeconomic Policy

Sustainable rate of economic growth Where the country should be able to produce more goods and services with the given resources. There must be sustained increase in the per capita income of the country. Economic growth can be achieved in several ways: Increase level of technology development Increase level of productivity and efficiency of labor
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Objectives of Macroeconomic Policy

Balance of payments in equilibrium External stability: ensure the balance of payments position of the economy is always in good order (balanced). Money in = Money out

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Key Terms

National economy Global economy Standards of living Costs of living Income Recession Expansion

Inflation Unemployment Value of money Business cycle Consumption

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The End

Next Topic: Measuring GDP

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