INTRODUCTION TO ECONOMICS II

•  Welcome to the Class!

•  Reading the class syllabus is a must

 INTRODUCTION TO ECONOMICS II

•  Students should review the page before each meeting: Read the
relevant chapter for the upcoming meeting

•  You are welcome to bring your laptop to the class

 INTRODUCTION TO ECONOMICS II

•  I will post lecture notes and do files after each class

•  I discourage students to take handwritten notes of all points in the

slides:
•  too slow
•  each of my lecture goes for 120 minutes max

•  You should read the textbook prior to each class

•  Pointers in the lecture notes should confirm what you've read

 INTRODUCTION TO ECONOMICS II

•  Ask!

•  Do not let a concept go undiscussed if you are still in doubt of its

essence

•  Do not ask your friends who sat next to you, he may not understand too!

•  Do not talk during my lecture or you will be dismissed from the class

•  Work in a group of two or three to discuss important concepts in class

and in problem sets
 INTRODUCTION TO ECONOMICS II

•  University copyright rules: – taking pictures or videos is prohibited:

•  request permission for audio recording
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•  Plagiarism on assignments

•  We may take phone calls only outside of the class

 INTRODUCTION TO ECONOMICS II

•  I will not entertain:

•  request for quiz, pop-quiz, or exam make ups:
•  request for assignment make ups
•  request for extra assignment if you score low on your exams

•  You are adults, act as adults, and take responsibilities as adults

•  I will implement fairness in grading

•  My grades are final but you have the rights to review your exam in front
of me
 READINGS

•  Mankiw, N.G., Principles of Economics, 8th edition, Cengage

Technology Edition, 2018. (M)

•  Samuelson, P. A. and W. Nordhaus, Economics, 19th edition, McGraw-

Hill Irwin, 2010. (SN)
 COURSE OBJECTIVES

•  To understand basic economic concepts related to macroeconomics.

•  To use basic economic principles to analyse macroeconomic issues or

phenomena.

•  To use basic economic principles to be able to predict how changes in

policy are expected to impact the economy.
PRINCIPLES OF ECONOMICS
Chapter 19 The Macroeconomic Perspective
PowerPoint Image Slideshow
 MICROECONOMICS VS MACROECONOMICS

Microeconomics:
The study of how individual households and firms make decisions, interact
with one another in markets.

Macroeconomics:
deals with the economy as a whole; it examines the behavior of economic
aggregates such as aggregate income, consumption, investment, and the
overall level of prices.
 THE GREAT DEPRESSION, 1929-33

At times, such as when many people are in need of government

assistance, it is easy to tell how the economy is doing. This
photograph shows people lined up during the Great Depression,
waiting for relief checks. At other times, when some are doing well
and others are not, it is more difficult to ascertain how the economy of
a country is doing.
 12 of 24
John Maynard Keynes
Much of the framework of
modern macroeconomics
comes from the works of
John Maynard Keynes,
whose The General
Theory of Employment,
Interest and Money was
published in 1936, which
emphasized short-term
stability.
“In the long-run, we are all
dead.”
 13 of 24
MACROECONOMIC GOALS

Three of the major goals of macroeconomics are

"   Sustained Economic Growth (about 3% per year)

" Low Unemployment (4-5% annually)

" Low Inflation (0-3% annually)

 INDONESIAN ECONOMIC GROWTH

GDP Growth by Industry: 2010 Constant Price, 2015-2018

Primary: Agriculture Primary: Mining and Quarriying
Industry Service
% y-o-y GDP
8

6
5.27 5.17

-2

-4

-6

Sumber: Setiastuti & Sahadewo (2019)

INFLATION IN INDONESIA
 INFLATION IN INDONESIA

Core Administered Prices Volatile Inflation

% (y-o-y)

12

10

8
2.82
6 1.76

2 3.39
3.06
0

-2
 INDONESIAN ECONOMIC GROWTH

GDP Growth by Industry: 2010 Constant Price, 2015-2018

Primary: Agriculture Primary: Mining and Quarriying
Industry Service
% y-o-y GDP
8

6
5.27 5.17

-2

-4

-6

Sumber: Setiastuti & Sahadewo (2019)

 INDONESIAN ECONOMIC GROWTH

Sumber: Setiastuti & Sahadewo (2019)

UNEMPLOYMENT IN INDONESIA
 20 of 24
MACROECONOMIC POLICIES

Fiscal Policy: Government policies of

changing income taxes and public
spending.

Monetary Policy: The tools used by the

Federal Reserve System to control the
quantity of money, which in turn, affects
interest rates.
 MACROECONOMIC FRAMEWORK

This chart shows what macroeconomics is about. The

box on the left indicates macroeconomic goals.
The middle box lists the framework economists use to
analyze macroeconomic changes.
The box on the right indicates the two tools the federal
government uses to influence the macro economy.
 22 of 24
MACROECONOMIC ACTIVITY

The Circular Flow

Diagram: A diagram
showing the income
received and payments
made by each sector of
the economy.
 GROSS DOMESTIC PRODUCT

GDP measures the market value of final goods and

services produced within national boundaries,
regardless who produced them.
GDP = C + I + G + (EX – IM)
COMPONENTS OF GDP
 WHAT ABOUT INDONESIA?

GDP Growth by Expenditure: 2010 Constant Price, 2016-2018

Household Consumption Expenditure Non-Profit Institutions Servings Consumption Exp

Government Expenditure Gross Fixed Capital Formation
Exports Imports
% y-o-y

20
14.06
15
[VALUE]
10
[VALUE]
5

[VALUE]
0

-5 [VALUE]
-10 [VALUE]

-15

Sumber: Setiastuti & Sahadewo (2019)

 WHAT ABOUT INDONESIA?

Private Consumption Government Consumption Investment

Net Export Changes in Inventory Statistical Discrepancy

% y-o-y
7.00

6.00
1.02
5.00 0.52
4.00 [VALUE]

3.00
[VALUE]
2.00

1.00
[VALUE]

0.00

-1.00
[VALUE]

-2.00

Sumber: Setiastuti & Sahadewo (2019)

 27 of 35
GROSS DOMESTIC PRODUCT (GDP)

Goods & Services Excluded from GDP Calculation

•  Used goods: already included when produced

•  Intermediate goods: already counted in final sale;
avoid double-counting of same items
•  Barter transactions: have no market value
•  Do-it-yourself activities: hard to compute
•  Paper transactions: do not add to production
•  Illegal goods and services: are not supposed to
be produced
 28 of 35
NOMINAL VS. REAL GDP

Nominal GDP: GDP measured at existing (current-year) prices

Real GDP: GDP measured at constant (base-year) prices

GDP Deflator: A measure of the general price level =

(Nominal GDP / Real GDP) * 100

Economic Growth Rate = Percentage change of Real GDP

Inflation Rate = Percentage change of Implicit GDP Deflator

Per Capita GDP = Real GDP / Population

 NOMINAL GDP

Nominal GDP values have risen exponentially from

1960 through 2010.
 GDP DEFLATOR

Much like nominal GDP, the GDP deflator has risen

exponentially from 1960 through 2010.
NOMINAL GDP VS. REAL GDP
 REAL GDP

U.S. Real GDP in 2012 was about $13 trillion. After

adjusting to remove the effects of inflation, this
represents a roughly 20-fold increase in the economy’s
production of goods and services since the start of the
twentieth century.
 33 of 35
LIMITATION OF GDP
GDP is not a Measure of Social Welfare
Society is better off when crime decreases; however, a decrease
in crime is not reflected in GDP. But, money spend on crime
reduction is included in GDP.

- Violent crimes falling 10% this year

ü  - Five extra police officers are hired at $80,000 each per year

An increase in leisure time is an improvement in social welfare;

but it is not reflected in GDP. Money spent on having more leisure
is included in GDP.

- Working three days a week

ü  - Club membership and expenses to playing golf two days a
week
 LIMITATION OF GDP
GDP is not a Measure of Social Welfare

Non-market transactions and do-it-yourself activities are not

counted in GDP even though they amount to real production.

- Stay home moms to raise children

ü  - Enrolling children at private day-care centers

Externalities of production and consumption are not included

in GDP.

- Air pollution, water contamination

ü  - Paying for smog checks

34 of 35
 AGGREGATE DEMAND AND SUPPLY CURVE

Aggregate demand curve.

It represents what everyone in the economy—consumers,
businesses, foreigners, and governments—would buy at different
aggregate price levels (with other factors affecting aggregate demand
held constant).

Aggregate supply curve

The quantity of goods and services that businesses are willing to
produce and sell at each price level (with other determinants of
aggregate supply held constant).
 MACROECONOMICS DATA

Faculty of Economics and Business

•  CEIC database
•  Bloomberg database

Web
•  Bank Indonesia SEKI
•  FRED
•  World Bank Open Database