Fundamentals of Economics - Chapter 1

CHAPTER
9
INTRODUCTION TO MACROECONOMICS
LEARNING OUTCOMES
At the end of this chapter, you should be able to:

 Interpret the meaning of macroeconomics.
 Distinguish the differences between macroeconomics
and microeconomics.
 State and explain the objectives of macroeconomics
from the conventional and Islamic perspectives.
Fundamentals of Economics All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2017 1–3
INTRODUCTION TO
MACROECONOMICS
• The branch of economies that

studies decision making by a single
individual, household, firm, industry
Microeconomics or level of government
• E.g. How much to produce?, How
price is determine?
• The branch of economies that studies

decision making for the economy as a
whole.
Macroeconomics • E.g. Inflation, unemployment, money
supply, and national income

INTRODUCTION TO
MACROECONOMICS (cont.)

OBJECTIVES OF MACROECONOMICS
Conventional
perspective
Objectives of
Macroeconomics
Islamic perspective

(cont.)
Macroeconomic Objectives from the Conventional

Perspective
To achieve full employment
To achieve price stability
To achieve economic growth
To achieve an equitable distribution of income
To achieve equilibrium in the foreign sector

(cont.)
(1) To Achieve Full Employment

 Full employment does not mean there is no
unemployed or jobless people in the economy.
 It is difficult to assume that full employment refers to
100% of the labour force is being employed.
 The potential benefits of full employment in an
economy are that it can optimize the available
resources efficiently.
 The crucial consequences of unemployment to the
economy are wastage of available resources and social
problems.
(cont.)
(2) To Achieve Price Stability

 A high degree of inflation rate that is associated with a
sustained increase in the general price level can be
disastrous to an economy.
 To the consumers, inflation directly influences their
purchasing power. The quantity of goods and services
purchased will be less if inflation is high.
 Maintaining price stability is beneficial because it
means uncertainty and disruptions in the economy
are avoided. It means consumers and businesses can
safely pursue long-term consumption and production
plans.
(cont.)
(3) To Achieve Economic Growth

 Economic growth can be described as expansion in
national output over a given period of time.
 As long as a nation achieves economic growth it tells
us that the economic performance is positive.
 However, an economy will not always encounter an
upward trend over time as economies tend to
experience short-term ups and downs in their
performance. This is called a business cycle.

(cont.)

(cont.)
(4) To Achieve an Equitable Distribution of Income

 It is necessary to ensure that the economic growth of
a nation is shared equally among the population
 Generally, policymakers try to ensure that there is no
wide gap between the rich and the poor.
 This is to ensure that all people are equal in terms of
standard of living.
 Disparities of income will create social friction and
bring out many problems.

(cont.)
(5) To Achieve Equilibrium in the Foreign Sector

 Foreign sector means economic transactions or
activities that take place beyond the political
boundaries.
 If a country faces balance of payment (BOP) deficit, it
means that the country will have to borrow from
overseas and leads to high debt problems whereas a
prolonged BOP surplus will lead to inflation.
 Thus it is important for a country to understand and
determine the favourable scale of their BOP.

(cont.)
Macroeconomic Objectives from an Islamic Perspective
Social justice
Equitable distribution of income
Universal education
Optimal rate of economic growth
Maximization of employment generation

(cont.)
(1) Social Justice

 Social justice aims to achieve spiritual salvation to
human happiness.
 It is based on the principle that all existence in the
universe belongs to Allah.
 There is no difference between the rich and the poor,
between the high and the low, or between the white and
the black.
 There is to be no discrimination due to race or colour or
position.
 The only criterion of a man's worth is character, ability
and service to humanity.
(cont.)
(2) Equitable Distribution of Income

 Islam insists on a powerful built-in income-redistribution
mechanism; nevertheless some income inequality is
allowed since it promotes individual initiative.
 Social justice in Islam is rooted in man's faith.
 Income redistribution, voluntary or compulsory, is not
only an economic necessity, but also a means to spiritual
salvation.
 In Islam, happiness is not derived from the possession of
material goods, but from contentment and gratitude.

(cont.)
(3) Universal Education

 Acquisition of knowledge is obligatory in Islam.
 Thus, every child, irrespective of his birth, must receive
an equal opportunity to education.
 Man’s claim to superiority over all creations is based on
this superior knowledge.
 In an Islamic economy, the government must subsidize
or provide free education so that education is available to
equalize man who are endowed differently in terms of
wealth and property.

(cont.)
(4) Optimal Rate of Economic Growth

 Growth in an Islamic economy is comprehensive and
includes moral, spiritual and material aspects of man's
life.
 In terms of capital formation, it includes human capital
and material capital.
 Man is the central to all economic activities. This
consideration should influence the composition of
investment because the expenditure on education is
considered an investment.

(cont.)
(5) Maximization of Employment Generation

 An Islamic economy must ensure that economic
growth results in a maximum contribution to the
creation of new employment opportunities.
 Additional employment in the long run must be
generated in a technically efficient manner with
suitable technology in line with resource endowment.
 Ensuring sufficient employment also includes the
need to provide educational and training opportunities
in specific fields.


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CHAPTER

At the end of this chapter, you should be able to:

Fundamentals of Economics All Rights Reserved

• The branch of economies that

• The branch of economies that studies

Fundamentals of Economics All Rights Reserved

Fundamentals of Economics All Rights Reserved

Fundamentals of Economics All Rights Reserved

Macroeconomic Objectives from the Conventional

To achieve price stability

To achieve economic growth

To achieve an equitable distribution of income

To achieve equilibrium in the foreign sector

Fundamentals of Economics All Rights Reserved

(1) To Achieve Full Employment

(2) To Achieve Price Stability

(3) To Achieve Economic Growth

Fundamentals of Economics All Rights Reserved

Fundamentals of Economics All Rights Reserved

(4) To Achieve an Equitable Distribution of Income

Fundamentals of Economics All Rights Reserved

(5) To Achieve Equilibrium in the Foreign Sector

Fundamentals of Economics All Rights Reserved

Macroeconomic Objectives from an Islamic Perspective

Equitable distribution of income

Optimal rate of economic growth

Maximization of employment generation

Fundamentals of Economics All Rights Reserved

(1) Social Justice

(2) Equitable Distribution of Income

Fundamentals of Economics All Rights Reserved

(3) Universal Education

Fundamentals of Economics All Rights Reserved

(4) Optimal Rate of Economic Growth

Fundamentals of Economics All Rights Reserved

(5) Maximization of Employment Generation

Fundamentals of Economics All Rights Reserved

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