INTRODUCTION TO MACROECONOMICS
Economics is the study of the choices people makes to
satisfy their wants and needs with a limited supply of
resources.
The concept of economics also involves the study of
production, distribution, and consumption of goods and
services that means how many goods and services need
to be produced, how will they produce them, and who
will use them.
Want is something people desire or need to have. Good
is a physical product we can hold and touch like books
and phones. Service is an action provided to us not
something that can be held or touched.
Resource is anything used to get or create goods and
service that people want. It includes anything from
natural resources from land, capital like money and the
buildings and machine used to produce goods and
services.
Scarcity means having limited supply of resources to
meet the needs and wants of society. Everyone can’t
have everything they want after all. Scarcity is what
drives economic decisions in society.
All economic questions fall into one of two categories:
Positive and Normative
Positive Economics
• What Is
• No value judgements
Normative Economics
• What ought to be
• Has value judgements
Two kinds of cost
Explicit cost involves monetary payment. An easy way
to remember explicit cost is there’s probably a receipt
for the item.
Implicit cost is an opportunity cost that occurs from
allocation of resources for a specific purpose, which
cannot easily be assigned a monetary value.
Two branches of economics
MICROECONOMICS- Came from Greek word “mikros”
meaning small.
Deals with the behavior of individual actors in the
economy.
MACROECONOMICS- Came from Greek word “makro”
meaning large.
Interested in the economy as a whole.
Macroeconomics is focused on three key indicators of
the economy’s performance and the underlying
explanations for their behavior. The indicators are:
1. The rate of growth of real national income.
2. The rate of inflation.
3. The rate of unemployment.
Three key dimensions of macroeconomic activity
1. Output
o A measure of the total quantity of goods and services
produced in the economy. It is also a measure of the
incomes generated by that production.
2. Price
o The weighted average of the market prices of all final
goods and services produced. The price level reflects
the costs of production in the economy.
3. Employment
o A measure of the number of jobs involved in the
production of goods and services, or, in more refined
terms, the number of hours of labor input required to
produce the economy’s output.
Definition of Terms
Real Gross Domestic Product- the quantity of final
goods and services produced by the economy in a
specified time period.
Economic growth- an increase in real GDP. Price level- a
measure of the average prices of all goods and services
produced in the economy.
Price index- a measure of the price level in one year
compared with prices in a base year.
Consumer Price Index (CPI)- a measure of the cost of
living in any one year compared to the cost of living in a
base year.
Inflation- a persistent rise in the general price level.
Labour force- adults employed plus those not employed
but actively looking for work.
Employment- number of adults employed full-time and
part-time and self-employed.
Unemployment- number of adults not working but
actively looking for work.
Cyclical unemployment- would be eliminated by higher
levels of economic activity.
Frictional unemployment- a result of the time involved
in adjusting to changing labour force and employment
opportunities.
Structural unemployment- caused by changes in
economic structure relative to labour characteristics.
Recession- a decline in economic activity, often defined
as two consecutive quarters of negative growth in real
GDP.
SUPPLY AND DEMAND ON
MACROECONOMICS
Non-economists frequently describe microeconomics
by saying “it’s all about supply and demand.”
What is supply and demand?
Demand is the quantity of a good or service that buyers
wish to purchase at each possible price, with all other
influences on demand remaining unchanged.
Supply is the quantity of a good or service that sellers
are willing to sell at each possible price, with all other
influences on supply remaining unchanged.
The Law of Demand
• states that "the higher the price (P) of the good, the
lesser the quantity demanded (Q)," or alternatively
stated, "the lower the price, the higher the quantity
demanded all other thing held equal or constant.
The equilibrium price equates demand and supply – it
clears the market. At higher prices there is an excess
supply— suppliers wish to sell more than buyers wish to
buy. Conversely, at lower prices there is an excess
demand. Only at the equilibrium price is the quantity
supplied equal to the quantity demanded.
Demand and supply curves
The demand curve reflects the relationship between
price and quantity demanded, but price is not the only
variable or factor can influence the consumer's demand.
Other non-price determinants of demand or the other
factors that may affect demand are as follows:
1. INCOME has direct relation for normal goods but if
the product is an inferior good, its relationship to
demand is inverse.
2. TASTES AND PREFERENCES have direct relation to
demand. if one’s taste is in favor of the product, the
higher will be the demand for it.
3. PRICES OF RELATED GOODS AND SERVICES for
substitute goods like nice and bread, if price of rice
increases, demand of bread increases, so relation is
direct but inverse for complementary goods like bread
and butter. if price of bread increases, other things
constant, the demand for butter declines.
4. BUYER'S EXPECTATIONS ABOUT FUTURE PRICES has
direct relation to demand. if price is expected to
increase, people tend to panic buy, hence, demand
increases.
5. NUMBER OF BUYERS has direct relation to demand.
the more the number of buyers the higher.
The Law of Supply
The law of supply demonstrates the quantities that will
be sold at certain prices. But unlike the law of demand,
the supply curve shows an upward slope. This means
that the higher the price, the higher the quantity
supplied. Produces supply more at a higher price
because it will mean higher revenue.
Supply Curve
Supply curve is a locus of points that shows the inverse
relations between price and quantity supply all other
things constant or equal.
Determinants of Supply
Aside from the price of the product there are non-price
factors that determine or affect the supply of a product.
These are the following:
1. Production costs has an inverse relation to supply.
High production cost discourages sellers hence there
will be a decrease in supply
2. Technology has a direct relation to supply. An
improved technology encourages producers hence
there will be an increase in supply.
3. The price of related goods or price of competing
products has an inverse relation to supply. For farmers,
palay and corn are competing products, if the price of
palay increases farmers will plant palay rather than corn
its competing product to take advantage of higher price
of palay.
4. Firm's expectations about future prices has an
inverse relation to supply. If the price of rice is expected
to increase, traders tend to hoard, hence, there will be
a decrease in present supply.
5. Number of suppliers has a direct relation to supply.
The more number of sellers, the higher the supply.
Change in demand occurs when there is a change in any
determinants of demand such as income, number of
buyers, price expectations, etc.
A Change in supply occurs whenever any of the non-
price determinants of supply changes. An increase in
supply is represented by a shift of the supply curve to
the right.
The term EQUILIBRIUM means that all forces in the
market are in balance.
Surplus and Shortage Defined
A surplus is the amount by which the quantity supplied
of a product exceeds the quantity demanded at a
specific price.
A shortage is the amount by which the quantity
demanded of a product exceeds the quantity supplied
at a specific price.
GOVERNMENT POLICIES ON SUPPLY AND DEMAND
1. Price Controls are govt. Rule or law that inhibits the
formation of market-determined prices. Price Controls
come in the form of either floors or ceilings.
Price Ceiling
A legally established maximum price at which a good to
be sold. It means that suppliers cannot legally charge
more than the specific price.
Two outcomes are possible when government imposes
a price ceiling
1. Not Binding price ceiling - if set above the
equilibrium price.
2. Binding price ceiling – if set below the
equilibrium price, leading to a shortage.
Price Floor
• A legally established minimum price at which a good
to be sold.
• It set the price above the market clearing price.
Two outcomes are possible when govt. Imposes a price
floor
Not binding price Floor – if set below the equilibrium
price.
Binding price floor - if set above the equilibrium price,
leading to a surplus.
2. Quotas
• It is a physical restriction on output
• It represents the right to supply a specified quantity of
a good to the market
• Quota are government – imposed trade restriction
that limit the monetary value of goods that a country
can import or exports
• The impacts of all of these restriction is to raise the
domestic price above the free market price.
Effects in Import Quotas
• It reduces the supply of imports
Effects in Export Quotas
• It limits the quantity of goods that a country can
export to another country.
Consumer, Producer and the Efficiency of Markets
Consumer Surplus
Consumer surplus, also known as buyer’s surplus.
Consumer surplus is the amount a buyer is willing
to pay for a good minus the amount the buyer
actually pays for it.
Consumer surplus = Value to buyers (Willingness
to Pay Price) – Amount paid by buyers (Market
Price)
Producer Surplus
Producer surplus is the difference between
how much a person would be willing to accept for a
given quantity of a good versus how much they can
receive by selling the good at the market price. The
difference or surplus amount is the benefit the
producer receives for selling the good in the
market.
Producer surplus = Amount received by sellers
(Market Selling Price) – Cost to sellers
(Economic Cost)
Market Efficiency
One possible way to measure the economic
well-being of a society is the sum of consumer and
producer surplus, which we called total surplus.
Consumer surplus is the benefit that buyers
receive from participating in a market, and
producer surplus is the benefit that sellers receive.
It is therefore natural to use total surplus as a
measure of society’s economic well-being.
An allocation of resources is efficient if it
maximizes total surplus. Efficiency means:
• The goods are consumed by the buyers who
value them most highly.
• The goods are produced by the producers
with the lowest costs.
• Raising or lowering the quantity of a good
would not increase total surplus.
Efficiency means that total surplus is
maximized, that the goods are produced by sellers
with lowest cost, and that they are consumed by
buyers who most value them.
When we add consumer and producer surplus
together, we obtain:
Total surplus = Value to buyers
(Willingness to Pay Price) - Amount paid by
buyers(Actual Purchase Price) + Amount
received by sellers (Actual Selling Price) -
Cost to sellers (Economic Cost)
The amount paid by buyers equals the amount
received by sellers, so the middle two terms in this
expression cancel each other. As a result, we can
write total surplus as
Total surplus = Value to buyers
(Willingness to Pay Price) – Cost to
sellers (Economic Cost)
INTERNATIONAL TRADE
International trade is the concept of this exchange
of goods or services between people or entities in
two or more different countries. Both the parties
benefit from the exchange because there is a need
or want of goods or services. Although sounds
simple, there is a great deal of theory, policy, and
business strategy that constitutes international
trade.
Trade - the activity of buying and selling, or
exchanging, goods and/or services between people
or countries
International trade- referred to as the exchange or
trade of goods and services between different
nations.
2 Components of International Trade:
IMPORT
- An import is a good or service that is
manufactured in a foreign country and sold in the
domestic market.
EXPORT
- An export is a good or service that is
manufactured domestically and sold in foreign
markets.
Measuring a nation’s income
Measuring the cost of living
Measuring a Nation’s Income
GDP measures two things at once:
• the total income of everyone in the economy
• the total expenditure on the economy’s output of
goods and services.
GDP can perform the trick of measuring both total
income and total expenditure because these two things
are the same. For an economy, income must equal
expenditure.
The Circular-Flow Diagram
Households buy goods and services from firms, and
firms use their revenue from sales to pay wages to
workers, rent to landowners, and profit to firm owners.
GDP equals the total amount spent by households in
the market for goods and services. It also equals the
total wages, rent, and profit paid by firms in the
markets for the factors of production.
GDP measures this flow of money. We can compute it
for this economy in either of two ways: by adding up
the total expenditure by households or by adding up the
total income (wages, rent, and profit) paid by firms.
Because all expenditure in the economy ends up as
someone’s income, GDP is the same regardless of how
we compute it. Households do not spend all their
income; they pay some of it to the government in taxes,
and they save some for use in the future.
The Measurement of GDP
Gross Domestic Product (GDP) is the market value of
all final goods and services produced within a country in
each period.
Market prices measure the amount people are
willing to pay for different goods, they reflect the
value of those goods.
 GDP adds together many kinds of products into
a single measure of the value of economic
activity.
 Uses market prices
 It includes all items produced in the economy
and sold legally in markets.
 GDP includes only the value of final goods
because the value of intermediate goods is
already included in the prices of the final goods.
 when an intermediate good is produced and,
rather than being used, is added to a firm’s
inventory of goods for use or sale later.
 GDP includes goods and services currently
produced. It does not include transactions
involving items produced in the past.
 GDP measures the value of production within
the geographic confines of a country.
 items are included in a nation’s GDP if they are
produced domestically, regardless of the
nationality of the producer.
 GDP measures the value of production that
takes place within a specific interval of time.
Usually, that interval is a year or a quarter
(three months). GDP measures the economy’s
flow of income, as well as its flow of
expenditure, during that interval.
Expenditure method of GDP
Consumption + Investment + Government Spending +
Net Exports (Exports –Imports)
GDP includes both tangible goods (food, clothing, cars)
and intangible services (haircuts, housecleaning, doctor
visits).
Expenditure Approach- GDP = summing up all the
expenditures made on final goods and services.
four main aggregate expenditures that go into
calculating GDP:
 consumption by households,
 investment by businesses,
 government spending on goods and
 services, and net exports, which are equal to
exports minus imports of goods and services.
The Components of GDP
GDP can be measured by adding up the value of the
expenditures on final goods and services.
• Consumption (C)
• Investment (I)
• Government Purchases (G)
• Net Exports (NX)
Y= C + I + G + N
Measuring the National Income Accounts
In a nation’s macroeconomy, income must equal
expenditure. This is true because, in every transaction,
the income of the seller must be equal to the
expenditure of the buyer.
Gross Domestic Product (GDP) - is a measure of the
total income or total output in the economy. Since
income equals expenditure, GDP can be measured by
adding up the income earned in the economy (wages,
rent and profit) or the expenditure on goods and
services produced in the economy. That is, income
equals expenditure equals GDP.
Gross National Product (GNP) - measures the total
market value of all final goods and services produced by
nationals or permanent residents of a country during a
given a year. This is regardless of where the income for
the final goods and services was earned.
Nominal Gross Domestic Product
• It values the production of goods and services
at current prices.
 • It is the sum total of the economic output
produced in a year valued at the current market
price.
• Also known as a “current dollar GDP” or
“chained dollar GDP”.
How is Nominal GDP Calculated?
In calculating nominal GDP, we only use current
quantities at current year prices. This is achieved by
using a consumer price index of the country’s basket of
goods.
Nominal GDP takes into account all the goods and
services that are produced within a country’s borders at
these current prices.
Nominal GDP = (current quantity) x (current price per
unit)
Real Gross Domestic Product
• It values the production of goods and services
at constant prices.
• is the sum-total economic output produced in a
year's values at a predetermined base market
price.
How is Real GDP Calculated?
To calculate real GDP, you must first calculate nominal
GDP for the deflator, which is a price index used to
measure inflation against a base year.
Real GDP = (base year price per unit) x (current year
quantity)
GDP DEFLATOR vs. CONSUMER’S INDEX PRICE
The main difference between the GDP deflator and the
CPI is their scope and purpose. The GDP deflator is a
broader measure of inflation used to assess overall
price changes in an economy, while the CPI is a more
specific measure that focuses on the cost of living for a
typical consumer.
Problems on Measuring Cost of Living
• Substitution Bias
• Introduction of a new product
• Unmeasured quality changes - quality bias
occurs when there are changes in quality for
the existing product that a consumer has been
using.
Correcting Economic Variables for the Effects of
Inflation
Inflation is the rate of increase in price over a given
period of time. It is typically broad measure, such as the
overall increase in prices or the increase in the cost of
living in a country.
• Indexation
• Nominal interest Rate
• Real interest rate

Gross Domestic Product Deflator – is a measure

of the price level calculated as the ratio of nominal GDP
to real GDP times 100. It tells us what portion of the
rise in nominal GDP that is attributable to a rise in
prices rather than a rise in the quantities produced

Consumer’s Price Index- The consumer’s price

index is a more comprehensive measure of the change
in prices from one year to the next.