Charmaine L.

Cabutihan

BSEd- Social Studies 2

NOTES FOR MACROECONOMICS

Introduction to Macroeconomics

Macroeconomics - is the branch of economics studying the behavior of the aggregate economy at the
regional, national or international level.

- It involves adding up the economic activity of all households and all businesses
in all markets to get the overall demand and supply in the economy.

AIM OF MACROECONOMICS

The aim of studying macroeconomics is to understand how an economy works, and identifying the
levers that can be pulled to put the overall economy on the right path of growth. The system that is a
result of different economic agents coming into contact is much more complex than the sum of its
independent and often disjoint parts.

While microeconomics is concerned primarily with the decisions made by an individual within the usual
economic constraints of scarcity, macroeconomics (Greek makro = ‘big) is the field of study that is
concerned with the indicators that reflect the performance of the broader economy- gross domestic
product, inflation levels, unemployment, growth rate, fiscal deficit etc.

Microeconomics Macroeconomics

Individual Markets Whole Economy (GDP)

Effect on price of a good Inflation (general price level)

Individual labor market Employment/Unemployment

Individual consumer behavior Aggregate demand (AD)

Supply of Good Productive capacity of economy

Moreover, it is strictly “non-experimental” as we do not have the luxury of conducting controlled

experiments like in the field of science. We can just wait and observe the effects of broader policy
measures with a certain level of accuracy and a tinge of hope.

It usually deals with goals that are conflicting; ensuring growth, taming inflation, full employment and
fair income distribution at the same time!
Three different perspectives of Macroeconomics:

 What are the macroeconomic goals? (Macroeconomics as a discipline does not have goals, but
we do have goals for the macro economy.)
 What are the frameworks economists can use to analyze the macroeconomy?
 Finally, what are the policy tools governments can use to manage the macroeconomy?

Goals Framework Policy Tools

- Economic growth -Aggregate demand/ -Monetary policy

Aggregate supply
-Low unemployment -Fiscal policy
-Keynesian model and
-Low inflation
Neoclassical model

Basic concepts of Macroeconomics

Currency

Before the advent of money and modern economic systems, barter was prevalent to facilitate the
exchange of goods and services. Money has many advantages over the barter system and serves
multiple functions: it is faster, convenient, holds value over time and both parties are not obligated to
want what the other is offering ensuring freedom of choice through a neutral medium of exchange.

There is no scope for confusion as everyone knows the current value of one unit of a currency. Interest
rate is the cost of borrowing money, which in turn is dependent upon the current demand of money in
the economy.

Simple Interest Equation

(Principal + Interest)

 It calculates an accrued amount that includes principal plus interest.

The total amount accrued, principal plus
interest, from simple interest on a principal of
₱150,000.00 at a rate of 6% per year for 3 years
is ₱177,000.00

The total amount accrued, principal plus

interest, from simple interest on a principal of
₱6,500,000.00 at a rate of 4% per year for 30
years is ₱14,300,000.00
 Inflation
Simply put, inflation is the erosion in value of a currency, as its buying capacity diminishes over
time. Alternatively, it can also be defined as a significant increase in the prices of goods/services
in an economy for considerable time duration.

Consumer Price Index (CPI) and Wholesale Price Index (WPI) are the measures of inflation used
in India.
There is no broad consensus upon the right rate of inflation in the economy, but majority
believe that a slightly positive rate of inflation signifies growth and is best for the economy.

Business cycles
Business cycles are the patterns of expansions & contractions in the economy. During a phase of
expansion, gross domestic product (GDP) rises and the unemployment rate falls. While recession
has found its place in the pop culture and now usually means any downturn in the economy, the
definition of recession usually requires the real GDP to decline for two consecutive quarters.

There is no set consensus among the economists as to what decides the extent of these cycles,
and the role government should play in influencing these cycles. Lowering taxes and increasing
spending usually provide the required stimulus to the economy during downturns.

Unemployment
Good rate of employment within an economy is important for a couple of reasons –
unemployed workforce is pure wasted potential, plus it leads to lowering in consumer spending
as they’ve got nothing to spend.

There are three sub-categories of unemployment:

- Cyclical unemployment: Result of business cycles, not harmful to the economy
in general
- Frictional unemployment: unemployment related to changing jobs
- unemployment that occurs in the meantime, as workers move between jobs
- Quitting, a voluntary form of frictional unemployment.
- Termination, an involuntary form of frictional unemployment.
- Seasonal employment, becoming unemployed because the work is done for the
season.
- Term employment, a job ends that was only temporary in the first place.
- Structural unemployment: Result of workers not being equipped for the jobs
that are available, can be detrimental to the economy
- The structurally unemployed are individuals who have no jobs because they lack
skills valued by the labor market, either because demand has shifted away from
the skills they do have, or because they never learned any skills.

Economic Growth
GROSS DOMESTIC PRODUCT- the total value of the final goods/services produced in an economy and is
the most commonly employed measure of a country’s economic capacity.

GROSS NATIONAL PRODUCT- an estimate of total value of all the final products and services turned out
in a given period by the means of production owned by a country's residents.

International Trade

- the exchange of capital, goods, and services across international borders or

territories because there is a need or want of goods or services.

LIBERALIZATION

- the removal or loosening of restrictions on something, typically an economic or

political system. (eg. tarrification and bilateral and multilateral aggreements)
- The basic aim of liberalization was to put an end to those restrictions which
became hindrances in the development and growth of the nation.

PRIVATIZATION

- The transfer of ownership, property or business from the government to the

private sector

GLOBALIZATION

- the speedup of movements and exchanges (of human beings, goods, and
services, capital, technologies or cultural practices) all over the planet.
- One of the effects of globalization is that it promotes and increases interactions
between different regions and populations around the globe
- Without international trade, the world suddenly becomes a very large and
disconnected place.

MACROENOMIC POLICY

1. Monetary policy - involves the management of the money supply and interest rates by central
banks. To stimulate a faltering economy, the central bank will cut interest rates, making it less
expensive to borrow while increasing the money supply. If the economy is growing too rapidly,
the central bank can implement a tight monetary policy by raising interest rates and removing
money from circulation.
2. Fiscal policy - on the other hand, determines the way in which the central government earns
money through taxation and how it spends money. To assist the economy, a government will
cut tax rates while increasing its own spending; to cool down an overheating economy, it will
raise taxes and cut back on spending. There is much debate as to whether monetary policy or
fiscal policy is the better economic tool, and each policy has pros and cons to consider.

MACROECONOMICS SCHOOL OF THOUGHT

Classical economics
 - a school of thought that’s generally regarded as the first school of economic
thought and is widely associated with Adam Smith, the father of modern
economics.
- The central idea behind the ideology is that markets work best when they are
left alone and role of the government be as minimal as possible. The ‘invisible
hand’ in the free markets automatically assigns resources to places where they
are best utilized.

Neo-classical economics

- is hinged on the premise of rationality in behavior, and that the consumers are
looking for maximum “utility” and the firms are looking for maximum profits.
This fundamental conflict gives rise to the current demand and supply theory.

Keynesian economics

- derives its roots from the ideas of the British economist John Maynard Keynes
(widely regarded as the most important economist of the 20th century).
- Based on his theory, Keynes advocated for increased government expenditures
and lower taxes to stimulate demand and pull the global economy out of the
depression.

Monetarist economics

- is a school of thought largely attributed to the contributions of Milton

Friedman. The central belief is: The role of the government is to control inflation
through manipulating money supply.