Macroeconomic Outlook

Lecture 4-5
Course Objectives:
1. Overview on the Microeconomics aspects
2. Study the behavior of the producers
3. Identify the kinds of markets
4. Fundamentals of the Macroeconomics
5. The behavior of the international trade
Lecture Outlines:
1. Methods of analysis
a. Top down approach
b. Bottom up approach

2. Measuring the Country performance

3. Macroeconomics objectives
4. The tools of Macroeconomic Policy
5. Macroeconomics Equilibrium
Approaches of Analysis
• One of the main points that the decision maker must take into consideration, is to
determine how the variables outside the company can affect on the organization
performance.

• Top-down and bottom-up are both approaches for analysis and determine the
mutual relation between the company and the other external environment.
Top-Down Approach
• Top-down analysis generally refers to using comprehensive factors as a basis for
decision making. The top-down approach will seek to identify the big picture and
all of its components.

• Overall, top-down is commonly associated with the word macro or

macroeconomics. Macroeconomics itself is an area of economics that looks at
the biggest factors affecting the economy as a whole. These factors often include
things like the federal funds rate, unemployment rates, global and country-
specific gross domestic product, and inflation rates.
Bottom-up Approach
• The bottom-up analysis takes a completely different approach. Generally, the
bottom-up approach will focus its analysis on specific characteristics and micro
attributes of an individual business.

• In bottom-up investing concentration is on business-by-business or sector-by-

sector fundamentals. Bottom-up researchers begins its research at the company
level but does not stop there. These analyses weigh company fundamentals
heavily but also look at the sector, and microeconomic factors as well.
Country Performance
• The business cycle is the periodic but irregular up-and-down movement in
production and jobs. The business cycle measure the economic performance of
an economy in a certain period of time.

• The economic performance including: Output, employment, income and standard

of living
Country Performance - Cont’d
• The National Bureau of Economic Research “NBER” defines the phases and
turning points of the business cycle as follows:

• A recession is a significant decline in activity spread across the economy and

affecting in all sectors of the country, lasting more than a few months, visible in
industrial production, employment, real income, and wholesale-retail trade.
Country Performance
• A recession begins just after the economy reaches a peak of activity and ends as the
economy reaches its trough. Between trough and peak, the economy is in an expansion.

• The expansion is the mirror of the recession, where the country output increase affecting on
the whole business cycle.

• Potential output represents the maximum amount the economy can produce while
maintaining price stability. Potential output is also sometimes called the high-employment
level of output.

• N.B: The depression is greater than recession in scale and duration

Macroeconomics Objectives
• The government of any country have a three main objectives that they seeking to
achieve on the long run.

1. Increase the output

2. Increase the employment

3. Sustaining price stability

Macroeconomics Objectives
1 – Output
• The most comprehensive measure of the total output in an economy is the Gross Domestic
Product (GDP) which is the measure of the market value of all final goods and services
produced in a country during a year.

• There are two ways to obtain GDP:

• Nominal GDP is measured in actual market prices.

• Real GDP is calculated in constant or invariant prices.

• N.B. Real GDP is the most closely watched measure of output; it serves as the carefully
monitored pulse of a nation’s economy.

• N.B.: Egypt real GDP reached to $280B in 2019

Macroeconomics Objectives
2 – Employment
• Of all the macroeconomic indicators, employment and unemployment are most
directly felt by individuals.

• The unemployment rate is the percentage of the labor force that is unemployed. The
labor force includes all employed persons and those unemployed individuals who are
seeking jobs. It excludes those without work who are not looking for jobs.

• The unemployment rate tends to reflect state of the business cycle: when output is
falling, the demand for labor falls and the unemployment rate rises.

• In Egypt, the unemployment rate reached to 7.8% by the end of December 2019.
Macroeconomics Objectives
3 – Sustaining price stability
• We can measure the degree of stability of prices by use Consumer Price Index, “CPI”
which measures the cost of a basket of goods (including items such as food, shelter,
clothing, and medical care) bought by the average urban consumer.

• Inflation rate is the increase in the price level of goods and services from one period
to another

• In Egypt, the inflation rate reached to 7 % by the end of December 2019.

Macroeconomics Objectives
3 – Sustaining price stability
• A deflation occurs when prices decline which means that the rate of inflation is
negative. At the other extreme is a hyperinflation , a rise in the price level of a
thousand or a million percent a year.

• Most nations seek the golden mean of stable or slowly rising prices as the best
way of encouraging the price system to function efficiently.
The tools of Macroeconomic Policy
• Governments have certain instruments that they can use to affect macroeconomic
activity. A policy instrument is an economic variable under the control of
government that can affect one or more of the macroeconomic goals.

1. Fiscal Policy. It denotes the use of taxes and government expenditures.

A. Government expenditures come in two distinct forms.

• First there are government purchases. These comprise spending on goods and services
• Second government transfer payments, which boost the incomes of targeted groups
such as the elderly or the unemployed.
The tools of Macroeconomic Policy
B. Taxation, affects the overall economy in two ways

Taxes affect people’s incomes (Direct Tax):

• It tends to affect the amount people spend on goods and services as well as the
amount of private saving. Private consumption and saving have important effects on
investment and output in the short and long run.

Taxes affect the prices (Indirect Tax):

• Taxes impose on the prices of goods and factors of production and thereby affect
desire and behavior of consumer to purchase.
The tools of Macroeconomic Policy
2. Monetary Policy: which is the government conducts through managing the
nation’s money, credit, and banking system. It consist of the mange of money
supply and interest rate

• Money consists of the means of exchange or method of payment. Today, people

use currency and checking accounts to pay their bills.

• Federal Reserve (Central Bank) uses certain tools that can regulate the amount of
money available to the economy.
The tools of Macroeconomic Policy
• Money supply has such a large impact on macroeconomic activity as by changing
the money supply it influence on the interest rates.

• The interest rate is the yearly price charged by a lender to a borrower in order for
the borrower to obtain a loan

• The interest rate consider to be one of the main factors that affect on the
Investment.
Macroeconomic Equilibrium
• The macroeconomic equilibrium of any country reach when the Aggregate demand
equal to Aggregate supply.

• Aggregate demand refers to the total amount that different sectors in the economy
willingly spend in a given period.

• N.B: AD depends on the level of prices, as well as on monetary policy, fiscal policy,
and other factors.

• The AD of sum of consumption + investment + government purchases + net export

Macroeconomic Equilibrium
Macroeconomic Equilibrium
• Aggregate supply refers to the total quantity of goods and services that the
nation’s businesses willingly produce and sell in a given period.

• N.B. AS depends upon the price level, the productive capacity of the economy,
and the level of costs.

• In general, businesses would like to sell everything they can produce at high
prices.
Macroeconomic Equilibrium
Macroeconomic Equilibrium
Expansion Fiscal Policy
• John Kennedy took over the presidency hoping to rescue the economy. This was the
era when the “New Economists” Came to Washington. Economic advisers to
Presidents Kennedy and Johnson recommended expansionary policies and Congress
enacted measures to stimulate the economy, including sharp cuts in personal and
corporate taxes in 1963 and 1964

• GDP grew 4 percent annually during the early 1960s, unemployment declined and
prices were stable. By 1965, the economy was at its potential output.
Macroeconomic Equilibrium
Expansion Fiscal Policy
Thank you so much