MACROECONOMICS

Introduction and History

PROF. ISIDRO APOLLO G. VALENSOY, JR.
 What is Economics?
• It is a field or discipline that studies how
individual agents (consumers, producers) or
their aggregates (households, business firms)
behave relative to the use of scarce resources
in the economy.
• That division of economics that studies the
economic behavior of individual agents is
Microeconomics.
• That of the aggregates is Macroeconomics.
 History…
 1776 – Adam Smith introduced the Laissez-Faire Policy
through his book, “Wealth of Nations.”
 Smith’s laissez-faire concept , indeed resulted to the
increase in wealth of many European nations, especially
England, but not for long.
 1930s – A great depression struck America and Smith’s
laissez faire concept became insufficient to ensure the
equitable distribution of goods for every American citizen.
 John Maynard Keynes published his General Theory of
Employment, Interest, and Money and urged a policy that
government must intervene to get the unemployed back to
work.
 MACROECONOMICS microeconomics

CONCERNS ITSELF WITH MARKET MORE FOCUSED ON THE CHOICES MADE

SYSTEMS THAT OPERATE ON A LARGE
SCALE
DEALS WITH THE PERFORMANCE,
STRUCTURE AND BEHAVIOR OF THE
ENTIRE ECONOMY.
BY INDIVIDUAL ACTORS IN THE ECONOMY.
DEALS WITH THE PERFORMANCE,
STRUCTURE AND BEHAVIOR OF A SINGLE
FIRM.

DEALS WITH POLICY DECISIONS (RAISING

OR LOWERING INTEREST RATES,
CHANGING TAX RATES)

DEALS WITH QUESTIONS LIKE: What

causes unemployment? What causes
inflation? What creates or stimulates
economic growth?

IT ATTEMPTS TO MEASURE HOW WELL THE

ECONOMY IS PERFORMING, UNDERSTAND
HOW IT WORKS, AND HOW
 MACROECONOMICS:
Schools of Thought
• CLASSICAL ECONOMISTS hold that prices, wages and
rates are flexible and markets always clear. As there is
no unemployment, growth depends upon the supply of
production factors.
• KEYNESIAN ECONOMISTS believe that the business
cycle can be managed by active government
intervention through fiscal policy (spending more in
recessions to stimulate demand) and monetary policy
(stimulating demand with lower rates).
• MONETARIST ECONOMISTS believe that the role of
government is to control inflation by controlling the
money supply.
• The NEW KEYNESIAN ECONOMISTS attempts to
add microeconomic foundations to traditional
Keynesian economic theories. While New
Keynesians do accept that households and firms
operate on the basis of rational expectations, they
still maintain that there are a variety of market
failures, including sticky prices and wages.
Because of this "stickiness", the government can
improve macroeconomic conditions through fiscal
and monetary policy.
• NEO-CLASSICAL ECONOMISTS assumes
that people have rational expectations
and strive to maximize their utility. Since
neoclassical economists believe the
market is always in equilibrium,
macroeconomics focuses on the growth
of supply factors and the influence of
money supply on price levels.
• NEW CLASSICAL ECONOMISTS believe that
unemployment is largely voluntary and that
discretionary fiscal policy is destabilizing,
while inflation can be controlled with
monetary policy.
• AUSTRIAN SCHOOL ECONOMISTS believe that
human behavior is too idiosyncratic to model
accurately with mathematics and that minimal
government intervention is best.
 SOME IMPORTANT CONCEPTS…
• Economics holds that maximizing welfare is a
key goal in all economic pursuits.
• WELFARE can be broadly defined as the
maximum enjoyment of resources for the
minimum output of effort (work, labor or
capital).
• Scarcity and choice are primary factors in
macroeconomics.
• SCARCITY means that a good or service is in
demand with a limited amount of resources.
• MARGINALISM refers both to the effect per
unit of a small change in any variable, as well
as the process of weighing only the costs and
benefits that are directly related to a
particular decision.
 DETERMINANTS of Demand
• Increase/decrease in real wealth – What
is its effect on our demand for goods?
What happens to this demand at higher
levels of wealth?
• Decrease/increase in real interest rate –
What is its effect on consumption?
• Increase/decrease in optimism – What is
its effect to consumer spending?
• Increase/decrease in expected inflation –
What is its effect on current consumption
spending?
• Higher/lower real incomes abroad – If
foreigners earn more, what is its effect on
their spending on imports?
• Reduction/increase in exchange value of
currency – What is the effect of a stronger
currency on consumers’ spending on imported
goods?
 DETERMINANTS of Supply
• Increase/decrease in resources –
What is its effect on the supply of
goods?
• Improvements in
technology/productivity – What is its
effect on cost of production?
• Changes in efficiency of resource use
– What is its effect on productivity?
• Decrease/increase in resource prices –
What is its effect on the good’s output in
relation to its price?
• Reduction/increase in inflation – What is
its effect on cost of production?
• Favorable/unfavorable supply shocks –
What is its effect on the profitability of
production? Access to supplies and
ability to produce?
 RAPID DEVALUATION
OF A CURRENCY

SUPPLY OF STAPLE NATURAL/MANMADE

COMMODITIES CALAMITIES

SUPPLY
SHOCKS
 TIGHT/EASY
CREDIT
INCREASE/
TAX DECREASE
CUTS/RAISE IN PUBLIC
SPENDING

DEMAND
SHOCKS