CHAPTER 10

INTRODUCTION TO
MACROECONOMICS

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 DIFFERENCE BETWEEN
MICROECONOMICS AND
MACROECONOMICS
MICROECONOMICS MACROECONOMICS
 Studies individual  Studies the aggregate
economic units, such as behavior of the entire
households, firms and the economy
government in detail.

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 DIFFERENCE BETWEEN
MICROECONOMICS AND
MACROECONOMICS
MICROECONOMICS MACROECONOMICS
 Studies on individual  Studies on national income
income  Analyzes total employment
 Analyzes demand for and in the economy
supply of labour  Deals with aggregate
 Deals with household and decisions
firms decisions  Studies overall price level
 Studies on individual prices  Analyzes aggregate
 Analyzes demand and demand and aggregate
supply of goods supply

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 MACROECONOMIC GOALS
Full Employment

Economic Growth
Price Stability

FOUR
MAJOR
GOALS

Equitable Distribution of Income

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 MACROECONOMIC GOALS
Full Employment

 Full employment of all available factors of

production
 Land, Labour, Capital and Entrepreneur
 Efficiency
 Unemployment = inefficiency and wastage
leading to economic loss and social loss

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 MACROECONOMIC GOALS
Price Stability

 Price stability and controlling inflation

 Purchasing power of consumers is reduced
 Loss to fixed income groups

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 MACROECONOMIC GOALS
Economic Growth

 Full production output level

 Business cycle – peak, recession, trough and
recovery
 Aggregate output and the unemployment rate
 GDP

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 MACROECONOMIC GOALS
Equitable distribution of Income

 Narrow gap between higher income and lower

income groups
 Taxation
 Transfer payments

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 GROWTH
GROWTH FISCAL
FISCAL
MONETARY
MONETARY
POLICY
POLICY POLICY
POLICY
POLICY
POLICY

Contractionary
Contractionary Expansionary
Expansionary Contractionary
Contractionary Expansionary
Expansionary

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 Fiscal Policy

 Fiscal policy refers to government policy

concerning taxes and expenditure.

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 Monetary Policy

 Monetary policy refers to the tools used by the

government through the central bank to control
the supply of money.
 Maintains overall price level, achieves higher
economic growth, removes fluctuations in
production and achieved full employment

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 Growth Policy

 Growth policy refers to government policy on

stimulating the potential growth of aggregate
output and income.

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 THE CONFLICTING
MACROECONOMIC

To achieve full employment

and maintain price stability.

To achieve economic To achieve economic

growth and a equilibrium growth and maintain price
in balance of payments. stability.

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 Full employment and price
stability
 To achieve full employment
 Expansionary policy – reducing tax rate –
increasing government spending – increase the
wage rate – higher demand – overall price level
increase - Inflation

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 Economic Growth and Price
Stability
 To promote economic growth
 Expansionary policy – increasing government spending
– increase the investment – creating more job
opportunities – increase the national output – demand is
more than the supply – overall price rise – Inflation
 To achieve price stability
 Government will increase the interest rate – reduce
government spending – consumer spending and
investment levels will decrease – restrict economic
growth.

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 Economic Growth and
equilibrium in balance of
payments
 Economy’s growth is fast – high consumer spending –
high income levels – preference for imported goods –
value of imports can be greater than the exports –
deficit in balance of payment
 (WTO disallows use of trade barriers – exchange
controls or import controls to adjust the BOP)
 To adjust a deficit in the BOP, the government has to
lower the economic growth.

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 COMPONENTS OF
MACROECONOMY
Supply of Factor of Production

Payment for Factor of Production

Taxes
Taxes
GOVERNMENT
GOVERNMENT
Transfer
payment, Payments
wages

Purchase of goods and services

Payments for goods and services

Export Export

Import Import

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 Households

 Own all the factors of production: Land, Labour, Capital

and Entrepreneurship
 Receive payments in the form of rent, wages, interest
and profit

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 Firms

 A firms is an organization that buys the factors of

production from households and then produces and
sells goods and services
 Sell to households and government
 Pay wages, rent and interest to the households
 Pay taxes to the government

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 Government

 Collect taxes from households and firms

 This revenue will be spent on development and
operational purposes
 Buy factors of production from households for public
consumption

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 International sector
 Other countries with whom the country trades – imports
and exports

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 The Circular Flow
 Transfer payments – is a kind of payment from the
government for which the people do not supply goods,
services and labour.
e.g Pensions, social security benefits, welfare
payments, subsidies

 Leakage in the circular flow – the percentage of income

which households save

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 AGGREGATE DEMAND AND
AGGREGATE SUPPLY
AGGREGATE SUPPLY
Overall Price Index - Refers to the total
quantity of output
supplied at alternative
AS price levels during a given
time period, ceteris
paribus.

AGGREGATE DEMAND
P*
- Refers to the total
quantity of output
demanded at alternative
AD price levels during a given
time period, ceteris
paribus.

Y* Yf Real GDP

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 AGGREGATE DEMAND AND
AGGREGATE SUPPLY (cont.)
AGGREGATE DEMAND AGGREGATE SUPPLY
Price Price AS2 AS0
AS1
A B

B A
AD1
AD2 AD0
Quantity
Quantity

 Movement along AD curve  Movement along AS curve

  in price level   Real GDP   in price level   Real GDP
(Point B  A) (Point A  B)
  in price level   Real GDP   in price level   Real GDP
(Point A  B) (Point B  A)

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 AGGREGATE DEMAND AND
AGGREGATE SUPPLY (cont.)
AGGREGATE DEMAND AGGREGATE SUPPLY
Price Price AS2 AS0
AS1
A B

B A
AD1
AD2 AD0
Quantity Quantity

Shifts of the aggregate demand curve to Shifts of the aggregate supply curve
right (AD0 to AD1) to right (AS0 to AS1)
Income increases  Interest rate decreases
Interest rate decreases  Cost decreases
Government expenditures increases
 Productivity increases
Taxation decreases
Wealth increases  Taxation decreases
Investment increases

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