MACROECONOMIC THEORY

& PRACTICE
 COURSE DESCRIPTION:
◦ This course seeks to provide students with a thorough
understanding of the workings of the economy.
◦ Aims to give appreciation of Basic economic concepts that are
covered in Microeconomics, Macroeconomics & Industrial
Economics.
◦ Topics include, among others, household behaviour & consumer
choice, firm theory, income distribution & poverty, globalization
& international trade.
 GRADING SYSTEM:
◦ MIDTERM GRADE:
◦ 60% Partial Class Standing (includes all Class standing components prior to midterm exam
20% Quizzes
5% Attendance
5% Assignments
10% Class Participation/Oral Recitation
10% Seatwork
10% Research Papers
40% Midterm Exam
◦ FINAL GRADE:
50% Final Class Standing
20% Midterm Exam
30% Final Exam
 MODULE I:
INTRODUCTION TO MACROECONOMICS
A.Roots of Macroeconomics
B.Macroeconomics and Microeconomics
C.Components of the Macroeconomy
D.The Market Arenas
E. Macroeconomics Concerns
F. Circular Flow Diagram
◦ Macroeconomics focuses on the determinants of total national output. It
looks at aggregate behavior, meaning the behavior of all firms and all
households (aggregate means “sum”). While microeconomists generally
conclude that markets work well, macroeconomists observe that important
prices in the economy are sometimes “sticky;” that is to say that they do
not always adjust rapidly to equate supply and demand. Since about 1970,
much work in macroeconomics has been concerned with making
macroeconomic analysis consistent with microeconomic postulates. This is
referred to as the microeconomic foundations of macroeconomics.
MODULE I INTRO TO MACROECONOMICS

A. ROOTS OF MACROECONOMICS
◦ Classical Models

◦ During the first two decades of the twentieth century, most economists believed
that the economy was able to correct itself. For example, downturns in the
economy, during which the economy slows down and people get laid off, were
thought to be only temporary. During such a downturn, it was believed; wages
would fall as unemployment rose, because the decrease in demand for labor
would push wage rates down. This lowers the costs of doing business for
producers and they respond by lowering prices and increasing output. The lower
wages and increased output lead to more workers being hired. Eventually, the
output of the economy and the unemployment rate return to their original level.
◦ In the long run, the economy will be at full employment without the
problems of unemployment inflation. This view seemed self-evident
during the 1920s because jobs were plentiful, the economy was growing
strongly, and prices were stable. Because of this, most economists
thought there was little need for the government to try to influence the
state of the economy. All of this changed, however, with the advent of
the Great Depression.

◦ At the end of the 1920s, the U.S. economy began a steep and prolonged
decline. The output of the economy plummeted. Unemployment began
to soar from about 5% in 1928 to over 25% by 1933. Banks failed and
many people saw their jobs and their wealth evaporate. Moreover, this
was not a temporary downturn of the economy. The economy
languished in this sorry state of affairs year after year.
B. MACROECONOMICS AND
MICROECONOMICS
◦Macroeconomics focuses on four groups:
households and firms (which together make up
the private sector), government (the public
sector) and the rest of the world (the
international sector). These four groups interact
in a number of ways.
THE COMPONENTS OF THE MACROECONOMY
D. THREE MARKET ARENAS

◦ This complex interaction occurs within three basic types of

markets: goods and services, the labor market, and the financial
market. In essence, the circular flow diagram tracks the flows of
these three components of the economy.
1.Goods-and-Services Market
2.Labor Market
3. Money Market
◦ Goods-and-Services Market
◦ Firms, both foreign and domestic, produce goods and services that are consumed
by households and the government in return for revenue.
◦ Labor Market
◦ Households supply labor to firms and the government in return for wages.
◦ Money Market
◦ Financial assets flow between firms, households, and foreigners. When households
or foreigners purchase government bonds, such as Treasury bonds, notes, and bills,
they receive interest payments. When households or foreigners purchase corporate
bonds and shares of stock, they receive interest and dividend payments. When
households or foreigners purchase real estate, they receive rents.
◦ Economic activity in a market economy consists of the flow of money for
products, labor, and financial assets.
E. MACROECONOMICS CONCERNS
◦ Macro economics is concerned with
-Monetary / fiscal policy. e.g. what effect does interest rates have on whole
economy
-Reasons for unemployment
-Economic Growth
-International trade and globalisation
-Reasons for differences in living standards and economic growth between
countries.
F. CIRCULAR FLOW DIAGRAM
◦ The Circular Flow Diagram
Any market economy comprises the interactions of
households, firms, the government, and other nations..
There, we introduced the circular flow between the input
and output markets. Now, let us add the other components
of the economy to the circular flow diagram
CIRCULAR FLOW DIAGRAM
◦ The figure above shows that households work for firms and the
government, receiving wages in return for supplying labor. In
addition, households receive interest payments, dividends, profits,
and rent from firms on their investments in stocks and bonds,
ownership of companies, and land used by firms. Households also
receive interest from the government from purchases of
government bonds and transfer payments (Social Security, welfare,
and others).
◦ The diagram also shows that firms and households pay taxes to the
government. Moreover, it illustrates that households, the
government, and foreigners purchase goods and services from
firms. Finally, it shows that households purchase goods and
services from foreigners.