ECN 1200

Macroeconomics
Lecture 1

Lecturer: Mr. Allicock

Purpose
The purpose of this presentation is to give an
introduction to Macroeconomics.
 Learning Objectives
At the completion of this presentation you should be
able to have an understanding of:

• Economic Growth, Inflation, Unemployment,

exchange rate, balance of payments.
 What is Economics?

Economics is the study of how individuals and

society allocate or utilize limited resources to satisfy
unlimited wants. Economists argue that the
fundamental problem of economics is scarcity.
 Branches of Economics

• Microeconomics

• Macroeconomics
 Branches of Economics
• Microeconomics- Microeconomics- this involves the

study of individual economic agents and individual

markets in an attempt to understand the decision-making

process of firms and households. Microeconomics is

concerned with the interaction between individual buyers

and sellers and the factors that influence the choices made

by buyers and sellers.

 Branches of Economics

Macroeconomics- involves the study of economics on an

aggregated scale or studies the behavior of the aggregate
economy. Macroeconomics examines economy-wide
phenomena such as changes in unemployment, national
income, rate of growth, gross domestic product, inflation
and price levels.
 Roots of Macroeconomics
1. Macroeconomics did not exist in its modern form until
1936
2. John Maynard Keynes is considered to be the founder
3. Great Depression of the 1930s
4. High levels of unemployment (England & USA)
 Roots of Macroeconomics
Before Keynes, you had the classical economists (like Adam
Smith) who believed that the economy will gravitate to some
equilibrium position. Further he posited, that any deviation from
that position, in the long run the economy will self correct itself
and therefore there is no need for government intervention.

As a result an economy in recession, left alone, will correct itself

and things will return to normalcy without government
involvement.

The Great Depression of the 1930’s proved this to be

incorrect!!!!!
 Macroeconomics Issues
1. Economic Growth (change in the level of output/ real GDP)-
whereby GDP is the value of all final goods and services produced in
a country.

2. Unemployment- The state of not having a job but actively searching

for one.

3. Inflation- The general rise in the average price level.

4. The Balance of Payments- A summary report of all the transaction

between a country and the rest of the world

5. Exchange Rates- The value of one currency in terms of another

 Macroeconomics Goals
1. Economic Growth- high level of sustainable economic growth,
measured by the change in real GDP

2. Full Employment-high level of employment and low involuntary

unemployment.

3. Price Stability- stable prices, no upswings or high uncertainty in

price levels.

4. International Trade/ balanced balance of payment- export and

import equilibrium.

5. Exchange Rate stability-

 Some Key Macroeconomic
Indicators
1. Real Gross Domestic Product (Real GDP)
2. The unemployment rate
3. The inflation rate
4. The interest rate
5. The exchange rate
 Economic Growth
Economic growth has been defined generally as an increase
of an economy’s capacity to produce final goods and
services; compared from one time period to another and
measured as a change in real GDP.
 Actual vs. Potential Growth
Potential growth (potential GDP) represents the maximum
sustainable level of output that the economy can produce
without experiencing inflationary pressures. When an
economy is operating at its potential, there are high levels
of utilization of the labour force and the capital stock.
Potential output is determined by the economy’s productive
capacity, which depends upon the inputs available (capital,
labour, land, etc.) and the economy’s technological
efficiency.
 Actual vs. Potential Growth
Actual growth (actual GDP) is the annual increase in the
GDP of an economy caused by increases in aggregate
demand.
 Drivers of Economic Growth
1. Natural Resources Endowment
2. Capital Accumulation
3. Rate of Saving
4. Technological Progress
5. Education and Training
6. Research and Development
 Business Cycles
Business Cycles are recurrent fluctuations of economic
activity or real GDP that occurs relative to the long-term
growth trend of the economy.

These cycles vary in duration and intensity however

economists have identified four phases of a business cycle.
 Business Cycles
.
 Business Cycles
.
 Business Cycles Cont’d

Peak: At this point economic activity is at a temporary

maximum. The economy is at the full employment level
and real output is at or very close to the economy’s capacity.
The price level is likely to rise during this phase. A peak is
followed by a period of recession.

Recession: A period of decline in an economy’s total output

usually lasting at least six months and marked by
contractions in many sectors of the economy. The price
level shows little or no change but if the recession is long
enough – turns into a depression- then prices will start to
fall. A recession is followed by a trough.
 Business Cycles Cont’d

Trough: In this phase the recession or depression is at its

lowest level, and can be short-lived or last very long. The
trough is followed by the recovery or expansionary phase.

Recovery (expansion): As the word suggests the economy

is on the road to growth. In this phase output and
employment start to rise, as a result the price level will start
to rise. This phase will continue until it reaches the plateau
or peak and a new cycle will begin.
END