What Is Macroeconomics?

How Macroeconomics Affects our Everyday

Lives
• Macroeconomics is concerned with the big economic issues that determine our
economic well-being.

• Macroeconomic issues involves the overall economic performance of the nation.

• There are six central concepts in macroeconomics; the unemployment rate, the
inflation rate, interest rates, budget deficits, trade deficits and productivity growth.

• The basic task of macroeconomics is to study the behaviour of each of these

concepts, why they matter to individuals and what the government can do improve
macroeconomic performance.
How Macroeconomics Affects our Everyday
Lives
1. The unemployment rate
• When unemployment rate is high, it is going to be harder for
individuals who want to work to find a job.
• Unemployed people will not be able to pay their bills. Crime, mental
illness and suicide will increase.
• Many economists consider unemployment as the single most
important macroeconomic issue.
• “Indolence is justly considered the mother of misery”, Robert Burton
said (1621).
• Unemployment Rate in Pakistan remained unchanged at 5.90
percent in 2016 from 5.90 percent in 2015. Unemployment Rate in
Pakistan averaged 5.47 percent from 1985 until 2016, reaching an all
time high of 7.80 percent in 2002 and a record low of 3.10 percent in
1987.
• 50 years
• Unemployment: someone who is willing, able and has been actively
searching for work are considered part of unemployed labor force.

• Labor force = employed + unemployed

• Unemployment rate = (unemployed/labor force)*100

Kinds of unemployment
• Structural

• Frictional

• Seasonal

• Cyclical
How Macroeconomics Affects our Everyday
Lives
2. The Inflation Rate
• A high inflation means that prices, on average are rising.
• In inflationary periods, retired people lose the most, as their savings
buy less as prices go up. While inflation harms savers, it helps
borrowers, i.e inflation redistributes income.
• Inflation increases uncertainty about the future
• In 2017, the average inflation rate in Pakistan amounted to about 4.15
percent.
• The Consumer Price Index (CPI) is a measure that examines the
weighted average of prices of a basket of consumer goods and
services, such as transportation, food, and medical care. It is
calculated by taking price changes for each item in the predetermined
basket of goods and averaging them.

• Changes in the CPI are used to assess price changes associated with
the cost of living. The CPI is one of the most frequently used statistics
for identifying periods of inflation or deflation.
How Macroeconomics Affects our Everyday
Lives
3. Productivity growth

• Production is the output produced by the input

• Productivity is the output per unit of the input. Increase in output

leads to efficiency.
How Macroeconomics Affects our Everyday
Lives
3. Productivity growth
• Productivity is the average output per hour of work that a nation produces
in total goods and services.
• The faster average productivity grows, the easier is for individuals to raise
their standards of living, i.e., there will be more houses, roads, cars,
hospitals, schools ..etc.
• An economy with no productivity growth is called the “zero sum society”
(the rate of growth is zero), any extra good or service enjoyed by one person
requires that something else is taken from another. For example in order to
build more houses, the economy has to sacrifice building fewer hospitals.
• Productivity can be increased by technological advancement,
specialization, overtime etc

• Outward shift of PPC

Real GDP: Actual and Natural
• The official measure of the economy is “the real GDP” includes all currently
produced goods and services sold on the market within a given time period,
i.e., reflects the quantity produced corrected for any changes in prices.

• Actual real GDP is the amount an economy actually produces at any given
time. Too much production of real GDP causes inflation, while too little
causes a waste of resources. Neither are desirable.

• Natural real GDP is the actual real GDP when inflation rate is constant with
no tendency to accelerate or decelerate.
Figure 1-1 : The Relation Between Actual and
Natural Real GDP and the Inflation Rate
Real GDP: Actual and Natural
Note:
• When real GDP equals natural GDP the inflation rate will be constant.

• During periods of low actual real GDP, inflation slows down.

• During periods of high actual real GDP, inflation accelerates

(excessive actual real GDP is called overheating the economy).
Unemployment: Actual and Natural
• When actual real GDP is low, actual unemployment rate rises above its natural level (note that
inflation slows down here).

• When actual real GDP is high, actual unemployment rate falls below its natural level (inflation
accelerates).

• Whenever actual real GDP equals natural real GDP actual unemployment equals natural rate of
unemployment NRU.

• (Figure 1-2)

• NRU corresponds exactly to natural real GDP. A situation in which there is no tendency for inflation
to change.
Phillips Curve
• The Phillips curve is an economic concept developed by A. W. Phillips
stating that inflation and unemployment have a stable and inverse
relationship. The theory claims that with economic growth comes
inflation, which in turn should lead to more jobs and less
unemployment.

• The Phillips curve was a concept used to guide macroeconomic policy

in the 20th century, but was called into question by the stagflation of
the 1970's.
The Behaviour over Time of Actual and Natural Real GDP
and the Actual and Natural Rates of Unemployment
Real GDP: Actual and Natural
Note:
• When real GDP equals natural GDP the inflation rate will be constant.

• During periods of low actual real GDP, inflation slows down.

• During periods of high actual real GDP, inflation accelerates

(excessive actual real GDP is called overheating the economy).
GDP and the three macro concepts
• When actual real GDP is higher than its natural level, unemployment
is low and vice versa

• When actual GDP is higher than its natural level, inflation speeds up
and vice versa

• When actual real GDP is higher than its natural level, productivity is
most likely to grow up.
Macroeconomics in the short run and in the
long run
• Macroeconomic theories can be divided into 2 main groups
• the short run (concern) stability of the economy
• the long run (concern) growth of the economy
• In the short run we focus on two main concepts unemployment and inflation.
Ups and downs in economic fluctuations are called the business cycles.
• In the long run we focus on productivity growth, or economic growth.

• Short run business cycles

• The main concern of macroeconomists is to minimize fluctuations in
unemployment and inflation rates. Fluctuations can be wide or small
• Business cycle concepts
• Peak: the highest point reached by real output in each cycle
• Trough: the lowest point reached by real output in each cycle
• Recession: the interval in the business cycle between the peak and
the trough
• Expansion: the period in the business cycle between the trough and
the peak
Note:
• The NRU is not necessarily constant
• The NRU is neither optimal nor immutable, and it can be reduced by
the government policies that help the economy to function better.
• To achieve a low inflation and unemployment at the same time is a
dilemma. To lower inflation real GDP must be reduced which in turn
increases actual unemployment and vice versa.
• The long run: Economic growth
• To achieve an increasing standard of living, output per person must
grow.
• Look at Figure 1-5 of two hypothetical nations, stag nation and speed
nation.
• If population growth is the same in the two countries, GDP per capita
in the speed nation is faster. i.e., people there can purchase more
goods, have better schools, hospitals and other public services
compared to the people of the stag nation.
• Taming the business cycles: Stabilization policy
• In policy discussions the target variables are inflation, unemployment and
long term productivity growth.
• Alternative policy instruments are used when these targets are different
from their desired values.
• policy instruments are:
1. Monetary policies (money supply and interest rates)
2. Fiscal policies (changes in G and T)
• Miscellaneous group, to equip workers with skills they need to qualify
for jobs
• The goal of productivity growth is simple; just make productivity
growth as fast as possible.
• The goal of unemployment is not simple. If unemployment is set to be
low, inflation accelerates. A compromise is to set it at its natural level
(constant inflation)
The role of stabilization policy

• They are used to offset undesired changes in private spending.

• But sometimes it may not be possible to control aggregate demand
instantly and precisely.
• The impact of different policies may also be highly uncertain.
• Macroeconomic goals are incompatible, we cant have low
unemployment rate and a stable price level.
The internationalization of macroeconomics

An open economy exports (sells) goods and services to other nations,

buys imports from them, and has financial flows to and from foreign
nations.