TOPIC 1

INTRODUCTION TO
MACROECONOMICS

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1.1 Microeconomics and Macroeconomics
distinction
• Microeconomics
Macroeconomics

 Micro(Greek)-
Macro(Greek)- small
large.

 Examine
Deals withtheeconomics
functioning
as aofwhole
individual industries and
(aggregate)
individual decision-making units.
 Studies on national income, increase in overall price level
 Deals with how FOPs are allocated to satisfy unlimited wants
(inflation), unemployment, consumption, etc.
 Focus : S&D of individuals, equilibrium price, market
structure, etc.

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 1.2 Macroeconomics Objectives

• Conventional Perspective :

Five objectives :
1. Full employment
2. Price stability
3. Economic growth
4. Equilibrium in international trade
5. Equitable distribution of income

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 1. Full Employment
• All available resources (FOP’s) are used efficiently to produce
output.
• Higher production means more job available and more
income is created by the country.
• However unemployment means resources are not fully
utilized and that creates a waste.
• Unemployment rate is the percentage of labour out of total
labor force who unemployed.
• Unemployment rate below 4% is considered full
employment.
• High unemployment rate may cause political upheaval as
people are living in poverty.

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 2. Price Stability
• Price stability means price are kept stable without any
frequent changes.
• Inflation means an increase in overall price level.
• Inflation rate is measured based on average prices. The
objective of the country is to keep inflation rate below 4%.
• Inflation can reduce purchasing power of consumers.
• Severe inflation may lead to income not rising as fast as
prices. The groups that receive fixed income may become the
losers as the ability to buy goods and services decreases.

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 3. Economic Growth

• A growing economy means there will be more production,

high employment and high income for the country.
• Economic growth is measured by aggregate output and
unemployment rate over the year.
• However, economic growth does not move constantly but
rather will experience short term up and down called
business cycle.
• Four phases of business cycle are peak, recession, trough and
recovery.
• High growth rate means people will be better off but slow or
stagnant growth causes a decrease in income of a country
and high unemployment.

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 4. Equilibrium in Foreign Sector
• Activities involve are buying goods (import) from and selling
goods (export)to other countries.
• This causes a greater amount of outflow an inflow of
currency which is recorded in the account known as Balance
of Payment.
• Equilibrium means at least export of goods equals to import.
This will cause a balance in BOP.
• If X>M it means more inflow of currency, therefore create
surplus in BOP.
• Disequilibrium means X<M which causes deficit in BOP or
more outflow of currency to the rest of the world.

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 5. Equitable Distribution of
income
• It means to reduce the income gap between the higher and
the lower income group.
• Methods to reduce the income gap are :
 Tax policy : higher income groups pay high taxes
 Expenditure policy : this includes subsidies, transfer
payments, educational scheme, etc.
• Disparity in income will create social friction and bring
about many problems such as poverty, murders, etc

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 ISLAMIC
MACROECONOMIC OBJECTIVES

• Focus on developing the society based on spiritual, moral and values.

• We are the khalifah of Allah on this earth relies on the principle of
tawheed which forms two relationship ; habluminallah and
hablminannas.
• The time frame under consideration is the life in this world and the
hereafter.
• There are four objectives of Islamic macroeconomics:

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Islamic Perspective :

Four objectives :
1. Social justice
2. Universal education
3. Optimal economic growth
4. Employment generation

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 1. Social Justice
• Man is guaranteed of his freedom and will not be abused
by those who have economic, political or physical power.
• Social justice are based on certain conception :
 The universe belongs to Allah and man is only the trustee.
The institutions must be created to ensure that man perform
his duties voluntarily.
 Although Islam insists on equal income distribution, some
income inequality is allowed to promote individual initiative.
 Social justice is rooted in man’s faith. A man of faith is
automatically will do the justice.
 Philosophically, justice means to maximize human
happiness.

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 2. Universal Education

• The acquisition of knowledge is an obligation.

• Every child irrespective of his birth must receive equal
opportunity to education.
• The man’s title to superiority over other creation is based on
his superior knowledge.
• In Islamic state, universal education has to be subsidized so
that education can equalize those who are endowed
differently in terms of wealth and property.

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 3. Optimal rate of growth
• Economic growth in Islam is not only quantitative but also
qualitative.
• Quantitative growth means factors of production are used
efficiently to increase the production of goods and services.
• The qualitative growth means the economic growth that
includes the growth of spiritual, moral and ethical of a
human being (development of human capital), for example a
good muslim producer who produces halal goods only.
• However, the qualitative growth which is the formation of
human capital is given more emphasis as the man of faith is
the center of all economic activities.

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 4. Maximization of employment
generation
• Islamic state must ensure that economic growth must make
a “maximum” contribution to the creation of employment
opportunity.
• It is to ensure that the growing economy will generate
additional employment as the next generation will not be
unemployed.
• This can be done through research and development
whereby new techniques, scientific knowledge, new
resources can be invented as to ensure continuous
employment in the future.

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Five macroeconomics problems (issues)

1. Unemployment
2. Inflation
3. Slow or no growth
4. Disequilibrium in trade
5. Inequitable distribution of income

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