A BRIEF HISTORY

OF MACROECON
OMICS
          How did it start?
Classical economists of the eighteenth and nineteenth centuries were
market optimists, believing that market forces restore actual output
to potential output quite quickly. The supply of potential output
then became the principal focus of study. French economist Jean-
Baptiste Say (1767–1832) gave his name to ′Say′s Law′, which states
that supply creates its own demand. If goods and services are being
produced, and the income thereby derived is passed on to the
owners of the factors of production, the latter then have the
spending power to purchase the original output. Nineteenth-century
UK economists in the classical tradition include James Mill, his son
John Stuart Mill, and David Ricardo. Classical economists still had
some explaining to do – for example, why was there a Great
Depression during 1873–79 in many leading economies? Had
potential output really fallen by that much that quickly?
Nevertheless, classical economics largely persisted until the 1920s.
After the First World War, European economies were struggling to
regain pre-war prosperity. At the time, they all belonged to the gold
standard, which in effect was a fixed exchange rate system. Within
this system, countries such as the UK had become seriously
uncompetitive as a result of wartime inflation. The 1926 General
Strike in the UK was the result of austerity designed to push wages
down to restore UK competitiveness, a close analogy of modern
Greek misery as it tries to reduce its budget deficit and increase its
competitiveness in order to survive within the Eurozone.
 Who is the
founder of
macroeconomi
cs?

John Maynard Keynes, 1st

Baron Keynes ( 5 June 1883
– 21 April 1946), was a
British economist whose
ideas fundamentally
changed the theory and
practice of macroeconomics
and the economic policies
of governments
 Great The Great Depression is a global

Depres economic crisis that began on

October 24, 1929, with the stock
market crash in the United States

sion 
and lasted until 1939. 1930s in the
general period of the Great
Depression.

The Great Depression hit the United

States, Canada, Great Britain,
Germany and France most severely,
but was felt in other states as
well. Industrial cities are
undertaken to the greatest extent,
construction is almost universally
used within countries. Due to the
growth in consumption, prices for
industrial products fell by 40-60%.
 Theory of Keynes
"General Theory of Employment, Interest and Money"

 Is a book by English economist John Maynard Keynes published in February 1936. It caused a

profound shift in economic thought, giving macroeconomics a central place in economic theory and
contributing much of its terminology – the "Keynesian Revolution". It had equally powerful
consequences in economic policy, being interpreted as providing theoretical support for government
spending in general, and for budgetary deficits, monetary intervention and counter-cyclical policies in
particular. It is pervaded with an air of mistrust for the rationality of free-market decision making.
Keynes denied that an economy would automatically adapt to provide full employment even in
equilibrium, and believed that the volatile and ungovernable psychology of markets would lead to
periodic booms and crises. The General Theory is a sustained attack on the classical
economics orthodoxy of its time. It introduced the concepts of the consumption function, the principle
of effective demand and liquidity preference, and gave new prominence to the multiplier and
the marginal efficiency of capital.
Components of aggregate demand
There are 2 sources of Aggregate demand:

Consumption Demand and Investment Demand

Consumption Demand represents the demand for goods and
services by individuals and households in the economy. This is
the major category in the national income accounts for most
countries, typically comprising from 50 percent to 70 percent
of the gross national product (GNP) for most countries.
Investment demand refers to the demand by businesses for
physical capital goods and services used to maintain or expand
its operations. Think of it as the office and factory space,
machinery, computers, desks, and so on that are used to
operate a business.
 Aggregate demand consists of
consumption and investment
demand. Aggregate demand is
the demand of total goods and
services in the economy as it is

Aggregat impossible to count all the

physical quantities the total
expenditure on all goods and
e demand services are taken into account.
Aggregate demand AD is the
sum of consumption demand C
and investment demand I.
Consumption demand and
investment demand are chosen
by different economic groups
and depend on different things.
 Consumption demand
Households buy goods and
services from cars to
cinema tickets. These
consumption purchases
account for most of
personal disposable
income.
Personal disposable
income is the income
households receive from
firms, 
+
transfers received from
government, minus taxes
paid to government. It is
the net
income households can
spend or save
The consumption function

The consumption function shows aggregate consumption demand

at each level of income. The consumption function tells us how to
go from income Y to consumption demand C. If A is a positive
constant, and c is a positive fraction between 0 and 1, then Our
bare-bones model has no government, no transfer payments and
no taxes. The consumption function is a straight line. A straight
line is completely described by its intercept – the height at which
it crosses the vertical axis –and its slope – the amount it rises for
each unit we move horizontally to the right.
 Investment
spending
Investment spending is Money spent on capital
goods or goods used in the production of
capital,  goods, or services. Investment
spending may include purchases such as
machinery, land, production inputs, or
infrastructure. Investment demand is firms
desired or planned additions to physical capital
(factories and machines) and to inventories.
The main drivers of planned investment
spending are the interest rate, the expected
future level of real GDP, and current
production capacity.
Thank y o u f o r
t e nt i o n !
your at