Macroeconomics and Business

Forecasting (Eco 502) - 1

- Dr. Mirza Azizul Islam

Meaning and scope of macroeconomics
(Text book, CH - 1, Introduction)

Concerned with the behavior of the economy as a

whole – booms and recessions in the total output of
goods and services – growth of output – rates of
inflation – employment – BOP – exchange rates –
both long term economic growth and short term
fluctuation
Meaning and scope of macroeconomics
(Text book, CH - 1, Introduction)

 Economic behavior and policies that affect consumption,

investment, exchange rate, balance of payment, interest rate, price
level, money supply – monetary, fiscal, exchange rate policies.
 Interactions among goods, labour, asset markets and among
national economies through trade, FDI, non-FDI financial flows.
 Does not deal with the behavior of individual economic units such
as households and firms
Concept of growth
(Text book, Section 1-2)
 The growth rate of the economy is the rate at which
the gross domestic product (GDP) is increasing – real
vs nominal.
 GDP grows over time because of
◦ Changes in the availability/ use of resources e.g. labour,
capital, land.
◦ Productivity increase – the same quantity of factors can
produce more output with technological changes.
Aggregate demand and supply
(Handout)
The key overall concepts in analyzing output, inflation, growth
and role of policies are aggregate demand and aggregate supply
Aggregate demand shows the relationship between spending on
goods and services and level of prices – i.e. total demand for
goods and services at different price levels.
Aggregate supply shows the price level associated with each
level of output i.e. amount of output firms produce and the price
level.
Aggregate demand and supply
(Handout)
Differences with microeconomic demand and supply curve –
aggregates and long run/short run supply

i. Interpretation of quantity and price

ii. Differences in shape of long run and short run supply curves

iii. Non-linearity of aggregate supply curve

The impact of shifts in aggregate demand on the level of output and
prices depends on the shape of the aggregate supply curve.
Aggregate demand and supply curves can be shifted through monetary
and fiscal policies
National income accounting
(Chapter 2)
National income accounting studied for two reasons
i. Provides a formal structure for what Dornbush, Fischer and
Statz call macro theory models
ii. Provides some ballpark numbers that help characterize the
economy.

The overriding concept in national income accounting is

GDP- defined as the value of all final goods and services
produced in the economy within a given period.
National income accounting
(Chapter 2)
 GDP can be looked at in two ways:
i. Production/supply side – output is paid to labour in the
wages and to capital in the form of interests and
dividends – also rent for land/buildings
ii. Expenditure/demand side – comprising expenditure on
consumption, investment etc.

 At equilibrium, the two sides yield the same

number and is an accounting identity.
 National income accounting
(Chapter 2)
The understanding of the two sides provides
the basis for analysis of aggregate demand and
supply.
National income accounting also includes
measure of the overall price level – this is
important because as an indicator of welfare,
what matters is the real GDP.
 National income accounting
(Chapter 2)

 Real GDP – Nominal GDP is the total value of all

final goods and services at current market prices
whereas real GDP is the value of all goods and
services produced presently at some base year prices
– the difference between the base year prices and
present years prices provides the basis for discussion
of inflation
Production of output and payments to
factors of production
(Text book, Section 2-1)

Production side transforms factors of production

into outputs – payments made to labour, capital etc.
GDP and GNP – adjust for receipts from or
payments from abroad for factors of production.
NDP = GDP minus depreciation i.e. the value of
capital used up in producing output.