UBEA 1013: ECONOMICS 1 CHAPTER 8: INTRODUCTION TO MACROECONOMICS 8.1 Introduction 8.2 Concern of...

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UBEA 1013: ECONOMICS

CHAPTER 8: CHAPTER 8: INTRODUCTION TO MACROECONOMICSINTRODUCTION TO MACROECONOMICS

8.1 Introduction

8.2 Concern of Macroeconomics

8.3 Government policy

8.4 Economics school of Thought(Intro only)

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• Microeconomics examines the behavior of individual decision-making units—business firms and households.

• Macroeconomics deals with the economy as a whole; it examines the behavior of economic aggregates such as aggregate income, consumption, investment, and the overall level of prices.

– Aggregate behavior refers to the behavior of all households and firms together.

8.1 8.1 Introduction to Macroeconomics

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• Connection to microeconomics:

• Macroeconomic behavior is the sum of all the microeconomic decision made by individual households & firms

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• Four of the major concerns of macroeconomics:– Output growth– Inflation– Unemployment

A) Society welfare

B) Government policy

Economics school of thought (Theories)

a) Fiscal b) Monetaryc) SS side stimulation

a) Classic b) Keynesianc) Monetaryd) Developmente) Marxistf) etc

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8.2 Concerns of macroeconomics:8.2 Concerns of macroeconomics:

(a) Output Growth

long-run economics growth short-run fluctuations

>> Business cycle

• The main measure of how an economy is doing is aggregate output:– Aggregate output is the total quantity of goods

and services produced in an economy in a given period.

The business cycle is the cycle of short-term ups and downs in the economy.

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Expansion and Contraction:The Business Cycle

• An expansion, or boom, is the period in the business cycle from a trough up to a peak, during which output and employment rise.

• A contraction, recession, or slump is the period in the business cycle from a peak down to a trough, during which output and employment fall.

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• It has become conventional to classify an economics downturn as a “technical recession” when aggregate output declines for two consecutive quarters.

• A prolonged and deep recession becomes a depression.

• Policy makers attempt not only to smooth fluctuations in output during a business cycle but also to increase the growth rate of output in the long-run.

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• Inflation is an increase in the overall price level.

• Hyperinflation is a period of very rapid increases in the overall price level. Hyperinflations are rare, but have been used to study the costs and consequences of even moderate inflation.

• Deflation is a decrease in the overall price level. Prolonged periods of deflation can be just as damaging for the economy as sustained inflation.

(b) Inflation

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• Stagflation (stagnation + inflation) occurs when the overall price level rises rapidly (inflation) during periods of recession or high & persistent unemployment (stagnation) .

• Unanticipated inflation is an inflation that takes people by surprise. Thus, it is the inflation that either higher or lower than expected.

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Three price indexes were used as measurements of inflation or overall price levels are as follow:

•GDP deflator = Nominal GDP / Real GDP

•Consumer Price Index (CPI) is a price index computed in a given period using a basket of goods purchased by typical consumer. It is the most popular price index.

•Producer Price Index (PPI) measure price changes for products at all stages in the production process.

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Cost of inflation:

• Inflation changes the distribution of income. Those who are living on fixed incomes are particularly hurt by inflation

• Inflation that is lower than expected benefits creditors and hurt the debtor and vice versa .

• When unanticipated inflation occurs regularly, investment risk increases

>> investor could be reluctant to invest and make long-term commitment

>> slow the economic growth

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(c) Unemployment

Definition: Is the percentage of the labour force that is unemployed

u n em p lo y m e n t ra te = u n em p lo y ed

em p lo y ed + u n em p lo y e d

Definition: Is the percentage of the labour force that is unemployed

Labor force:

Who qualified as “labour force”?Who can be said as “employed”?Who can be said as “unemployed”?

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• An employed person is any person 16 years old or older:

1. who works for pay, either for someone else or in his or her own business for 1 or more hours per week,

2. who works without pay for 15 or more hours per week in a family enterprise, or

3. who has a job but has been temporarily absent, with or without pay.

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• An unemployed person is a person 16 years old or older who:

1. is not working,

2. is available for work, and

3. has made specific efforts to find work during the previous 4 weeks.

• A person who is not looking for work, either because he or she does not want a job or has given up looking, is not in the labor force.

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Population

Labor force Not in labor force

Employed

Unemployed

< 16

> 55

Discourage workers

Discouraged workers are people who want to work but cannot find jobs. They grow discourage and stop looking for jobs

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Population

Labor force Not in labor force

Labor force

Labor force

< 16

> 55

Discourage workers

p o p u la tio n = lab o r fo rce + n o t in lab o r fo rce

lab o r fo rce = em p lo y ed + u n em p lo y e d

lab o r fo rce p artic ip a tio n ra te = lab o r fo rce

p o p u la tio n

u n em p lo y m en t ra te = u n em p lo y ed

em p lo y ed + u n em p lo y ed

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Three types of unemploymentThree types of unemployment

1. Frictional unemployment is the portion of unemployment that is due to the normal working of the labor market; used to denote short-run job/skill matching problems.

2. Structural unemployment is the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries

3. Cyclical unemployment is the increase in unemployment that occurs during recessions and depressions .

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The natural rate of unemployment is the unemployment that occurs as a normal part of the functioning of the economy.

Sometimes taken as the sum of frictional unemployment and structural unemployment.

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8.3 Government Policy8.3 Government Policy

• There are three kinds of policies that government has used to influence the macroeconomic as below:

1. Fiscal policy: Refer to government policies concerning taxes and spending,

2. Monetary policy: Consist of tools used by the central bank to control the quantity of money in the economy,

3. Supply-side policy: Are government policies that focus on stimulating aggregate supply .

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• Classical economists applied microeconomic models, or “market clearing” models, to economy-wide problems. E.g. Adam Smith theory of “Invisible hand of the free competitive market”.

• However, simple classical models failed to explain the prolonged existence of high unemployment during the Great Depression. This provided the impetus for the development of macroeconomics.

8.4 Economics School of Thought (Theories)8.4 Economics School of Thought (Theories)

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• In 1936, John Maynard Keynes published The General Theory of Employment, Interest, and Money.

• Keynes believed governments could intervene in the economy and affect the level of output and employment.

• During periods of low private demand, the government can stimulate aggregate demand to lift the economy out of recession.

End

UBEA 1013: ECONOMICS 1 CHAPTER 8: INTRODUCTION TO MACROECONOMICS 8.1 Introduction 8.2 Concern of...

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