1 Overview of Macroeconomics - Week01

OVERVIEW OF MACROECONOMICS
A.
B.
KEY CONCEPTS OF MACROECONOMICS The central macroeconomics questions Objectives and instruments of macroeconomics International linkages AGGREGATE SUPPLY AND DEMAND
Microeconomics and Macroeconomics
Microeconomics focuses on the individual parts of the economy.
How households and firms make decisions and how they interact in specific markets
Macroeconomics
whole.
looks at the economy as a
Economy-wide phenomena, including inflation, unemployment, and economic growth
The central macroeconomic questions:

Why
do output and employment sometimes fall, and how can unemployment be reduced? What are the sources of price inflation, and how can it be kept under control? How can a nation increase its rate of economic growth?
Objectives and instruments of macroeconomics

Objectives Output:
High level and rapid growth of output
Instruments Monetary Policy:

Controlling the money supply to determine interest rate
Employment:
High level of employment with low involuntary unemployment
Fiscal Policy:
Government expenditure, and taxation
Price - level stability
Objectives of Macroeconomics
Output

The ultimate objective of macro activity is to provide the goods and services that population desire. The most comprehensive measure of total output in an economy is the Gross Domestic Product (GDP). There are two ways to measure GDP: Nominal GDP and Real GDP. A steady long-term growth in real GDP and the improvement in living standards is known as economic growth.
High Employment, Low Unemployment

Employment and unemployment are most directly felt by individuals. Unemployment rate is the percentage of the labor force that is unemployed
Labor force includes all employed person and those unemployed individuals who are seeking jobs.
Stable Price

The most common price measure is the Consumer Price Index (CPI). The CPI measures the cost of a basket of goods (including item such as food, shelter, clothing, and medical care) bought by average urban consumer. The rate of growth or decline of the price level from one year to the next is known as the rate of inflation. Stable price mean slowly rising prices.
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The Tools of macroeconomic Policy
Fiscal Policy, tries to influence target variables (objectives of macroeconomics) by manipulating government expenditures and tax rates.
Government Expenditures
Taxation, effects the overall economy in two ways:
Government spending on goods and services Government transfer payments which boost the incomes of targeted groups
Taxes effect peoples incomes Taxes effect the prices of goods and factors of production and thereby effect incentives and behavior.
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The Tools of macroeconomic Policy
Monetary Policy, tries to influence target variables by changing the money supply or interest rates or both.
Central Bank can influence many financial and economic variables, such as interest rates, stock prices, housing prices, and foreign exchange rates by controlling money supply. If the central bank is faced with a business downturn, it can increase the money supply and lower interest rates to stimulate economic activity.
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International linkages
All nations participate in the world economy and are linked together trough trade and finance. As the cost of transportation and communication have declined, international linkages have become tighter than were a generation ago. As economies become more closely linked, policy makers devote increasing attention to international economic policy.
Trade policies: tariffs, quota, and other regulations that restrict or encourage imports and exports International financial management adopt different systems to regulate foreign exchange market.
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AGGREGATE SUPPLY AND DEMAND

Aggregate Supply (AS) The total quantity of goods and services that the nations business willingly produce and sell in a given period. Aggregate Demand (AD) The total amount that the different sector in the economy willingly spend in a given period. Sum of spending by consumers, business, government, and foreigner.
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AS and AD Determine the Major Macroeconomic Variables
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Macroeconomic Equilibrium
A macroeconomic equilibrium is a combination of overall price and quantity at which all buyers and sellers are satisfied with their purchases, sales and prices
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AD & AS Shocks
AD Shocks Occur as consumers, business, or governments change total spending relative to the economys productive capacity
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AD & AS Shocks
P Potential Output AS1 AS
AS Shocks is a sudden change in input cost or productivity which shifts AS sharply
P P*
E 1
E
AD
Q1
Q*
Q
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Assignment-1
1. Answer the questions for discussion at the end of the chapter 2. Collect the major macroeconomic data (e.g. nominal GDP, real GDP, unemployment rate, CPI, inflation rate (CPI), Government budget surplus/deficit, net export).
These data can be obtained from: www.bps.go.id Or, www.bi.go.id
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OVERVIEW OF MACROECONOMICS

Microeconomics and Macroeconomics

Microeconomics focuses on the individual parts of the economy.

looks at the economy as a

Economy-wide phenomena, including inflation, unemployment, and economic growth

The central macroeconomic questions:

Objectives and instruments of macroeconomics

Instruments Monetary Policy:

Price - level stability

High Employment, Low Unemployment

The Tools of macroeconomic Policy

Taxation, effects the overall economy in two ways:

The Tools of macroeconomic Policy

AGGREGATE SUPPLY AND DEMAND

AS and AD Determine the Major Macroeconomic Variables

AS Shocks is a sudden change in input cost or productivity which shifts AS sharply

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