BUSINESS ECONOMICS

BM002-3-1

Lecture 6

INTRODUCTION TO MACROECONOMICS

Learning Outcomes
1. At the end of the lesson, you should be able to: Define Macroeconomics and differentiate with microeconomics

2.
3. 4.

Explain major issues in macroeconomics

Discuss economics policies and major components in macroeconomics Draw and discuss circular flow in Macroeconomics.

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What is Macroeconomics?
Macroeconomics is :

study of the economy as a whole

concerns itself not with individual prices but the price level as a whole; it attempts to explain output as a whole not that of individual products; it attempts to explain employment in the economy as a whole not in individual companies or industries.
Macroeconomics has a broad focus.
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The major macroeconomic issues

1. Economic Growth

a growing economy means that there will be

more good and services for people to consume.

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The major macroeconomic issues

2. Economic Development
- Is the improvement in the standard of living in a

nation's population with sustained growth from a simple, low-income economy to a modern, highincome economy. - focusing basic needs, education, healthcare, life expectancy, security, poverty level and so on.

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The major macroeconomic issues

3. Inflation
- A general rise in price throughout the economy. - Changes in the general level of prices affects output, which in turn affects employment.

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The major macroeconomic issues

4. Unemployment
occurs when people are without jobs and they have actively looked for work within the past four weeks.

Labor force = employed + unemployed

Employed includes those who worked as paid employees ( both full time and part time), having own business, worked as unpaid workers in family business, who were not working (but had jobs) temporarily because vacation, illness and bad weather.

NOT in Labor Force full time students, homemakers,

retiree, disable people and etc.
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The major macroeconomic issues

5. Balance of Payments
account records all transactions between the residents of that country and the rest of the world. Transactions enter as either debit items or credit items.

Debit items - all payments to other countries: countrys purchases of imports, the spending on investment it makes abroad and the interest and dividends paid to foreigners who have invested in the country.
Credit items include all receipts from other countries: from the sales of exports, from investment expenditure by foreigners in the country and interest and dividends earned from abroad.
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Macroeconomic Policies
The government implements macroeconomics policies to solve the major macroeconomics problem; Government - the agency through which a political unit exercises its authority, controls and administers public policy, and directs and controls the actions of its members or subjects.
Economic Policy : 1. Microeconomic Policy 2. Macroeconomic Policy
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 Microeconomic policy this relates to the allocation of resources from the viewpoint of efficiency and equity Macroeconomic policy this relates to the economy as a whole and covers one or more of the following:

General level of unemployment General level of prices Rate of economic growth Balance of payments
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Three (3) Important instruments of economic policy :

1. Measures related to efficiency Policies directed at the private sector, where government engages in intervention to help certain industries and to regulate others. Examples : subsidies to industry in need of special assistance. 2. Measures Related to Equity

Governments remit - try and make the allocation of resources fairer between individuals. 2 instruments : redistribution of income- giving people the freedom to spend their income as they see fit. provides certain goods and services to all that want them, regardless of income. 2 ways of redistribution of income are taxes and subsidies
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3. Control of the Economy as a Whole

Governments have taken on the responsibility of influencing the rate of inflation, the level of unemployment, the rate of economic growth and the balance of payments between the own country and the rest of the world. The tools available to government in these tasks are: Fiscal policy which seeks to influence total spending through the governments own budget changes in taxation and expenditure as required. (saving and investment) Monetary policy operated by the Central Bank which tries to influence spending through interest rates and the supply of money ( liquidity and money supply)
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Components of Macroeconomics
Households Households own all the factors of production: land, labour, capital and entrepreneur. Households provide the services of factors of production to firms and the government and receive payments in the form of rent, wages, interest and profit.

Firms

An organization that buys the factors of production from households and then produces and sell goods and services. Firm will sell their goods and services to households and the government and earn a revenue from the sales. A firm will pay wages, rent, and interest to households for the services of the factorsp of production and also pays taxes to the government.

Government

Government will collect taxes from households and firms. Government revenue will be spent on development and for operational purposes. The government also buys factors of production from households for public consumption.
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The Circular Flow of Income

Import Expenditure

Taxes Savin g factors payments Inner Flow Consumptio n of domestically produced goods and services BANK etc GOVERNMENT ABROAD

Investment

Govt Expenditure

Export Expenditur e
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The Inner Flow Firms pay money to households in the form of wages and salaries, dividends of shares, interest and rent. These payments are in returns for the services of the factors of production land, labour and capital ( which are supplied by households). Money flows directly from firms o households as 'factors payments' ( left hand side of inner flow) Households in return pay money do domestic firms when consume domestically produced goods and services. ( right hand side inner flow). There is thus a circular flow of payments from firms to household to firms and so on.
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Withdrawls

Saving

Part of the incomes received by households will be spend on the goods and services of domestic firms Part of the incomes generated by firms will be paid to domestic households. There are three forms of withdrawls :
Income that households choose not to spend but to put aside for the future. Savings are normally deposited in the financial institutions like banks and building society. When people pay taxes ( to either central or local government) this represents a withdrawls of money from the inner flow in much the same way as saving; only in this case, people have no choice. Households spend some of their incomes on imported goods and services, or on goods and services using imported compenents. Although the money that consumers spend on such goods initially flows to domestic retailers, it will eventually find its way abroad.
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Taxes

Import Expenditure
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Injections Part of the demand for firm's output arises from consumers' expenditure. The reminder comes fom other outsides the inner flow. There are three forms of injections :
The money that firms spend after obtaining it from various financial institutions - either past savings or loans or through a new issues of shares. They may invest in plant and equipments or may simply soend they money on building up stocks of inputs , semi finidhed and finished goods

Investment

When the government spends money on goods and Government services produced by firms this counted as injections. Expenditure Like government spends on public goods such as road, hospitals, schools and etc.

Export Money flows into the circular flow from abroad when Expenditure residents abroad buy our exports of goods and services.
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