L-7 Introduction to Macroeconomics - mizan128

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Oct 28, 2013 (3 years and 7 months ago)

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What Macroeconomics is about


Structure and performance of national economies


Policies that governments formulate and use to affect
economic performance


Some notable issues that macroeconomics addresses:


Sources of growth


Reasons of fluctuation in economies


Inflation and unemployment


Government policies


Growth of economies


2

Growth of economies


Between
1960 and
2002 the size
of US
economy as
well as per
capita
income grew
steadily.
Why?


3

0
5000
10000
15000
20000
25000
30000
35000
US
GDP
per capita

Fluctuation in the growth process


In certain
periods US
economy
faced
fluctuations
in per capita
income.
Why?

4

0
5000
10000
15000
20000
25000
30000
35000
US GDP per capita

5

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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.

Inflation


Inflation in
Bangladesh
fluctuated quite
a bit during the
period 1987 and
2002. When did
it go up? Why?
When did it go
down? Why?

6

0
2
4
6
8
10
12
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Inflation (CPI) in Bangladesh

1995:
National
election held
1998: Flood

1990: Regime
change

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Unemployment


The
unemployment rate

is the
percentage of the labor force that is
unemployed.


The unemployment rate is a key indicator
of the economy’s health.


The existence of unemployment seems to
imply that the aggregate labor market is
not in equilibrium.

Relationship between Inflation and
Unemployment


A W Philips
(1958) observed
that there was an
inverse
relationship
between
unemployment
rate and
inflation….


WHY???

8

Rate of change in inflation

Unemployment rate

Unemployment rate in the US

9

Government Policies


There are three types of policy that the
government uses to influence economy.



Fiscal policy


Monetary policy


Growth policy

10

Government Policies

11


Fiscal policy

refers to government policies concerning
taxes and spending.


Monetary policy

consists of tools used by the Federal
Reserve to control the quantity of money in the
economy.


Growth policies

are government policies that focus
on stimulating economic growth.

12

Exchange Rate


Exchange rates are quoted as foreign
currency per unit of domestic currency or
domestic currency per unit of foreign
currency.

Why Exchange Rate is Important


Determines the value of our goods in terms of
international currencies


We can compare prices of same goods produced
in different countries


Change in the exchange rate has impact on the
import
-
export flows

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Demand and Supply in Macroeconomics


Aggregate demand

is the
total demand for goods and
services in an economy.


Aggregate supply

is the total
supply of goods and services in an
economy.


Aggregate supply and demand
curves are more complex than
simple market supply and demand
curves.

Four Sectors of Macroeconomics

1.
Real sector:
Encompasses activities related to the aggregate supply and
aggregate demand in an economy. Data on this sector cover gross domestic and
national product, consumption, savings, inf lation and capital formation.

2.
Fiscal sector:

Encompasses government income and expenditure related
activities

3.
Monetary sector:

Encompasses activities related to money demand, money
supply, interest rate.

4.
International sector:

Encompasses activities related to export, import,
capital f lows, exchange rate.


When we analyze data to estimate macroeconomic scenario, now
-
a
-
days
we use data from these four sectors. However, for theoretical purpose,
economists historically use three markets to analyze macroeconomic
problems. These are:

1.
Labor market

2.
Goods market

3.
Asset market

15

Schools of Macroeconomics

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Classical school

Believes in free market
and advocates market
reaches equilibrium
through quick
adjustments.

Keynesian school

Believes that market often
does not adjust quickly and
may need government
intervention.

Which one do you think fit the real
world better?


During Great Depression, US as well as the world economy did not
adjust quickly to overcome the depression. Stagnation stayed for a
long time… more than a decade. At that time Keynesian theory
very neatly identified the reasons of such prolonged stagnation,
that the classical economics had failed to explain.


However, in 1970 USA suffered high inflation and stagnation at the
same time…


This phenomenon is called
STAGFLATION
.


Keynesian theory could not solve stagflation.


Neoclassical economists came up again and attacked the
Keynesians on the ground that it could not explain stagflation and
it did not have enough theoretical background.


Both the schools are still working on their weaknesses in
theoretical explanations of real life problems.

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Our study of macroeconomics will cover the following


Measurement of national income


Productivity, output and employment


Consumption, savings and investment


Asset market


Combining asset and goods market through IS
-
LM framework to
determine general equilibrium of the economy.


Unemployment and inflation


Business cycle


Monetary policy


Fiscal policy


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