Introduction-Macro Economics-Lecture Slides, Slides of Macroeconomics

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Lecture 1& 2

Chapter 26 –

I. Introduction: Macroeconomic Issues

II. National Income and Output

III. Money, Banking and Monetary Policy

Core Reading List:

I. McConnell and Brue, Economic Principles, Problems and Policies II. Lipsey, An Introduction to Positive Economics

 The study of the behavior of an economy at the aggregate level, as opposed to the level of a specific subgroups or individuals (which is called microeconomics). For example, a macroeconomist might consider the industrial sector, the services sector, but he/she will not consider specific parts of any of these sectors. Factors studies include inflation, unemployment, and industrial production, often with the aim of studying the effect of government policy on these factors.

 Pakistan economy grew at 4.1% in 2009-

 1.2% in 2008-

 An increase in real GDP occurring over some time

period.

 2009: Real GDP was Rs. 14,668,

 2010: Real GDP was Rs. 12,739,

 Growth rate in real GDP =?

 Mathematical approximation of the effect of

growth

 Approximate number of years required to

double GDP = 70/ (annual percentage rate of

growth)

1. Increasing its inputs of resources

2. Increasing productivity of inputs

 Productivity (real output per unit of input)

rises by increasing health, sanitation, training,

education, motivation etc

 Peak : temporary maximum in activity. Economy is near or at full employment, and the level of real output is at or very close to the economy’s capacity. Price level is likely to rise

 Recession : a period of decline in total output, employment, trade, income.

 Trough : bottom lowest in the temporary cycle

 Recovery : rise in output and employment towards full employment. A recession is usually followed by a recovery and expansion

 Causes of business cycles

 Changes in productivity  Changes in money supply  Changes in spending levels

 Growth trend is the overall trend of the business

cycles

 Expansionary  Contractionary

 Those part of the labor force which are not

employed

 must be actively seeking work to be considered unemployed

 Unemployment rate = unemployed * 100

labor force

1. Frictional  In search of employment  In between jobs, fresh graduates
2. Structural  Changes in consumer preferences, consumer demand and in technology e.g sewing. Structurally unemployed find hard to obtain new jobs without retraining, additional education or relocating
3. Cyclical  Caused by changes in spending , less demand and less income causes higher unemployment e.g. Credit Crunch 2008. Typically begins in the recession phase of the business cycle

 Large unemployment has costs

 Causes a GDP gap  The amount by which actual GDP falls short of potential GDP (at full employment levels)  Okun’s law: for every 1 percentage point unemployment rises above NRU a GDP gap of 2 percent occurs

 Cost of unemployment is unequally distributed

 Different groups experience different unemployment rates

 Unemployment varies by

 Occupation  Age  Race and ethnicity  Gender  Education  Duration

 Non-economic costs:

 depression, socio-political unrest, lowering morale, poverty, ethnic and racial tension

Quantity in Basket

2006 2007 2008

(kg or litre) Price^

Cost of basket

Price Cost ofbasket Price Cost ofbasket

Flour 6 Rs. 200 1200 Rs. 300 Rs. 150

Oil 1.5 Rs. 80 120 Rs. 150 Rs. 50

Milk 1 Rs. 40 40 Rs. 55 Rs. 30 Rice 3 Rs. 300 900 Rs. 250 Rs. 250

Total cost 2260 Price index

100

 Cost push inflation  affects supply side  thus reduces output.

 Rising input prices raise per-unit production

costs. It is the average cost of output. These rising costs squeeze profits and reduce the amount of output firms want to supply. Hence supply of goods declines and prices rise.

 Demand pull inflation  affects demand side  more output produced to satisfy demand

 Excess demand bids up the prices of the limited output. Prices increase due to excess total spending beyond the economy’s capacity to produce.