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SUBJECT CODE SOCSCI 9

SUBJECT DESCRIPTION MACROECONOMICS /INTERNATIONAL
ECONOMICS
MODULE DESCRIPTION Modules 1-2-3
OBJECTIVE OF THIS
MODULE:
1. For students to understand:
* what is Macroeconomics ,
International Economics and
Its differences and similarities
* how economies operate on a
global scale and its implications

DURATION Three (3) week

A. LESSON PROPER

Macroeconomics is concerned with

the broader economy of a single
country or region, focusing on
collective measures like GDP and
inflation.

International Economics deals with

the economic interactions between
countries, analyzing how trade,
investment, and policies affect global
and national economies

Part 1 = Introduction to
Macroeconomics
* Definition and scope of
macroeconomics

Macroeconomics is a branch of
economics that deals with the
structure, behavior, and decision-
making of an economy as a whole.

It focuses on broad aggregates such

as national income, total employment,
overall price levels, and the total
output of goods and services.
Scope:

National Income: Measurement and

analysis of national income and its
components, including GDP, GNP, and
NNP.

Employment: Study of factors

affecting overall employment levels,
unemployment rates, and labor force
participation.
Inflation and Deflation: Analysis of
price level changes, their causes, and
their impacts on the economy.

Economic Growth: Examination of the

long-term increase in a country’s
productive capacity and the factors
driving growth.
Monetary and Fiscal Policy: The role
of government policies in influencing
economic performance through
taxation, spending, and money supply
management.

* Importance of
macroeconomics

1. Policy Formulation: Helps

governments and central banks to
design and implement policies to
stabilize the economy, manage
inflation, and stimulate growth.
2. Economic Stability: By
understanding the dynamics of
business cycles, macroeconomics
helps in minimizing the negative
impacts of economic fluctuations.
3. Resource Allocation:
Macroeconomics provides insights
into how resources are allocated in
an economy, guiding decisions on
production, consumption, and
investment.
4. Understanding Economic
Indicators: It helps in interpreting
key economic indicators such as
GDP, unemployment rates, and
inflation, which are crucial for
making informed decisions in
business and government.
5. Global Economic Relations:
Macroeconomics is vital for
understanding the complex
interrelations between economies
in the global market, including
trade, finance, and investment
flows.
 *Theories of
Macroeconomics

1. Classical Theory:
o Key Concepts: The economy is
self-regulating; markets are
always clear, and full
employment is the norm.
o Key Figures: Adam Smith, David
Ricardo.
o Assumptions: Flexible prices
and wages, Say’s Law (supply
creates its own demand).
2. Keynesian Theory:
o Key Concepts: Aggregate
demand is the primary driver of
economic activity, and
government intervention is often
 necessary to manage economic
fluctuations.
o Key Figures: John Maynard
Keynes.
o Assumptions: Prices and wages
are sticky, especially downward,
leading to prolonged periods of
unemployment.
3. Monetarist Theory:
o Key Concepts: The money
supply is the most important
determinant of economic
activity and inflation.
o Key Figures: Milton Friedman.
o Assumptions: The economy is
inherently stable, and inflation is
primarily a monetary
phenomenon.
4. New Classical Theory:
 o Key Concepts: Emphasizes the
importance of rational
expectations and market
efficiency.
o Key Figures: Robert Lucas.
o Assumptions: Economic agents
use all available information to
make decisions, and markets
are efficient.
5. New Keynesian Theory:
o Key Concepts: Integrates
Keynesian concepts with
microeconomic foundations,
emphasizing market
imperfections.
o Key Figures: Gregory Mankiw,
David Romer.
o Assumptions: Market
imperfections like sticky prices
 and wages can cause short-term
economic fluctuations.
6. Supply-Side Economics:
o Key Concepts: Economic growth
is most effectively driven by
lowering taxes and reducing
regulation.
o Key Figures: Arthur Laffer.
o Assumptions: Lowering taxes
increases incentives for
production, investment, and
innovation.
7. Post-Keynesian Theory:
o Key Concepts: Focuses on the
role of uncertainty, institutions,
and the non-neutrality of money
in the economy.
o Key Figures: Joan Robinson,
Paul Davidson.
 o Assumptions: Economic reality
is inherently uncertain and
cannot always be explained by
rational expectations or
equilibrium models.

These theories provide diverse

perspectives on how economies
function and how economic policies
should be designed and implemented

National Income
Accounting

* Review of GDP, GNP, and

NNP GDP, GNP, and NNP

Gross Domestic Product (GDP):

 Definition:

 GDP is the total market value of all
final goods and services produced
within a country's borders in a
specific period, usually a year or a
quarter. It measures the economic
performance of a country.


 Components: GDP can be

calculated using three approaches:
1. Production Approach: Sum of
the value added at each stage of
production.
2. Expenditure Approach: Sum
of consumption, investment,
government spending, and net
exports (exports minus imports).
3. Income Approach: Sum of all
incomes earned by factors of
production, including wages,
rents, interests, and profits.
Gross National Product (GNP):

 GNP is the total market value of all

final goods and services produced
by the residents of a country,
regardless of where they are
located, within a specific period. It
includes the income earned by
residents abroad and excludes the
income earned by foreigners within
the country.


 Comparison with GDP: While GDP

focuses on location, GNP focuses
on ownership. For instance, if a
country's residents own businesses
or earn income abroad, that income
is included in GNP but not in GDP.

Net National Product (NNP):

  NNP is the total market value of all
final goods and services produced
by a country's residents, minus
depreciation (wear and tear of
capital goods).
 Formula: NNP = GNP - Depreciation.
 Importance: NNP gives a clearer
picture of the economy’s
sustainability by accounting for the
loss of value in capital goods.

Aggregate Demand and Aggregate

Supply Analysis

Aggregate Demand (AD):

 AD represents the total quantity of

goods and services demanded
across all levels of an economy at
a particular price level and in a
given period.
 Components:
 1. Consumption (C): Spending
by households.
2. Investment (I): Spending on
capital goods by businesses.
3. Government Spending (G):
Public sector spending.
4. Net Exports (NX): Exports
minus imports (X - M).

 AD Curve: The AD curve slopes

downward, indicating an inverse
relationship between the price
level and the quantity of output
demanded.

Aggregate Supply (AS):

 Definition: AS represents the total

quantity of goods and services that
producers in an economy are
willing and able to supply at a
 particular price level and in a given
period.
 Short-Run AS (SRAS): Upward
sloping, indicating that as prices
rise, producers are willing to supply
more goods and services.
 Long-Run AS (LRAS): Vertical,
representing the economy’s
potential output when all resources
are fully employed.
 Shifts in AS: Factors such as
changes in resource availability,
technology, and labor force can
shift the AS curve.

AD-AS Model:

 Equilibrium: The intersection of the

AD and AS curves determines the
equilibrium price level and output.
  Economic Fluctuations: Shifts in AD
or AS can lead to changes in output
and price levels, causing economic
expansions or recessions.

Part 2. Unemployment and Inflation

* Unemployment concepts
and types of unemployment

* Theories of inflation
* Hyperinflation and
deflation

Unemployment Concepts and Types of

Unemployment

Unemployment:

 Definition: Unemployment occurs

when people who are willing and
able to work are unable to find a
job.
  Unemployment Rate: The
percentage of the labor force that
is unemployed.

Types of Unemployment:

1. Frictional Unemployment:
o Definition: Temporary
unemployment that occurs when
people are between jobs or
entering the labor market for the
first time.
o Causes: Job searching,
voluntary transitions.
o Duration: Usually short-term.
2. Structural Unemployment:
o Definition: Unemployment
resulting from a mismatch
between the skills of workers
and the requirements of jobs.
 o Causes: Technological changes,
shifts in consumer demand,
globalization.
o Duration: Can be long-term if
workers need retraining.
3. Cyclical Unemployment:
o Definition: Unemployment
caused by economic downturns
or recessions.
o Causes: Decrease in aggregate
demand leading to reduced
production and layoffs.
o Duration: Varies depending on
the length of the economic
cycle.
4. Seasonal Unemployment:
o Definition: Unemployment linked
to seasonal variations in
demand or supply.
 o Causes: Seasonal industries
such as agriculture, tourism,
and retail.
o Duration: Short-term, recurring
annually.
5. Natural Rate of Unemployment:
o Definition: The unemployment
rate when the economy is at full
employment, consisting of
frictional and structural
unemployment.

Theories of Inflation

1. Demand-Pull Inflation:

 Definition: Inflation caused by an

increase in aggregate demand
exceeding aggregate supply.
 Causes: Higher consumer spending,
increased investment, government
spending, or net exports.
  Mechanism: As demand for goods
and services increases, prices rise
due to the limited availability of
resources.

2. Cost-Push Inflation:

 Definition: Inflation resulting from

an increase in the costs of
production.
 Causes: Rising wages, increased
costs of raw materials, or supply
chain disruptions.
 Mechanism: As production costs
rise, businesses pass these costs
onto consumers in the form of
higher prices.

3. Built-In Inflation (Wage-Price

Spiral):

 Definition: Inflation that occurs

when wages increase, leading to
 higher costs of goods and services,
which in turn leads to further wage
demands.
 Causes: Expectations of future
inflation, strong labor unions.
 Mechanism: A cycle where higher
wages lead to higher costs and
prices, which then lead to further
wage demands.

4. Monetarist Theory of Inflation:

 Definition: Inflation is primarily

caused by an increase in the
money supply that exceeds
economic growth.
 Key Figure: Milton Friedman.
 Mechanism: "Too much money
chasing too few goods," leading to
an overall increase in prices.

5. Structural Inflation:
  Definition: Inflation that results
from structural factors within the
economy, such as bottlenecks in
production or rigidities in the labor
market.
 Causes: Inflexibility in economic
systems, monopolies, or
government policies.
 Mechanism: Persistent imbalances
between demand and supply in
specific sectors cause sustained
inflationary pressures.

These theories provide a framework

for understanding the causes and
mechanisms behind inflation and are
critical for designing effective
monetary and fiscal policies to
manage inflation.
Part 3 – Macroeconomic Policy in an
Open Economy
* Monetary & Fiscal policies in an
open economy

Hyperinflation:

 Definition: Hyperinflation is an
extremely high and typically
accelerating rate of inflation, often
exceeding 50% per month. It leads
to a rapid erosion of the real value
of the local currency, causing the
prices of goods and services to rise
uncontrollably.
 Causes:
1. Excessive Money Supply:
Often results from the
 government printing money to
finance deficits.
2. Loss of Confidence: A decline
in confidence in the currency
and the economy can lead to
rapid price increases as people
rush to spend money before it
loses value.
3. External Shocks: Such as a
war or political instability,
disrupting normal economic
activity and leading to runaway
inflation.
 Examples: The hyperinflation in
Germany in the early 1920s,
Zimbabwe in the late 2000s, and
Venezuela in the 2010s.
 Effects:
o Severe economic instability.
 o People resorting to bartering or
using foreign currency.
o Collapse of the financial system
and savings.

Deflation:

 Definition: Deflation is a decrease

in the general price level of goods
and services, leading to an
increase in the real value of money.
 Causes:
1. Decrease in Aggregate
Demand: Can result from
reduced consumer spending,
business investment, or
government expenditure.
2. Increased Supply:
Improvements in technology or
production methods leading to
 lower production costs and
prices.
3. Tight Monetary Policy:
Central banks reducing the
money supply to control
inflation, leading to deflation.
 Effects:
o Increased real value of debt,

making it harder for borrowers

to repay.
o Decreased consumer spending

as people expect prices to fall

further.
o Potential for a deflationary

spiral, where reduced spending

leads to further price decreases,
causing economic contraction.

(b) Macroeconomic Policies in an

Open Economy
Definition: Macroeconomic policies in
an open economy refer to the
strategies and tools used by a
government to manage its economy
when it interacts with the rest of the
world through trade, investment, and
financial flows. These policies must
account for external influences and
the impact of international
transactions.

Key Macroeconomic Policies:

1. Monetary Policy:
o Interest Rates: Central banks
can adjust interest rates to
influence exchange rates and
capital flows. For example,
higher interest rates might
attract foreign investment,
strengthening the currency.
 o Exchange Rate Management:
Central banks may intervene in
foreign exchange markets to
stabilize or devalue the currency
to support exports.
2. Fiscal Policy:
o Government Spending and
Taxation: In an open economy,
fiscal policy affects trade
balances. For example,
increased government spending
can raise domestic demand,
potentially increasing imports.
o Public Debt Management: In an
open economy, governments
must consider how borrowing
will affect interest rates and
exchange rates, particularly if
the debt is held by foreign
investors.
3. Trade Policy:
o Tariffs and Quotas:
Governments may use trade
restrictions to protect domestic
industries but must consider
potential retaliation and its
impact on exports.
o Trade Agreements: Participating
in regional or global trade
agreements can enhance trade
flows and economic growth.
4. Capital Controls:
o Regulating Capital Flows: To
prevent destabilizing capital
movements, some countries
may implement capital controls,
restricting the flow of foreign
investment in and out of the
country.
5. Exchange Rate Policy:
 o Fixed vs. Floating Exchange
Rates: The choice of exchange
rate regime (fixed, floating, or
pegged) impacts how an
economy responds to external
shocks and adjusts to trade
imbalances.
6. External Debt Management:
o Managing International Debt: In
an open economy, governments
need to manage their external
debt to maintain credibility and
avoid defaults, which could
trigger financial crises.

Challenges:

 Exchange Rate Volatility:

Fluctuations in the exchange rate
can impact the effectiveness of
monetary and fiscal policies.
  Global Economic Conditions:
Changes in global demand, interest
rates, and commodity prices can
influence domestic economic
stability.
 Capital Mobility: High capital
mobility in open economies can
limit the effectiveness of
traditional monetary policies.

(c) Definition and Scope of

International Economics

Definition: International economics is

a field of economics that studies the
patterns and effects of interactions
between countries, including trade,
investment, and finance. It analyzes
how economic activities in one
country can affect others, considering
both the benefits and challenges of
economic interdependence.

Scope:

1. International Trade:
o Trade Theories: Examination of
why countries trade, what goods
they trade, and how trade
impacts the economy (e.g.,
comparative advantage,
Heckscher-Ohlin theory).
o Trade Policies: Analysis of
tariffs, quotas, and trade
agreements, and their effects on
domestic and global economies.
o Globalization: The increasing
integration of economies
through trade and the
implications for economic
growth and development.
2. International Finance:
o Exchange Rates: Study of how
currencies are valued and how
exchange rates are determined
in the foreign exchange
markets.
o Balance of Payments:
Examination of a country’s
transactions with the rest of the
world, including trade,
investment, and transfers.
o Global Capital Markets: Analysis
of international investment
flows, capital mobility, and their
effects on national economies.
3. International Monetary System:
o Monetary Policies: How different
countries’ monetary policies
interact and affect global
economic stability.
 o Currency Systems: The role of
different exchange rate regimes
(fixed, floating, pegged) in
international economic
relations.
o Financial Crises: Study of
international financial crises,
their causes, and their global
impact.
4. Development Economics:
o Economic Development: The
role of international trade and
finance in the economic
development of nations,
particularly in emerging and
developing economies.
o Poverty and Inequality:
Examination of how global
economic policies and practices
 impact income distribution and
poverty levels worldwide.
5. Global Economic Institutions:
o Role of Institutions: Analysis of
institutions like the
International Monetary Fund
(IMF), World Bank, and World
Trade Organization (WTO) in
shaping international economic
policies and ensuring global
economic stability.
6. Regional Economic Integration:
o Regional Trade Agreements:
Study of regional economic
blocs like the European Union
(EU), NAFTA, and ASEAN, and
their impact on member
economies.
o Customs Unions and Free Trade
Areas: Examination of how
 regional agreements influence
trade patterns and economic
policies.

Importance of International
Economics:

 Policy Formulation: Helps

governments design effective trade
and financial policies.
 Global Cooperation: Encourages
cooperation among nations to
achieve global economic stability
and growth.
 Understanding Globalization:
Provides insights into the
opportunities and challenges of an
interconnected global economy.

International economics is crucial for

understanding how nations interact
economically and how these
interactions affect global prosperity
and stability.