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Intro Macro

This document provides an introduction to macroeconomics. It defines macroeconomics as dealing with the economy as a whole, examining aggregates like income, consumption, investment and price levels. It explains that macroeconomists try to forecast economic conditions to help consumers, firms and governments make better decisions. They analyze topics like GDP, unemployment and inflation. The document also introduces concepts like the circular flow model, the three market arenas of goods/services, labor and money, and how households, firms, government and other sectors interact in the macroeconomy.

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Krrish Bhardwaj
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© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
58 views

Intro Macro

This document provides an introduction to macroeconomics. It defines macroeconomics as dealing with the economy as a whole, examining aggregates like income, consumption, investment and price levels. It explains that macroeconomists try to forecast economic conditions to help consumers, firms and governments make better decisions. They analyze topics like GDP, unemployment and inflation. The document also introduces concepts like the circular flow model, the three market arenas of goods/services, labor and money, and how households, firms, government and other sectors interact in the macroeconomy.

Uploaded by

Krrish Bhardwaj
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Introduction to

Macroeconomics

Introduction

When the price of a product you want to


buy goes up, it affects you.
But why does the price go up?
Is the demand greater than the supply?
Did the cost go up because of the raw materials
that make it, or, was it a war in an unknown
country that affected the price?
In order to answer these questions, we need to
turn to macroeconomics.

What do Macroeconomists
do?

Macroeconomists try to forecast economic


conditions to help consumers, firms and
governments make better decisions.
Consumers want to know how easy it will be to
find work, how much it will cost to buy goods and
services in the market, or how much it may cost
to borrow money.
Businesses use macroeconomic analysis to
determine whether expanding production will be
welcomed by the market. Will consumers have
enough money to buy the products, or will the
products sit on shelves and collect dust?

What do Macroeconomists
do?

Governments turn to the macroeconomics


when budgeting spending, creating taxes,
deciding on interest rates and making policy
decisions.
Macroeconomic analysis broadly focuses on
three things:
National output (measured by GDP),
Unemployment and
Inflation

Introduction to
Macroeconomics
Microeconomics examines the behavior of
individual decision-making unitsbusiness firms and
households.

Macroeconomics deals with the economy as a


whole; it examines the behavior of economic
aggregates such as aggregate income, consumption,
investment, and the overall level of prices.

Aggregate behavior refers to the behavior of all


households and firms together.

The Circular-Flow Model


The circular-flow model is a
simple way to visually show the
economic transactions that occur
between households and firms in
the economy.

The Circular Flow of Income and Expenditure


2 Sector Model: Households and Firms

Firms produce
goods and
services. The
value of income
must always be
equal to the value
of production.
This is a National
Accounting
INDENTITY

Households
Income

Consumption Expend
100

100

Firms

This is a fully sealed circular flow - there are no leakages


from, or injections into the flow of income and expenditure
between firms and households
.

The Circular Flow of Income and Expenditure


3 Sector Model: Households, Firms & Banks
Households
Consumption
Consumption
80 100
Expend

Income
100

Saving
20

Firms

Assume households
save 20% of their
disposable income.
This is a functional

relationship

Investment
20

Banks

Income (Y) = C + I
Income (Y) = 80 + 20 = 100

The Circular Flow of Income and Expenditure


4 Sector Model: Households, Firms, Banks & Government
Disposable
Income 60

Government
Taxes 40

Households
Consumption
Consumption
Consumption
80
Expend
48 100

Income
100

Govt Expend

Firms

40
Investment
Investment
20
12

Income (Y) = C + I + G
Income (Y) = 48 + 12 + 40 = 100

Banks

Saving
Saving
20
12

The Circular Flow of Income and Expenditure


5 Sector Model: Households, Firms, Banks, Government& Rest of World

Closed (Domestic) Economy


Disposable
Income 60

Government

Taxes 40

Households
Consumption
80
Expend
48 100

Income
100

Govt
Expend

Firms

40

Investment
Investment
20
12

Saving
Saving
20
12

Banks

Exports

Rest
of
World

Imports

National Income
(Y) = C + I + G + NX (Exports - Imports)
.

FIVE SECTORS OF THE ECONOMY


Households

Households supply factors of production to firms for


which they receive INCOME. They spend that income on
CONSUMPTION goods and services
Firms PRODUCE goods and services and pay wages,
profits etc to households. Firms also INVEST in plant
and equipment

Firms
Government
Banks
Rest
of
World

Governments TAX and spend (GOVT EXPENDITURE)


EXPENDITURE
Households deposit their SAVING with banks and Banks
lend firms money to INVEST
IMPORTS and EXPORTS

Development of Macroeconomic
Thought

Four Phases
Classical Economics
Keynesian Economics
Monetary Economics
Supply Side Economics

The Roots of
Macroeconomics

The Great Depression was a period of severe


economic contraction and high unemployment that
began in 1929 and continued throughout the 1930s.
Classical economists applied microeconomic models,
or market clearing models, to economy-wide
problems.
However, simple classical models failed to explain the
prolonged existence of high unemployment during the
Great Depression. This provided the impetus for the
development of macro-economics.

The Roots of
Macroeconomics

In 1936, John Maynard Keynes published


The General Theory of Employment,
Interest, and Money.
Keynes believed governments could
intervene in the economy and affect the level
of output and employment.
During periods of low private demand, the
government can stimulate aggregate demand
to lift the economy out of recession.

Recent Macroeconomic
History

Fine-tuning was the phrase used by Walter


Heller to refer to the governments role in
regulating inflation and unemployment.
The use of Keynesian policy to fine-tune the
economy in the 1960s, led to disillusionment
in the 1970s and early 1980s.
This brought the importance of money in an
economy followed by the supply side policies.

Macroeconomic Concerns

Three of the major concerns of


macroeconomics are:

Inflation
Output growth
Unemployment

Output Growth:
Short Run and Long Run

The business cycle is the cycle of shortterm ups and downs in the economy.
The main measure of how an economy is
doing is aggregate output:

Aggregate output is the total quantity of goods


and services produced in an economy in a given
period.

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.

Output Growth:
Short Run and Long Run

A recession is a period during which aggregate output


declines. Two consecutive quarters of negative GDP
growth signals a recession.
A prolonged and deep recession becomes a
depression.
Policy makers attempt not only to smooth fluctuations
in output during a business cycle but also to increase
the growth rate of output in the long-run.

Unemployment

The unemployment rate is the percentage


of the labor force that is unemployed.
The unemployment rate is a key indicator of
the economys health.
The existence of unemployment seems to
imply that the aggregate labor market is not
in equilibrium.

Government in the
Macroeconomy

There are three kinds of policy that the


government has used to influence the
macroeconomy:
1.
2.
3.

Fiscal policy
Monetary policy
Growth or supply-side policies

Government in the
Macroeconomy

Fiscal policy refers to government policies


concerning taxes and spending.
Monetary policy consists of tools used by the
Central Bank (In Indias case, the Reserve Bank) to
control the quantity of money in the economy.
Growth policies are government policies that focus
on stimulating aggregate supply instead of
aggregate demand.

The Three Market Arenas


Households, firms, the government, and the
rest of the world all interact in three different
market arenas:

1.
2.
3.

Goods-and-services market
Labor market
Money (financial) market

The Three Market Arenas

Households and the government purchase goods and


services (demand) from firms in the goods-and
services market, and firms supply to the goods and
services market.
In the labor market, firms and government purchase
(demand) labor from households (supply).

The total supply of labor in the economy depends on


the sum of decisions made by households.

Transfer payments are payments made by the


government to people who do not supply goods,
services, or labor in exchange for these payments.

The Three Market Arenas

In the money marketsometimes called the


financial markethouseholds purchase stocks and
bonds from firms.

Households supply funds to this market in the expectation


of earning income, and also demand (borrow) funds from
this market.
Firms, government, and the rest of the world also engage
in borrowing and lending, coordinated by financial
institutions.

Supply of Goods and Services

HOUSEHOLD
SECTOR

Savings

FINANCIAL
SECTOR

Investment

Rent, Wages, Interest, Profits


Land, Labour, Capital, Enterprise

Remittances
Manpower
.

EXTERNAL
SECTOR

FIRMS

Receipts (Exports)

Payment for Goods and Services

Taxes

Facilities

GOVERNMENT Direct and indirect


SECTOR
Infrastructure

& Subsidies

Infrastructure

Direct Taxes

Payment (Imports)
26

Goods Market
Payment for Goods and Services
Supply of Goods and Services

HOUSEHOLD
SECTOR

Real Flow

FIRMS

Rent, Wages, Interest, Profits


Land, Labour, Capital, Organization

Nominal
flow

Factor Market

27
.

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