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Macroeconomic Variables

The document discusses the differences between microeconomics and macroeconomics, with microeconomics focusing on individual economic units and macroeconomics examining the overall economy. It also outlines the three basic questions of macroeconomics: why output and employment fall during recessions, what causes inflation and how to control it, and how to increase economic growth. Finally, it identifies the major macroeconomic goals as increasing output, maintaining high employment and low unemployment, and achieving stable prices.

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75 views10 pages

Macroeconomic Variables

The document discusses the differences between microeconomics and macroeconomics, with microeconomics focusing on individual economic units and macroeconomics examining the overall economy. It also outlines the three basic questions of macroeconomics: why output and employment fall during recessions, what causes inflation and how to control it, and how to increase economic growth. Finally, it identifies the major macroeconomic goals as increasing output, maintaining high employment and low unemployment, and achieving stable prices.

Uploaded by

mahdi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Lecture -1

MACROECONOMIC VARABLES

Md. Shamsuddin Sarker


Lecturer
Department of Economics
Southeast University, Banani, Dhaka
Macroeconomics VS Microeconomics

• Microeconomics and Macroeconomics: Microeconomics and Macroeconomics are


two approaches to economic problems and analysis.
 Microeconomics relates to the study of individual economic units.
 Macroeconomics is a study of the economy as a whole.
 Rangner Frich as the first to use the terms ‘micro’ and ‘macro’ in economics in
1933.
• Microeconomics is called price theory.
• Price Theory explains the composition, or allocation, of total production – why
more and some things are produced than of others.
• Macroeconomics is called Income Theory.
• Income theory explains the level of total production and why the level rises and
falls.
Three Basic Questions of Macroeconomics

Question: What are basic macroeconomics questions? (short question)

1) Why do output and employment sometimes fall, and how can unemployment be reduced?
 All market economics show patterns of expansion and contraction known as business cycle. During
the business cycle downturn , such as the recession of 1990—1991 , production of goods and
services fall, and millions of people lose their jobs. For much of the postwar period, one key goal of
macroeconomic policy has been to use monetary
2) What are the sources of price inflation, and how can it be kept under control?
 Economists have learned that high rates of price inflation have a corrosive effect on market
economics.
 A market economy uses prices as a yardstick to measure economic values and as a way to conduct
business. During periods of rapidly rising prices, the yardstick loses its value: People become
confused, make mistakes, and spend much of their time warring about inflation eating away at their
time worrying about inflation eating away at their incomes. Rapid price changes lead to economic
inefficiency.
 and fiscal policy to reduce the severity of business-cycle downturns and unemployment.
Three Basic Questions of Macroeconomics

3) How can a nation increase its rate of economic growth?


 Macroeconomics is also concerned with the long-run prosperity of a country. Over a period of three
decades and more, the growth of a nation’s productive potential is the central factor in determining
the growth in its real wages and living standards. Over the last 45 years, r5apid growth in Asian
countries such as Japan, South Korea and Taiwan sent average incomes for their citizens soaring.
Nations want to know the ingredients in a successful growth recipe.
 Does running a big budget deficit or a big trade deficit have harmful long-run effects on growth?
 What is the role of investment in physicl capital, in research and development, and in human capital?
 Should the government nourish key industries through sybsidies and industrial poiicy, or does a
hands of policy work better?
Measuring Macroeconomic Objectives

• Syllsbus: Measuring Macroeconomic Variables: Output growth; unemployment; price level;


consumption function; price indexes; inflation; Phillips curve; business cycle; circular flow of
economy; two, three and four sectors economy.

• Question: Describe the major macroeconomic goals or objectives of an


economy. (Broad Question)

• Output growth: The ultimate objective of economic activity is to provide the goods and services that the
population desire. What could be more important for an economy than to produce ample shelter, food,
education, and recreation for its people?
 Gross Domestic Product (GDP): The most comprehensive measure of the total output in an economy is
the GDP. GDP is the measure of the market value of all final goods and services – food, shelter, cars,
airplane rides, health care and so on – produced in a country during a year. There are two ways to
measure GDP.
1) Nominal GDP : It is measured in actual market prices; it is the market value of final goods.
Quantitatively it is the product of the quantity of goods and services produced times their respective
prices.
 Measuring Macroeconomic Variables

2) Real GDP : It is calculated in constant or invariant prices (say for the year
2005).When current year prices are used in measuring output, nominal
(current dollar) GNP includes the effect of price changes during the
current year. To eliminate the effect of price changes, prices in a selected
year can be used to measure output in preceding and proceeding years;
this provides a measure of real (constant dollar) GNP.

3) Potential GDP: It is the long-run trend in GDP. It represents the long-run


productive capacity of the economy or the maximum amount the
economy can produce while maintaining stable prices. .
 Measuring Macroeconomic Variables

4
• High Employment, Low Unemployment: The next major
objective of macroeconomic policy is high employment,
which is the counterpart of low unemployment. A person is
considered employed if he or she spent most of the
previous week working at a paid job. A person is
unemployed if he is on temporary lay off, is looking for a
job, or is waiting for the start date of a new job. A person
who fits neither of the first two categories, such as a full-
time student, homemaker, or retiree, is not in the labour
force.
 Measuring Macroeconomic Variables

* Unemployment Rate = (Number of unemployed/ Labour force)


x 100
People want to be able to find high-employing and stable job
without searching or waiting too long. The unemployment rate
tends to move with the business cycle. when output is
depressed, the demand for labour falls and the unemployment
rate increases. When a country shows a steady long-term
economic growth unemployment rate reduces and exhibits an
improvement in living standard of the people.
 Measuring Macroeconomic Variables

• Stable Prices: The third macroeconomic objective is to


maintain stable price within free markets. The first part of this
goal is the existence of free market. In the free market, prices
are determined by supply and demand to the maximum
possible extent, and governments abstain from controlling the
prices of individual goods. Only by allowing firms to make
their production and pricing decisions freely can society
harness the profit motive for the public interest.
Sample questions
Short questions:
1. Define Microeconomics and Macroeconomics
2. What are the basic macroeconomic question?
3. Define GDP and distinguish between Nominal and Real GDP.
Broad Questions:
1. Describe the major macroeconomic goals or objectives.

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