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1 Macroeconomics
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define macroeconomics;
2. Elaborate on the policies and goals of macroeconomics; and
3. Analyse the economic phases in a business cycle.
INTRODUCTION
Macroeconomics is the study of a nations economic growth and also the policies
used to enhance economic performance. Macroeconomists are interested in the
factors that contribute to a countrys economic growth because if a countrys
economy expands, it will create more job opportunities, goods and services, thus
enhancing the peoples standard of living. Macroeconomics has the potential to
expand because it tests the theory of how the economy functions as a whole, in
which a theory can be used to predict the effects of a certain policy or event.
1.1 MACROECONOMICS
What is macroeconomics and how would you define it? Economists define
macroeconomics as a field that is related to aggregate variables such as income,
employment, price and money. This means that macroeconomics studies the
functions of an economy as a system, in other words, how the levels of supply
and demand of goods, services and resources are measured and the factors that
affect them.
(b) Productivity
The average labour productivity or output of an employee is important in
determining the standard of living. Macroeconomics will look into the
factors that determine the growth rate of productivity.
(d) Unemployment
Unemployment is a situation where a person desires to work but is unable
to gain employment. It will rise during an economic decline. However,
unemployment exists even if the economy is good. Macroeconomics studies
the sources of unemployment, types of unemployment and methods to
overcome this problem.
(e) Inflation
Inflation occurs when there is a rise in the general price level, which is
usually measured against a standard index of purchasing power. The usual
question arising from the study of macroeconomics is why the inflation rate
varies over a given period of time and why it is different for every country.
ACTIVITY 1.1
There are two main types of macroeconomic policies as shown in Figure 1.1.
ACTIVITY 1.2
What are the differences between monetary policy and fiscal policy?
List the differences in a table.
ACTIVITY 1.3
ACTIVITY 1.4
(i) Depression
Depression happens when there is severe economic contraction. Even
though there is no formal definition for depression, during this phase
there is a sudden decline in a countrys total output, followed by a
massive unemployment rate within a period of less than a year.
(ii) Recession
Recession occurs when there is moderate economic contraction,
which involves a decline in total output and employment, and the
timeline is at least six months.
Figure 1.2 depicts a business cycle that shows the movement of economic
activities along a long-term growth trend line.
Recession will start after the preceding economic expansion exceeds the peak,
and is followed by the trough stage, which is the lowest phase. The economy will
expand after suffering a downturn, followed by a recovery to another peak stage.
A complete cycle is formed from a peak stage to another peak stage, and it also
applies from one trough stage to another.
ACTIVITY 1.5
1.5.1 Microeconomics
Microeconomics can be described as follows:
1.5.2 Macroeconomics
In general, macroeconomics can be described as follows:
EXERCISE 1.1
Essay Question
Microeconomics Macroeconomics
(a) (a)
(b) (b)
(c) (c)
A. Individual firms
B. Individual consumer
D. Governmental units
A. Monetary policy
B. Fiscal policy
C. Supply-side policy
D. Trade policies
The two most important macroeconomic policies are monetary policy and
fiscal policy, which are used to achieve the objectives of macroeconomics, for
example, full employment, price stability and satisfying economic growth.
A normal business cycle consists of two vital phases, which are expansion
and contraction. It can also be viewed in more precise detail, including the
peak, recession, trough, recovery and expansion phases.