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INTRODUCTION TO MACROECONOMICS

B.PRAHALATHAN
DEPARTMENT OF COMMERCE
UNIVERSITY OF JAFFNA
SRILANKA

Modern Economics has two Major Branches

Micro Economics
Macro Economics.

These two branches..

study economic phenomena


investigate into economic issues
provide a logical solution to economic problems
at two different levels.
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Micro economics studies economic


problems at individual level

Analysis of the constituent elements of an


economy

Not aggregative but selective

Explains the
working of the markets for
individual commodities

Explain the behaviour of the individual buyer


and seller
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Micro economics studies economic


problems
at individual level ..
Microeconomics studies issues like

Demand , Supply and Market Equilibrium


Production and production efficiency
Cost and cost minimization,
Market structures and pricing
Distribution and profit maximization etc

at the individual firm, industry, household or


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Subject Matter or Scope of Microeconomics


Commodity Pricing

Prices of individual commodities are determined by


market forces such as demand and supply.

So micro economics makes demand analysis


(individual consumer behavior) and supply analysis
(individual producer behavior).

Subject Matter or Scope of Microeconomics


Factor Pricing.

Land, labor, capital and entrepreneur, all factors


contribute in production process.

So they get rewards in the form of rent, wages,


interest and profit respectively.

Micro economics deals with determination of such


rewards i.e. factor prices.

So micro economics is also called as 'Price


Theory' or 'Value Theory'.
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Subject Matter or Scope of Microeconomics


Welfare Theory

Micro economics deals with optimum allocation of


available resources and maximization of social
welfare.

It provides answers for 'What to produce?', 'When


to produce?', 'How to produce?' and 'For whom it is
to be produced?'.

In short, Micro economics guides for utilizing


scarce resources of economy to maximize public
welfare.
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Subject Matter or Scope of Microeconomics

Uses
/
Importance
Microeconomics

Advantages

of

1.

Understanding operation of economy at a


micro level -

helps us in understanding various market


situations

helps in understanding the economic reasons


behind the decisions like What to Produce?
For whom to produce? How much to Produce?
etc.
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Optimization of resource allocation

helps in understanding that how a firm or


an industry etc can maximize its
production efficiency and the profit
Helps to do the appropriate allocation and
utilization of resources
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Minimization of Cost

helps in the determination of


production point for a firm/industry.

optimum

The theory also helps in determining the point


of cost minimization for a firm

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Understanding Consumer Behaviour

The study of Marginal Utility theory, Revealed


Preference Hypothesis, Consumer Indifference curves
etc give useful insight into consumer behaviour

help in understanding and predicting the consumer


behaviour in various market situations.
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Demand Forecasting
The theory of Demand and Demand analysis, elasticity
of demand etc help in understanding and predicting
demand of a product.

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Impact of change in Price/Income/Prices of


related goods etc on the demand of a
Product

It helps an individual firm to understand the


impact of change in price, income, prices of
other related goods etc
On the demand of the good or service which
the firm is offering to the market.
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Government Policy Making

The study of demand theory, supply theory,


market theory etc can help the government in
policy making at macro level.
For example the study of microeconomic theory
can help in deciding appropriate tax policy,
pricing policy of the public goods and services,
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Foreign trade and exchange rate


determination

theory of demand, supply, elasticity of demand


etc help in understanding the impact of change
in tariff on the terms of trade.
Similarly, microeconomic theory of demand,
supply etc helps in understanding the exchange
rate determination process in the foreign
exchange market.
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Maximisation of Social Welfare

help in deciding the appropriate allocation of


resources, commodities and output mix for the
maximization of the social welfare.

Cardinal utility
Ordinal utility
Social choice theory
marginal rates of substitution
marginal rate of transformation
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Macroeconomics
Macro economic studies the economic problems at
aggregate - national level and international levels.

Explain the Working of The Economy as a


Whole/unit of study
behavior of the economy
performance of the economy as a whole.

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Macro-economics is related to study of aggregates like

total employment,
total output,
total consumption,
total savings,
total investment,
national income,
aggregate demand,
aggregate supply,
general price level,

balance of payments position of an economy etc.

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DETERMINATION OF NATIONAL INCOME AND


EMPLOYMENT

ME deals with aggregate demand and aggregate


supply that determines the equilibrium level of income
and employment in the economy.

Macroeconomics also deals with the problem of


unemployment due to lack of aggregate demand.

It studies the economic fluctuations and business


cycles.

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DETERMINATION OF GENERAL PRICE LEVEL

ME studies the general level of price in an


economy.

It also studies the problem of inflation and


deflation.

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ECONOMIC GROWTH AND DEVELOPMENT

ME deals with economic growth and development.

It studies various factors that contribute to


economic
growth and development.

The economic growth of a country is


measured by the increase in its GDP or
Gross Domestic Products
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ECONOMIC GROWTH AND DEVELOPMENT

WHAT IS Nominal and Real Economic Growth


?

the nominal growth includes the inflation

the real economic growth is nominal growth


adjusted for inflation rate.

When we talk about real economic growth, we


usually
talk about the long term economic stabilization and
growth.
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What is Sustainable economic growth


expansion of the productive potentials of an Country
in the long run. . OR
Sustainable economic growth means a rate of
growth
which can be maintained without creating other
significant economic problems, especially for future
generations
It should result in higher standards of living, giving
rise to employment and an increase in the real GDP
of a country.
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What are the determinants of Economic Growth


and Development

Inflation

Interest rates

Value of the currency

Environmental impacts

Government intervention
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DISTRIBUTION OF FACTORS OF
PRODUCTION
Distribution
refers to the way total output,
income,
or wealth is distributed among individuals or
among the factors of production (such as labour,
land, and capital)
ME also deals with various factors of production
and their relative share in the total production or
total national income
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Macroeconomic Theories
The main bodies of macroeconomic theories are,

Income Determination
Consumption
Investment
Employment
Price Level Determination
Product and Money Market Equilibrium
Exchange Rate
Balance of Payments
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In Final Word..

More importantly; ME studies the relationship and


interaction between the factors that determine

Growth of output OR Economic Growth


Employment
General price level
Balance of payments position of the economy
Aggregate investment
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Macroeconomic Policy orientation

analyses the working of government policies


and effects of government policies Especially
about the monetary and fiscal policies

policies are extremely useful for controlling and


regulating the economy to achieve the desired
goals.
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Importance of Macroeconomics
Importance of aggregate variables.
useful to understand the functioning of complicated
economic system.
Why complicated?
Since macroeconomic problems are related to the
aggregate variables at the same time they are
interrelated with each other.

Ex: a tool to solve the urgent economic


problems High inflation

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Importance of Macroeconomics

Importance of macroeconomic issues


ME issues need to be handles effectively because
they are part of the economic fate of a country and its
people.

What are the Determinants of Economic Growth and Living


Standards in a Country?
Productivity
What is the Cause of Decline and Growth in an Economy?
What are Factors Affecting Unemployment?
What are Factors that Cause the General Price Levels or
Inflation to Rise?
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Growing complexity of Economic System


Due to the following reasons modern economic system
has
grown extremely complex.

Expansion of human desires for more and better goods and


services.

Increasing economic interactions between the nations because


of the globalization of economic activities.

Increasing international flows of capital and technology.

Growing interdependence of the economies


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Growth of international economic unions and their effect on

Need for government intervention with the market


system
Why government intervention is need ?

To ensure efficient allocation of resources

To achieve socially optimum production and


distribution patterns of goods and services

To bring stability in growth, employment, price


levels, and foreign exchange rates.
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In final wordwe can say

Macroeconomic is a Policy Science


Provides a frame work
Provides instrument

For reconstructing the economy and guiding it on


the path of growth and stability.
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Primary objectives

To achieve full employment


To achieve price stability
To achieve economic growth
Regional development

Secondary objectives
Full production
High standard of living
Reduction in inequalities
Social Justice
Control of monopoly
Economic freedom
Equilibrium in balance of payments

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Primary objectives - To achieve full employment

Maintain high and stable level of employment is the


major aim of all the countries.

Primary objectives - Price stability


Price stability means that the absence of sharp short run movements in
the general price level

Price instability affects investments decisions


Price inflation leads to balance of payments difficulties
Price instability may break down of the entire monetary system
Price instability redistributes income in favor of the richer class
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Primary objectives - To achieve economic growth


What economic growth give?
It provides more employment opportunities
Its higher rate assures a higher standard of living

Rapid economic growth promotes scientific and technology


developments leading to increase in productivity
Rapid economic growth promotes education facilities, health
service and housing of a nation
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Primary objectives To achieve Regional development


What is regional development
Regional development policy means to maintain a balanced
regional development in the nation.
Since balanced regional development is necessary to ensure a
fair distribution of income and wealth.

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Secondary objectives - Full production


full production situation could be understand through the GNP
gap.
What is GNP Gap?
GNP gap The difference between a country's actual output and
the output that it would reach at full employment.
GNP gap is the difference between the out put at full
employment and out put at actual employment rate.

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Output Gap
The output gap is a measure of the difference between actual
output (Y) and potential output (Yf).
The output gap = Y- Yf
What is potential output?
Potential output
Potential output is the maximum amount of goods and
services an economy can turn out when it is most efficient or
at its at full capacity. OR
Total gross domestic product (GDP) that could be produced by
an economy if all its resources were fully employed.
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Two Types of Output Gaps


Negative Output Gap

Positive Output Gap


A positive output gap occurs when actual output is more than
the full-capacity output.
Negative output gap occurs when actual output is less than
full-capacity output
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Two Types of Output Gaps..


Negative Output Gap

This is also called a deflationary (or recessionary) gap.

There will be unemployment, low growth and / or a fall in


output.

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Two Types of Output Gaps..

Positive Output Gap


This will occur when economic growth is above the long run
trend rate (e.g. during an economic boom).
With a positive output gap, there will be inflationary
pressures.
It will also tend to cause a bigger current account deficit as
consumers buy more imports due to domestic supply
constraints.
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Secondary objectives - High standard of living


Increase real income per head and reduces the
population growth.

Secondary objectives - Reduction of inequalities


Inequalities of income lead to concentration of economic
power in the hands of few people which is preventing
the national welfare.
Thus objective of macroeconomic policy is giving equal
opportunities to all in income and employment
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Secondary objectives - Social justice

The uplift of the society socially and economically


In this case all the public expenditures programs that are
undertaken to promote social welfare.
Ex: adult education, omens welfare, child welfare, old
age benefits, unemployment benefits

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Secondary objectives - Control of monopoly


In a capitalist economy control of monopoly forms the chief
objective of macro economic policy.
Since growth of monopoly power creates serious problems to
the nation. Ex: waste of resources, consumer exploitation.

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Secondary objectives - Economic freedom


Economic freedom means policy of exercising a minimum control on
private enterprise.

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Secondary objectives- Equilibrium in Balance of payment


Another objective of macroeconomic policy is to maintain
equilibrium in balance of payments.
Deficit balance of payment will retard the achievement of
other objectives.

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