Basic Macroeconomics Concepts

NATIONAL INCOME ACCOUNTING

 

  

1.1      Basic Macroeconomics Concepts

 

 

1.1.1   What is macroeconomics?

•  Is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole. 
•  It studies about aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions.
•  Develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance.

 

 

1.1.2   Differences between Microeconomics and Macroeconomics

 

Microeconomics	Macroeconomics
Studies individual income	Studies national income
Analyzes demand and supply of labour	Analyzes total employment in the economy
Deals with households’ and firms’ decision	·      Deals with aggregate decisions
Studies individual prices	Studies overall price level
Analyzes demand and supply of goods	Analyzes aggregate demand and aggregate supply

 

 

 

 

1.1.3   Macroeconomics Indicators

 

 

(i)                Economic growth

·         An increase in economic activity. It is often measured as the rate of change of GDP.

·         Negative growth is associated with economic recession and economic depression.

 

 

(ii)              Gross National Product

·         The total value of output (goods and services) produced and income received in a year by domestic residents of a country. It includes profits earned from capital invested abroad.

 

 

 (iii)            Gross Domestic Product (GDP)

·         The total value of output (goods and services) produced by the factor of production located within the country’s boundary in a year. The factor of production may be owned by any one-citizens or foreigners.

 

 

(iv)            National income

·         Total value of final goods and services produced by the nationals of the country for a particular period of time, usually a year.

 

 

(v)       Full employment

·   Full employment occurs when the economy is producing to its maximum sustainable capacity, using labor, technology, land, capital and other factors of production to their fullest potential.

·         In a situation of full employment, some workers may still be unemployed if they are temporarily between jobs and searching for new employment (this is called ‘frictional unemployment’).

 

 

(v)              Inflation

·       Inflation may be defined as a sustained increase in general price level of goods and services in the economy

 

 

 

 

 

 

1.1.4   Macroeconomics objective

 

 

                                 i.            Reduce the unemployment rate

                               ii.            Stabilize the economy's growth rate

                             iii.            Satisfactory balance of payment position

                             iv.            Relatively stable price level

 

 

 

 

1.1.5   Government policy

 

 

All problems of economy will be control by the government. Hence, government would think the best policy that can be taken to overcome any problems.  There’s two policy commonly used in economics; monetary and fiscal policy.

 

 

 

 

 

 

1.1.5.1            Monetary policy

 

 

·         Monetary policy is one of the tools used by national Government to influence its economy.

·         Using its monetary authority to control the supply and availability of money, a government attempts to influence the overall level of economic activity in line with its political objectives.

·         Usually this goal is "macroeconomic stability" - low unemployment, low inflation, economic growth, and a balance of external payments. 

 

1.1.5.2            Fiscal policy

 

 

·     The term fiscal policy refers to the expenditure a government undertakes to provide goods and services and to the way in which the government finances these expenditures.

·         The fiscal policy tools are taxes (T) and government expenditure (G).

 

 

 

 

To find equilibrium in measuring national income, economist will use the concept of aggregate demand (AD) and aggregate supply (AS).

 

 

a.                   Aggregate demand

 

 

·         Aggregate demand is the total demand for final goods and services in the economy (Y) at a given time and price level. It is the amount of goods and services in the economy that will be purchased at all possible price levels. 

 

 

 

b.                  Aggregate supply 

 

 

·         Aggregate Supply (AS) measures the volume of goods and services produced within the economy at a given overall price level. There is a positive relationship between AS and the general price level.