Chapter 1 The Scope of Macroeconomics Foundation In Arts

FOUNDATION IN ARTS

MACROECONOMICS

Chapter 1 : THE SCOPE OF MARCOECONOMICS

OBJECTIVES

At the end of this topic, students should be able to;

 Distinguish between macroeconomics and microeconomics.

 Explain the relevance of the study of macroeconomics.

 Explain the macroeconomics objectives.

 Explore the components of macroeconomics.

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Chapter 1 The Scope of Macroeconomics Foundation In Arts

THE SCOPE OF MARCOECONOMICS

A. INTRODUCTION
 The term ‘macro’ derives from the Greek word, meaning large
 Macroeconomics is the study of the economy as a whole.
 Macroeconomics studies the ‘ordinary business of life’ in the aggregate; that
is we look at the behavior of the economy as a whole. We examine the problems
relevant to aggregates of firms and households rather than individual firms
and households.
 That means macroeconomics concerned not with the price of tea, but with prices
in general; not with the output of cars, but with the level of total output; not with
the individual firm or industry, but with the whole economics system.
 The key variables in macroeconomics study include; the business cycles, total
output in the economy, economic growth, the aggregate price level,
employment and unemployment, inflation, interest rates, wages rates,
international trade, and foreign exchange
 This means we shall be examining such aggregates as output, employment,
consumption, investment, the supply of money, the general price level and exports
and imports.
 In addition, our study requires an appreciation of the role of government in
determining the levels of these aggregates and the manner in which it uses its
policy instruments for this purpose. Government policy includes fiscal policy and
monetary policy; fiscal policy involves the use of government expenditures and
taxation, whereas monetary policy involves the use of tools by the government or
central bank to control the money supply and the rate of interest.
 Basically, fiscal policy and monetary policy are used to achieve a desirable
macroeconomic performance.

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Chapter 1 The Scope of Macroeconomics Foundation In Arts

B. THE RELEVANCE OF MACROECONOMICS

 Macroeconomics involves the study of economic conditions and trends, with a view to
maintaining or improving the standard of living of the community. These affect us either
directly or indirectly.
 Rationales of study the whole economy include:
 To describe and explain economic trend
 To predict what will happen to the economy in the future.
 To measure the economic welfare of the nation.
 To determine the standard of living is increasing over time.
 To develop and apply appropriate policies to improve national economic
performance.

C. DISTINGUISH between MICROECONOMICS and MACROECONOMICS

MICROECONOMICS
Studies individual income
Analyzes demand and supply
Deals with households and firms decision
Studies individual price
Analyzes one good or one firm/consumer
MACROECONOMICS
Studies National Income
Analyzes aggregate demand and aggregate
supply
Deals with aggregate decision
Studies overall price level
Analyzes total employment in the economy

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Chapter 1 The Scope of Macroeconomics Foundation In Arts

D. COMPONENT of MACROECONOMICS

 Household
- Own all the factor of production (land, labour, capital and entrepreneur)
- Provide services to firm and government
- Receive payments in term of rent, wages, interest and profit.
- Pay taxes to government.
 Firm
- Buy the factor of production from households
- Sell goods and services and earn profits
- Pay wages, rent, and interest to household
- Pay taxes to government
 Government
- Collect taxes from households and firms
- Spend on development and operational purposes
- Also buys factor of production from households.

 Rest of the world

- Refer to foreign sector
- Involves import and export

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Chapter 1 The Scope of Macroeconomics Foundation In Arts

E. OBJECTIVE of MACROECONOMICS

 Economic Growth
~ To achieve economic growth, economy must be operating at maximum capacity.
~ Refers to an increase in the final production or output level of a nation over time (a
year).
~ Does not move constantly and will experience short term ups and downs (business
cycle).
~ Measured by the aggregate output and the unemployment rate.
~ 4 phases in business cycle: peak, recession, trough and recovery.

 Price stability
~ Maintaining or controlling inflation.
~ Keep its inflation rate as low as possible.
~Inflation occurs when there is an increase in the overall price level.
~Inflation can reduce the purchasing power of consumers.

 Full employment
~Achieving full employment of all available factors of production i.e. land, labour,
capital and entrepreneurs.
~Economy should use all its available resources more efficiently to attain maximum
output.
~Full employment means that unemployment rate is equal to all types of unemployment
except cyclical unemployment.

 Equitable distribution of income

~ Try to narrow the gap between the higher income and the lower income groups.
~Disparities of income will create social friction and bring more problems.
~Taxation is one method of achieving an equitable distribution of income.
~Another method: providing subsidies, transfer payment and providing education

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Chapter 1 The Scope of Macroeconomics Foundation In Arts

scholarship.

 External stability
~maintaining a sustainable Balance of Payment (BOP) position and a stable currency.

~BOP refer to the statement of systematic records of all economics transactions between

one country and the rest of the world in a given period of time.

~ BOP also refers as the difference between the total value of goods and services

imported and exported over given period of time and consist of current account, capital

account and financial account.

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Chapter 1 The Scope of Macroeconomics Foundation In Arts

F. Monetary Policy and Fiscal Policy

 Monetary Policy

~Refers to the tools used by the government through the central bank to control supply of
money.
~To maintain the overall price level, to achieve higher economic growth, to remove
fluctuation in production and to achieve full employment
~There are two types of monetary policies:
a) Contractionary Monetary Policy
- To curb inflation where the amount of money supplied will be reduced.

b) Expansionary Monetary Policy

- Implemented where there is deflation or recession where the money
supplied will be increased.

 Fiscal Policy

~Refers to the government policy concerning taxes and expenditure.

~The purpose of a fiscal policy is to stabilize the economy.
~There are two types of fiscal policies:
a) Contractionary Fiscal Policy
- Can be used to bring the economy out of inflation.
- By increasing taxes and decreasing government expenditure.
- Slows down growth.

b) Expansionary Fiscal Policy

- Implemented to get the economy out of a slump/recession.

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Chapter 1 The Scope of Macroeconomics Foundation In Arts

- By decreasing taxes and increasing government expenditure.

- Can increase the disposable income, leads to an increase in
consumption.