Addis Ababa College

Macroeconomics

Department of Economics

By Desalegn N.

1 October 12, 2023

 Chapter One: The State of Macroeconomics

Outlines:
 Introduction
 methods of Macroeconomic Analysis
 Basic Macroeconomic Concepts
 The evolution of macroeconomics Schools of
Thoughts
 INTRODUCTION
 In modern time economics broadly classified into two. Those are

macroeconomics and microeconomics.

 Microeconomics: is a branch of economics focused on individual economic

unit like utility maximization, profit maximization , and determination of

employment input to produce a specific product.

 Macroeconomics: is a branch of economics that deals about the economy as a

whole such as income of nation, general price level, unemployment, exchange

rate, balance of payment, business cycle etc. It concerned with the behavior of

aggregate components of the economy.

 Method of Analysis
 Macroeconomics analyzed by Aggregate demand and aggregate

supply.

 Aggregate demand: is the total demand for goods and services

in the economy.

 aggregate supply: is the total output that the producers in an

economy are willing and able to produce and sell in a given

period of time October 12, 2023

 Basic Macroeconomic Concepts
Macroeconomic theories usually relate the phenomena of output,
unemployment, and inflation, business cycle, balance of payment
(BOP).
A. Gross domestic product (GDP): is the market values of final
goods and services produce in domestic territory of the country.
B. Unemployment: Unemployment refers to a situation where
the persons who are able to work and willing to work, at the
current market wage rate, but fail to secure work or activity
which gives them income or a means of livelihood.
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Basic Macroeconomic Concepts
There are three types of unemployment: those are frictional
unemployment, structural unemployment, and cyclical
unemployment.
I. Frictional unemployment: This is temporary
unemployment which exists like during a period of the
transfer of labor from one occupation to another.
II. Structural Unemployment: is situation in which workers
become jobless due to loss of demand in particular regions or
industries. This type of unemployment highly related to
technological innovation.
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 Basic Macroeconomic Concepts
III. Cyclical Unemployment: is the amount of unemployment resulting
from declines in real GDP/activity. It accur when the economy lies on
depression.

 Unemployment can be measured by:

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
 measured by:𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒
𝑥100%

C. Inflation and Deflation

 Inflation: is the sustained rise of general price level. The level of inflation
may be moderate, galloping or hyper inflation.

 Moderate inflation is important for economic growth because it encourage

production and investment.
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 Basic Concepts and method of Analysis
 On the contrary hyper inflation reduce the economic growth, saving and
consumption.

Disinflation: shows a sharp reduction in the annual rate of inflation .

D. Business Cycle: is the up and downs of economic activity of the nation.

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 Basic Concepts and method of Analysis
E. Balance of Payment (BOP): is an accounting record of all monetary

transactions between a country and the rest of the world. It’s the financial

aspect of international trade.

 1.2.1 Goals Macroeconomics

 The following are the basic macroeconomic goals a country:

Higher rate of economic growth

Stability of the economy- stabilize the general price level/reduce level of

inflation and exchange rate.

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Basic Concepts and method of Analysis
Achieving a favorable balance of payment

Reducing budget deficit

Reduce unemployment/achieving full employment level

Equity in income and wealth distribution among people

Efficiency in resource allocation

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 1.2.2 Macroeconomics Instruments
To achieve the above objectives economic policy makers use mix of

macroeconomics instruments. The most important instruments

among others include monetary policy, fiscal policy, income policy,

and labor policy, trade policy.

A. Fiscal policy: is a policy by which a government adjusts its level

of spending and revenue to monitor and influence a nation’s

economy.
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 1.2.2 Macroeconomics Instruments
B. Monetary policy: is regulation of money supply and the

control of the cost and availability of credit by the central bank of

the country.

C. Income policy: is a policy of government used to control

wage/salary.

N.B: expansionary or tight fiscal and monetary policies

implemented depending the prevailing economic condition.

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1.4 The evolution of macroeconomics Schools of Thoughts

 Economic thinking has begun since the cradle/birth of man kind/human

being. This is because archeological excavations evidenced that our

ancestors (ancient man kind) were having some economic thinking such as

saving due to scarcity of resources and division of labor. But, formal study on

economic issues was started around 2 century AD in ancient Greek

philosophy.

 The following are the major school of thought:

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1.4 The evolution of macroeconomics Schools of Thoughts

 1.4.1 The classical school of thought (1776 – 1870)

The dominant idea of this school of thought was the invisible hand or

lassies fair, which means leave the market free (free market) advocated by

Adam Smith. The reason for their argument was due to the idea of supply

will create its own demand.

According to this school of thought government intervention is not

need/the disequilibrium can be corrected by market.

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1.4 The evolution of macroeconomics Schools of Thoughts

1.4.2The Keynesian macroeconomics (1936-1975)

Keynes believes that markets are not always self-regulating. Output

fluctuation is caused by business investment (private sector). He criticize

the classical economist during the great depression on their idea of “supply

creates its own demand”

Investors are pessimistic about the future. Pessimism leads to a decline in

business investment and hence output causing unemployment.

Wages do not adjust rapidly to equilibrate the economy.

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1.4 The evolution of macroeconomics Schools of Thoughts

Thus, government intervention is therefore needed to stabilize the economy.

1.4.3 The neo-classical school of thought

 Neo-classical economist are the son of classical economist.

 The idea of this school of thought was not different from the classical

economist.

 The difference lies on classical school concern on what makes the economy

expand and contract whilst neo classical economist focus on how

individuals behave in the economy.

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