MACROECONOMIC GOALS

AND INSTRUMENTS

STATEMENT OF AIM
In this lesson, We shall discuss about:
a) What is Macroeconomics
b) What are different Macroeconomic
goals and objectives.
c) How to calculate GDP growth rate,
CPI and Inflation rate.

MACROECONOMICS
Macroeconomics is the study of the
behavior of the economy as a whole. It
concerns the business cycles that lead
to unemployment and inflation, as well
as the longer-term trends in output and
living standards.

MACROECONOMIC GOALS
Output
High

level and sustainable growth

Employment
High

level of employment and low

involuntary unemployment

Stable Prices
International trade
Export

and import equilibrium and

exchange rate stability

OUTPUT
The ultimate objective of economic
activity is to provide the goods and
services that the population desires.
The most comprehensive measure of
the total output in an economy is the
Gross Domestic Product (GDP).

GROSS DOMESTIC
PRODUCT
Total market value of all final goods and services produced
within a country in a given period of time (usually a
calendar year).
When you calculate the estimated value
that defines the worth of any countrys
services provided and production
carried out over a whole year, then you
refer to it as that countrys GDP.
GDP = consumption + investment +
(government spending) + (exports
imports).
GDP = C + I + G + (X-M)

EMPLOYMENT
The unemployment rate measures the
fraction of the labour force that is
looking for but cannot find the work.
The labour force includes all employed
persons and those unemployed
individuals who are seeking jobs.
The unemployment rate tends to move
with the business cycle.

STABLE PRICES
The third macroeconomic goal is to
maintain stable prices within free
markets.
Defined as low and stable inflation rate
A market economy uses prices as a
yardstick to measure economic values.

The rate of inflation measures changes

in the level of prices. It denotes the rate
of growth or decline of the price level
from one year to the next.

CPI
The consumer price index (CPI) is the
government's key inflation indicator. The
Bureau of Labor Statistics calculates
the CPI each month.
This index is based on data related to
consumer spending habits and the
prices paid for a variety of goods,
including food, clothing, medications,
energy, homes and furnishings.

Determine the goods and the time frame for which

you are interested in measuring the inflation rate.
For simplicity's sake, that you are interested in the
inflation rate for a basket of goods that includes

a gallon of milk,
a loaf of bread
and a Magazine.

Calculate the number of units you purchase of

these goods and the prices you paid one year ago.

Four gallons of milk,

Three loaves of bread
And a Magazine per month
And that one year ago, you paid the
following prices:
$2.75 per gallon;
$2 per loaf;
And $7 per Magazine.
This means you spent a total of $24 a
month one year ago for these goods.

Suppose the current prices are

$3.50 for a gallon of milk
$2.50 for a loaf of bread,
while the price of a Magazine is the
same $7.
This means you now spend $28.50 a
month for the same basket of items.

Types of Inflation
Deflation
When

Prices Decline, means that rate of

inflation is negative

Hyperinflation
A

rise in the price level of a thousand or a

million percent of a year

INTERNATIONAL TRADE
International trade is becoming
increasingly important to most countrys
economy.
International trade is beneficial to
society even if some individuals are
harmed by it.
International trade includes import and
export of goods, services, capital,
borrowing and lending money etc.

Net export is the numerical difference

between the value of a countrys
exports and the value of its imports.
When net exports are positive, a trade
surplus exists.
A trade deficit occurs when the value of
imports is greater than the value of
exports.

RECAPITULATION

To
Summarize:
The
Goals
macroeconomics policy are:
A

high and growing level of national output

High
A

of

employment with low employment

stable or gently rising price level

QUESTIONS???

Macroeconomic Policy
Instruments

A policy instrument is an economic

variable
under
the
control
of
government that can affect one or more
of the macroeconomic goals

Macroeconomic Policy
Instruments
Fiscal Policy
Monetary Policy

Fiscal Policy

Fiscal policy is the use of government

expenditures and taxes to affect
aggregate demand and aggregate
supply.

Fiscal Policy
Government
expenditure
includes
government spending on goods and
services. It determines the relative size of
the public and private sectors.
Taxation affects the overall economy in
two ways:
Taxes

tend to reduce the amount people

spend on goods and services
Taxes
affect market prices, thereby
influencing incentives and behaviour.

Monetary Policy
Monetary policy determines the money
supply as well as interest rates, in order
to achieve desired economic objectives.
Changes in the money supply move
interest rates up or down and affect
spending in sectors such as investment,
housing, and net exports.