MACROECONOMICS

(ECON 2072)
By:Urgessa Firomsa
December 2020
 CHAPTER ONE
INTRODUCTION
Section 1. Definition and concepts of Economics

What is Economics?

Economics can be defined in different ways. The

following are the major ones.
 cont.
1) Economics is a social study of production,
distribution, and consumption of wealth or
output.
2) Economics is a study of choice. Economic
agents make choice because of scarcity,
constraints or limitations of resources.
There are two major types of constraints or
limitations.
 Cont.
3) Economics is the study of decision-making.
a) What to produce
b) How to produce
c) For whom to produce
4) Economics is the study of wise and efficient
use of limited resources.
Economics is not the study of greedy or
gluttonous
Section 2: Branches of Economics

What are the major branches of Economics?

What is the difference between Macroeconomics

and Microeconomics?
Cont.
For example, from the point of view of
elements of analysis, economics has two
major branches:
a) Microeconomics and
b) Macroeconomics
Microeconomics deals with behaviors of
individual economic units such as
consumers, producers, business firms and
other economic decision-making units.
Cont.
Macroeconomics deals with aggregate units
of national economy such as national output
or Gross National Product (GDP), general
price level, inflation and national
employment.
ii) From the viewpoint of interest
Positive economics is a branch of
economics which is concerned with the
explanations of economic conditions. It tries
to answer the question “What?”
Normative Economics is a branch of
economics, which deals with value
judgment on economic situation. It tries to
answer questions like “What should be?”
iii) On the basis of the economic policies a
country follows.
A) Command economy is the type economy where
economic variables (prices, output etc.) are
controlled by the government.
B) Market economy is the type of economy where
values of economic factors are determined by market
forces.
C) Mixed economy
 1.1 An Overview: Definition, Focus Areas &
Instruments of Macroeconomics
 Macroeconomics: is the study of the behavior
of the economy as a whole & the policy
measures that the government uses to influence
it.
 It is concerned with:
 The economy’s total output of goods &
services and the growth of output,
 Booms & recessions,
 The rates of inflation and unemployment,
 Balance of payments & exchange rates.
 1.1 An Overview: Definition, Focus Areas &
Instruments of Macroeconomics
 Central issues (focus areas) in macroeconomics:
 Economic growth and Development
 Inflation,
 Unemployment
 Major policy instruments in macro-economics:
 Fiscal,
 Monetary, and
 Trade policy instruments
 Income policy etc.
 1.1 An Overview: Definition, Focus Areas &
Instruments of Macroeconomics
 In macroeconomics, we do two things:
1. We seek to understand the economic
functioning of the world we live in; and
2. We ask if we can do anything to improve the
performance of the economy.
 That is, we are concerned with both
explanation and policy prescriptions.
 Macroeconomics makes use of:
 algebraic & geometric tools of analysis like
differentiation & graphs;
 models like AD-AS model & IS-LM model.
Elements of National Economy

a) Gross Domestic Product (GDP) is the sum

of values of total goods and services produced
in a given country in a given period of time
(a year).
b) Government expenditure is the amount of
resources that the government sector of a
country spends in a given fiscal year (budget
year). Consumption expenditure and
Investment Expenditure
Cont.

c) Total money supply is the sum of total

currencies in circulation. The amount or size of
money supply is controlled to the appropriate
level by Central Bank
d) Inflation represents a rise in general price
level.
e) Trade Balance is the net inflow of foreign
exchange from trade (export and import). It is
the value of net export of a country.
Cont.
F) Balance of Payment (Bop) is the net inflow of
resources to a given country/economy from the rest
of the world. This includes the flow of all resources.
E.g. foreign investment, borrowings from the rest of
the world and repayments of such borrowings.
g) Exchange rate refers to the rate at which
domestic currency is exchanged for foreign currency.
h) Consumer price Index (CPI) is the measure of
weighted average of prices of goods and services
used by consumers. It is the measure of cost of
living.
Cont.
i) Per Capita Income (PCI) is the measure
of average output of a country per person.
It is the ratio of (GDP) to total population
(N) of the country.

 GDP 
PCI =  .
 N 
END OF CHAPTER ONE!!!

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