MACROECONOMICS

REVIEW

Economics
social science

studies people or the society

REVIEW

Economics
efficient allocation of scarce resources

REVIEW

Economics
decision-making/choices

OPPORTUNITY COST

REVIEW

Basic Questions in Economics

What will be produced? How will it be produced? Who will get what is produced?

REVIEW

Branches of Economics
Microeconomics

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Branches of Economics
Macroeconomics

Macroeconomics vs. Microeconomics

Division of Economics Micro Production Output in individual industries and businesses
How much steel? How much office space? How many cars?

Prices Prices of individual goods and services

Price of medical care Price of gas Rent

Income Distribution of income and wealth

Wages in the auto industry Minimum wage Executive Salaries

Employment Employment by individual businesses and industries

Jobs in the steel industry No. of employees in a firm

Macro

National Production/ Output

GDP Growth of output

Aggregate price level

Consumer and Producer prices Inflation

National Income
Total wages and salaries Total corporate profits

Employment and unemployment in the economy

Unemployment rate

Macroeconomics

Aggregate Demand
the sum of the primary expenditures on goods and services produced by an economy at a specific period of time
Consumption Investment Governement Purchases Net Exports

Macroeconomics

Aggregate Demand Curve

Shows an inverse relationship between the overall price level and aggregate demand
Increase in price Real Value of Income decreases Consumption decreases Increase in price Increase interest rates Lower Investment Expenditures Increase in price Value of Budget decreases Government Expenditures decreases Increase in price Price of local goods > Price of foreign goods Exports decreases

Macroeconomics

Aggregate Demand Curve

Overall Price, P

AD National Income,Y

Macroeconomics

Aggregate Demand (Shifts)

Foreign Income Exchange Rate Fluctuations Expectations about future prices Monetary and Fiscal Policies

Macroeconomics

Aggregate Demand (Shifts)

Foreign Income
If your trading partner-country is in recession, what will happen to the demand of your goods?

What happens to the AD Curve?

Macroeconomics

Aggregate Demand (Shifts)

Exchange Rate Fluctuations
When your exchange rate depreciates or its value decreases (i.e. From Php 43/ USD to Php 44/ USD), what will happen to national income? What happens to the AD Curve?

Macroeconomics

Aggregate Demand (Shifts)

Expectations about future prices
If you expect prices to increase in the future, how will this affect your current consumption?

What happens to the AD Curve?

Macroeconomics

Aggregate Demand (Shifts)

Monetary and Fiscal Policies
Monetary use of money supply to address macroeconomic needs Fiscal use of taxes or government expenditures to address macroeconomic needs If the Central bank increases money supply, how will this affect investment expenditures? What happens to the AD Curve?

Macroeconomics

Aggregate Supply
Total production of products and services that are made in an economy at a specific time
Based on the available amount of resources of the economy, level of resource utilization as inputs of production, and the level of technology used in production

Macroeconomics

Aggregate Supply Curve

Shows a positive relationship between aggregate production and the overall price level in the short-run
Increase in prices wages are constant production expands

Macroeconomics

Aggregate Supply Curve

Shows a positive relationship between aggregate production and the overall price level in the short-run
Overall Price, P

SAS

Income,Y

Macroeconomics

Short-Run Aggregate Supply Curve (Shifts)

Changes in costs of production Changes in expectations of inflation Productivity Excise and Sales Taxes Import Prices

Macroeconomics

Short-Run Aggregate Supply Curve (Shifts)

Changes in costs of production
If input prices increase, how will the quantity of output be affected?
What will happen to SAS?

Macroeconomics

Short-Run Aggregate Supply Curve (Shifts)

Changes in expectations of inflation
If you expect prices to increase in the future, what will you do now?
What will happen to SAS Curve?

Macroeconomics

Short-Run Aggregate Supply Curve (Shifts)

Productivity
If productivity increases and reduces the cost of production, how will this affect the output level?
What happens to SAS Curve?

Macroeconomics

Short-Run Aggregate Supply Curve (Shifts)

Excise and Sales Taxes
If excise and sales taxes increase, how will this affect the level of output?
What happens to the SAS Curve?

Macroeconomics

Short-Run Aggregate Supply Curve (Shifts)

Import Prices
If a firm heavily imports raw materials from abroad and import prices decreased, how will this affect the level of output? What will happen to the SAS Curve?

Macroeconomics

Aggregate Supply Curve

Shows that aggregate production/supply does not change even if the overall price changes in the long-run
Increase in price increase in wages no increase in production

Macroeconomics

Long-Run Aggregate Supply Curve (Shifts)

Capital Available resources Technology Entrepreneurship

Macroeconomics

Aggregate Supply Curve

Shows that aggregate production/supply does not change even if the overall price changes in the long-run
Overall Price, P LAS

Income,Y

Macroeconomic Goals of A Nation

Sustainable Economic Growth

Measure of Success Gross Domestic Product (GDP)
Consumption Investments Government Expenditures Net Exports

Gross National Product (GNP)

GDP + Net Factor Income from Abroad (OFW remittances)

Sustainable - increasing

Macroeconomic Goals of A Nation

Sustainable Economic Development

Issues in Poverty, Education, Population and Agriculture should be addressed

Macroeconomic Goals of A Nation

Price Stability
Measured by inflation rate (percentage increase in price level of commodities)
Based on Consumer Price Index (CPI) ability to pay usual commodities per month
Housing and Repairs Services (Education, Recreation, Transportation) Water/Fuel/Electricity Clothing Miscellaneous (Other Expenses)

Macroeconomic Goals of A Nation

Price Stability
Ideal: single-digit inflation 1%/ 2% - stagnant economy

Macroeconomic Goals of A Nation

Full Employment
Willing and able to work have jobs (15 to 65 years old) Target employment rate: 95% of the population

Macroeconomic School of Thoughts

Classical Theory
In the long-run (LR), output is determined by supply, which depends on technology (the production function) and the equilibrium in the labor market (there is full-employment) Money is neutral. Increasing the level of money supply will only lead to proportional increase in the level of prices, with no impact on output.

Macroeconomic School of Thoughts

Keynesian Theory
In the short-run (SR), economys total income is largely determined by the desire to spend by households, firms and the government. The economy is not operating at full employment During recessions, there is inadequate spending; thus, there is a need to stimulate demand

Macroeconomic School of Thoughts

Keynesian Theory
The more people would like to spend, the more firms would be willing to produce and sell; thus, firms will hire more workers. In the SR, demand determines supply. Prices are sticky in the short-run