MACROECONOMICS

Definition, scope and concerns

Gay Margarett A. Gange

August 2017
Macroeconomics: Definition, scope
and concerns

Why have some countries experienced rapid growth in

incomes over the past century while others stay mired in
poverty?

Why do some countries have high inflation

rates while others maintain stable prices?

Why do all countries experience recessions and depressions?

How can government policy reduce the frequency and severity

of these episodes?
Macroeconomics: Definition, scope
and concerns

Definition

Macroeconomics is concerned with the behaviour of the

economy as a whole- with booms and recessions, the economy’s
total output of goods and services, the growth of output, the rates
of inflation and unemployment, the balance of payments, and
exchange rates. Macroeconomics deals with both long-run and
economic growth and the short-run fluctuations that constitute the
business cycle.
Macroeconomics: Definition, scope
and concerns

Definition

Macroeconomics deals with the major economic issues and

problems of the day. To understand these issues, we reduce the
complicated details of the economy to manageable essentials.
Those essentials lie in the interactions among the goods, labor, and
assets markets of the economy and in the interactions among national
economies that trade with each other.
Macroeconomics: Definition, scope
and concerns

Three Macroeconomic Variables

1. Real GDP
- measures the total income of everyone in the economy
(adjusted for the level of prices).
2. Inflation Rate
- measures how fast prices are rising
3. Unemployment Rate
- measures the fraction of the labor force that is out of work
Macroeconomics: Definition, scope
and concerns

Key growth factors

1. Reliance on well regulated private markets for most economic

activity
2. Stable macroeconomic policies
3. High saving rate and investment
4. Openness to international trade
5. Accountable and non-corrupt government
Macroeconomics: Definition, scope
and concerns

Important Macroeconomic Terms

• recession- a sustained period of falling real income.
• depression- a very severe recession.
• deflation- a decrease in over-all level of prices.
• Gross Domestic Product (GDP)- total income earned domestically,
including the income earned by foreign-owned factors of
production; the total expenditure on domestically produced goods
and services.
• Gross National Product (GNP)- the total income of all residents of
a nation, including the income from factors of production abroad;
the total expenditure on the nation’s output of goods and services.
Macroeconomics: Definition, scope
and concerns
Macroeconomics: Definition, scope
and concerns

for example….
• Business executives forecasting the demand for their products must
guess how fast consumers’ incomes will grow.

• Fresh graduates looking for jobs hope that the economy will boom
and that firms will be hiring.
M I
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M POLITICAL DEBATES
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Macroeconomics: Definition, scope
and concerns

• world leaders- creation of economic policies

• macroeconomists- explain how the economy as a whole works
- collect data on income, prices, unemployment,
and many other variables from different time
periods and different countries

Purpose: GUIDE POLICY MAKERS AND WORLD LEADERS IN

DRAFTING SOUND ECONOMIC POLICIES
Macroeconomics: Definition, scope
and concerns

Thinking like an economist

• Economists try to address politically charged issues with a scientist’s
objectivity.
- scientific method, models, equations
• models- simplified representation of reality designed to yield
hypotheses about economic behavior
- graphs, symbols and equations
- models help us to dispense with irrelevant details and to
focus on important connections.
Macroeconomics: Definition, scope
and concerns

Thinking like an economist

• Endogenous variables- variables that a model tries to explain.
• Exogenous variables- variables that a model takes as given.

EXOGENOUS ENDOGENOUS
VARIABLES MODEL VARIABLES

The purpose of the model is to show how the exogenous

variables affect the endogenous variables.
Macroeconomics: Definition, scope
and concerns

Thinking like an economist

• What factors influence the price and quantity of pizza sold?
- This situation would involve three equations to come up with the model of the market
for pizza

1. quantity of pizza demanded by consumers Qd depends on the price of pizza P

and aggregate income Y.
Qd= D(P,Y)
where D represents the demand function
2. quantity of pizza supplied by pizza houses Qs depends on the price of pizza P
and on the price of inputs/ingredients I in making pizzas (cheese, pineapples, ham,
mushroom)
Qs= S(P,I)
where S represents the supply function
Macroeconomics: Definition, scope
and concerns

Thinking like an economist

• What factors influence the price and quantity of pizza sold?
- This situation would involve three equations to come up with the
model of the market for pizza
3. the price of pizza adjusts to bring the quantity supplied and
quantity demanded in to balance
Qs=Qd
 Macroeconomics: Definition, scope
and concerns

The Model of Supply and Demand

Price of pizza, P

supply What are the endogenous and

exogenous variables in this model?

Market equilibrium
Equilibrium price

demand

Quantity of pizza, Q
Equilibrium quantity
Macroeconomics: Definition, scope
and concerns

The Model of Supply and Demand

The model can be used to show how a change in one of the
exogenous variables affects both endogenous variables.

• What happens when aggregate income increases?

• What happens when prices of inputs of producing pizza increases?
Macroeconomics: Definition, scope
and concerns

Macroeconomics Encapsulated in Three

Models
• the economy in the long run
- classical model of how the economy works
• the economy in the very long run
- capital accumulation and economic growth
• the economy in the short run
- fluctuations in the economy
THANK YOU!