APPLICATION OF

MACROECONOMICS
THEORY AS A BASIS FOR
UNDERSTANDING THE KEY
ECONOMIC VARIABLES
AFFECTING THE BUSINESS
Macroeconomics is the study of national
economy and the determination of national
income. It involves the major sectors of the
national economy, that is:

 Households
 Business firm
 Government
 Foreign sector
 Flow of Goods and Services

Business

Input Output
Production
Suppliers
Of Labor Buyers
And other
input
Profit
Cost of Input Revenue From
Maximization
Selling Output

Flow of money
 Significance of
Macroeconomics
 Notional Gross Domestic product (GDP)-
The price of all goods and services produced by a
domestic economy for a year at current market prices.

 Real GDP- The price of all goods and services produced

by the economy at price level adjusted (constant) prices.
Price level adjustment eliminates of inflation on the measure.

 Potential GDP- The maximum amount of production

that could take place in an economy without putting pressure
on the general level of prices.
 Net Domestic Product (NDP)- GDP minus
depreciation

 Gross National Product (GNP)- The price of all

goods and services produced by labor and property supplied
by the nation’s residents.
CALCULATION OF GDP
 1. INCOME OUTPUT APPROACH
- Adds up all incomes earned in the production of final goods and services
such as wages. Interest, rents, dividends, and so forth.

Compensation to employees P12020

Corporate profits 1534
Net interest 1108
Proprietor’s income 1486
Rental income of persons 286
National Income 16434
Plus indirect taxes 1588
Minus: others including statutory discrepancy (320)
Net national product 17702
Plus: consumption f fixed capital 2702
Gross national product 20404
Plus: payments of factor income to the other countries 682
Minus: receipts of labor from other countries (670)
Gross domestic product 20416
 EXPENDITURE INPUT APPROACH
- Adds up all expenditure to purchase final goods and
services by house holds, businesses and the government.

Personal consumption expenditures 14130

Gross domestic fixed product
Business 2492
Residential 892
Governmental purchases
Federal 1232
State and local 2446
Net exports (660)
Changes in business inventories (116)
Gross domestic product 20416
AGGREGATE DEMAND AND
SUPPLY

 Aggregate demand curve illustrates the relationship

between the quantity of real GDP demanded and the
price level, holding other things constant.

 The price level affects aggregate demand for several

reasons, namely:
1. Effects of change in interest rate
2. Effect of change in wealth
3. Effect of change in international purchasing power.
 AGGREGATE SUPPLY

The aggregate supply (output) schedule on the other hand,

presents the relationship between goods and services supplied
and the price level, on the assumption that all other variables
affecting supply are constant.
 Aggregate Supply
Curve

Price
Level

Real
Output

As can be observed prices remain relatively stable or constant until the economy
reaches near capacity at which time prices begin to increase at a significant rate.

Shifts in the aggregate supply curve may be caused by:

 Technology improvements
 Changes in resource availability, or
 Changes in resource costs
 Multiplier
- Refers to the fact that an increase in spending y consumers,
businesses, or the government has a multiplied effect on
equilibrium GDP.

1
MPS -change in spending
 PRODUCTIO
N
The inputs in production can be divided into five big categories:

1. Land
2. Labor
3. Capital
4. Intermediate inputs
5. Business know how
 Marginal product of labor
- Is the extra amount of output a business can generate by
adding one or more workers.
 Total cost production
- Is the sum of the costs for each of the inputs.
 Marginal costs
- Is the added cost to produce one more unit of output
 Revenue
- Is the amount of money companies get from selling their
products or services.
 Marginal revenue
- Is the added revenue from producing and selling one more unit
of output.
 SHORT-TERM PROFIT
MAXIMIZATION AND LONG-
TERM DECISION

Short-term profit maximization- focuses on

achieving the highest profit, assuming that fixed costs are
constant and cannot be changed.

Long-term profit maximization- assumes that a

business can vary all its inputs even going as far as shutting down.
This also includes the results of a company’s big strategic
decisions such as, coming up with new products, entering new
markets, offering low prices or trying to get maximum efficiency
from their workforce.
 BUSINESS CYCLES

 Business cycle - is fluctuation in aggregate economic output

that last for several years.
 Peak - is the date on which a recession starts-that is, when the
economy hits a high points and starts heading downward
 Recession is a period of negative GDP growth. Recession
usually refers to at least two consecutive quarters of negative
GDP growth.
 Trough is the date on which the recession ends and the
economy starts heading up again.

 Expansion is the time from the trough, through recovery and all
the way to the next peak.
 Peak
Real GDP
Peak

Trough

Output
(increasing)

Recession Expansion

Business Cycle Time

(increasing)

Typical Business Cycles

THE IMPACT OF RECESSION ON BUSINESS

Recession hurt businesses as well as workers. As an economy slows,
the demand schedules of most businesses shift to the left. For the
same price, the quantity demanded falls and therefore the
quantity supplied also falls.
Fiscal Policy

 Is the use of government revenue collection

mainly taxes and expenditure spending to
influence the economy. According to Keynesian
economics, when the government changes the
levels of taxation and governments spending, it
influences aggregate demand and the level of
economic activity. Fiscal policy can be used to
stabilize the economy over the course of the
business cycle.
GOALS OF MONETARY POLICIES

1. Controlling Inflation
- Inflation is a sustained upward movement in
the average price level of goods and services,
usually measured on an annual basis.

2. SMOOTHING OUT BUSINESS CYCLE

3 ENSURING FINANCIAL STABILITY
These are generally two causes for inflation:

 Demand-pull inflation. The occurs when

aggregate spending exceeds the economy’s
normal full-employment output capacity.

 Cost-push inflation. Occurs from an

increase in the cost of producing goods and
services. It is usually characterized by decreases in
aggregate output and employment because
consumers are not willing to pay the inflated prices.
Long-Term Effects Of
Monetary Policy

 There are two indirect ways by which effective

monetary policy can improve long-term outcomes.
 1. Low inflation makes the future more predicable
making is easier for the business and individuals to plan
and make good decisions.
 2. If the central bank is able to smooth out the business
cycle, recessions will be few and mild.
Monetary policy Tools
1. Control over short term interest rates
2. The Discount window
3. The reserve requirement and other
regulation
Supply-Side Policies

 This economic theory holds that bolstering an

economy’s ability to supply more goods is the
most effective way to stimulate growth. A
decrease in taxes (especially for businesses and
individuals with high income) increases
employment, savings, and investments; and is an
effective way to stimulate the economy.