Macro economics

1. Macro economics

2. INTRODUCTION

3. 1 Ten Principles of Economics

4. . . . The word economy comes from a Greek word for “one who manages a household.” Economy. . .

5. A household and an economy face many decisions: • Who will work? • What goods and how many of them should be produced? • What resources should be used in production? • At what price should the goods be sold? Ten principles of economics

6. Society and Scarce Resources: • The management of society’s resources is important because resources are scarce. • Scarcity. . . means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Ten principles of economics (Contd….)

7. Economics is the study of how society manages its scarce resources. Ten principles of economics (Contd….)

8. How people make decisions. • People face tradeoffs. • The cost of something is what you give up to get it. • Rational people think at the margin. • People respond to incentives. Ten principles of economics (Contd….)

9. How people interact with each other. • Trade can make everyone better off. • Markets are usually a good way to organize economic activity. • Governments can sometimes improve economic outcomes. Ten principles of economics (Contd….)

10. The forces and trends that affect how the economy as a whole works. • The standard of living depends on a country’s production. • Prices rise when the government prints too much money. • Society faces a short-run tradeoff between inflation and unemployment. Ten principles of economics (Contd….)

11. “There is no such thing as a free lunch!” Principle #1: People face tradeoffs.

12. To get one thing, we usually have to give up another thing. • Guns v. butter • Food v. clothing • Leisure time v. work • Efficiency v. equity Making decisions requires trading off one goal against another. Principle #1: People face tradeoffs (Contd….)

13. Efficiency v. Equity • Efficiency means society gets the most that it can from its scarce resources. • Equity means the benefits of those resources are distributed fairly among the members of society. Principle #1: People face tradeoffs (Contd….)

14. Decisions require comparing costs and benefits of alternatives. • Whether to go to college or to work? • Whether to study or go out on a date? • Whether to go to class or sleep in? • The opportunity cost of an item is what you give up to obtain that item. Principle #2: The cost of something is what you give up to get it.

15. LA Laker basketball star Kobe Bryant chose to skip college and go straight from high school to the pros where he has earned millions of dollars. Principle #2: The cost of something is what you give up to get it. (Contd….)

16. Marginal changes are small, incremental adjustments to an existing plan of action. People make decisions by comparing costs and benefits at the margin. Principle #3: Rational People Think at the Margin.

17. Marginal changes in costs or benefits motivate people to respond. • The decision to choose one alternative over another occurs when that alternative’s marginal benefits exceed its marginal costs! Principle #4: People Respond to Incentives.

18. People gain from their ability to trade with one another. • Competition results in gains from trading. • Trade allows people to specialize in what they do best. Principle #5: Trade Can Make Everyone Better Off.

19. A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. • Households decide what to buy and who to work for. • Firms decide who to hire and what to produce. Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.

20. Adam Smith made the observation that households and firms interacting in markets act as if guided by an “invisible hand.” • Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social costs of their actions. • As a result, prices guide decision makers to reach outcomes that tend to maximize the welfare of society as a whole. Principle #6: Markets Are Usually a Good Way to Organize Economic Activity.

21. Market failure occurs when the market fails to allocate resources efficiently. • When the market fails (breaks down) government can intervene to promote efficiency and equity. Principle #7: Governments Can Sometimes Improve Market Outcomes.

22. Market failure may be caused by • an externality, which is the impact of one person or firm’s actions on the well-being of a bystander. • market power, which is the ability of a single person or firm to unduly influence market prices. Principle #7: Governments Can Sometimes Improve Market Outcomes (Contd…)

23. Standard of living may be measured in different ways: • By comparing personal incomes. • By comparing the total market value of a nation’s production. Principle #8: The Standard of Living Depends on a Country’s Production.

24. Almost all variations in living standards are explained by differences in countries’ productivities. • Productivity is the amount of goods and services produced from each hour of a worker’s time. Principle #8: The Standard of Living Depends on a Country’s Production.(Contd….)

25. Standard of living may be measured in different ways: • By comparing personal incomes. • By comparing the total market value of a nation’s production. Principle #8: The Standard of Living Depends on a Country’s Production.(Contd….)

26. Inflation is an increase in the overall level of prices in the economy. • One cause of inflation is the growth in the quantity of money. • When the government creates large quantities of money, the value of the money falls. Principle #9: Prices Rise When the Government Prints Too Much Money.

27. The Phillips Curve illustrates the tradeoff between inflation and unemployment: òInflationðñUnemployment It’s a short-run tradeoff! Principle #10: Society faces a short-run tradeoff between inflation & unemployment.

28. When individuals make decisions, they face tradeoffs among alternative goals. • The cost of any action is measured in terms of foregone opportunities. • Rational people make decisions by comparing marginal costs and marginal benefits. • People change their behavior in response to the incentives they face. Summary

29. Trade can be mutually beneficial. • Markets are usually a good way of coordinating trade among people. • Government can potentially improve market outcomes if there is some market failure or if the market outcome is inequitable. Summary (Contd….)

30. Productivity is the ultimate source of living standards. • Money growth is the ultimate source of inflation. • Society faces a short-run tradeoff between inflation and unemployment. Summary (Contd….)

31. Macroeconomics considers the performance of the economy as a whole. • We try to understand changes in • The rate of economic growth • The rate of inflation • Unemployment • Our trade performance with other countries • Macroeconomics also includes an evaluation of the relative success or failure of government economic policies What is macroeconomics?

32. The economy is made up of four sectors sometimes called economic agents: • Households who receive payments (income) for their services (eg labour and land) and use this money to buy the output of firms (ie consumption or household spending). • Firms who use land labour and capital to produce goods and services for which they pay wages rent etc (income) and receive payment (expenditure) • Government (also known as the public or state sector) and • Internationaleg consumers buying overseas products (M) and Foreigners buying UK products (X) So what is ‘the economy’?

33. Microeconomics • Recession in the tourist industry due to the global downturn • A government subsidy to steel producers • A recession in the textiles industry • Increased spending on the National Health Service Difference between micro & macro

34. Microeconomicsfocuses on the individual parts of the economy. • How households and firms make decisions and how they interact in specific markets • Macroeconomicslooks at the economy as a whole. • How the markets, as a whole, interact at the national level. Microeconomics and Macroeconomics

35. Microeconomics is the study of how households and firms make decisions and how these decision makers interact in the broader marketplace. In microeconomics, an individual chooses to maximize his or her utility subject to his or her budget constraint. Microeconomics Macroeconomic events arise from the interaction of many individuals trying to maximize their own welfare. Because aggregate variables are the sum of the variables describing individuals’ decisions, the study of macroeconomics is based on microeconomic foundations. Macroeconomics Using Microeconomics in Macroeconomics

36. The Essence of Microeconomics-Buyers and Sellers

37. The Many Facets of Macroeconomics

38. Gross Domestic Product (GDP) • The monetary value of all goods and services produced within India in a given time period • Real GDP • The volume of goods and services produced within the UK (i.e. GDP adjusted for changes in the price level) • Economic Growth • The percentage rate of increase of real GDP • Inflation • The annual percentage rate of change of the general price level Key Concepts

39. For an economy as a whole, income must equal expenditurebecause: • Every transaction has a buyer and a seller. • Every rupee of spending by some buyer is a rupee of income for some seller. • Say’s Law-Supply creates it’s own demand • This process can be seen using a Circular Flow Diagram. The Economy’s Income and Expenditure

40. Gross domestic product (GDP) is a measure of the income and expenditures of an economy. • It is the total market value of all final goods and services produced within a country in a given period of time. • How much is the current GDP? Gross Domestic Product

41. Revenue Spending Goods & Services sold Goods & Services bought Inputs for production Labor, land, and capital Wages, rent, and profit Income Market for Goods and Services Firms Households Market for Factors of Production The Circular-Flow Diagram

42. The Components of the Macroeconomy

43. Everyone’s expenditure is someone else’s receipt. Every transaction must have two sides.

44. National Income Accounting: Important Identities

45. Microeconomics Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets.

46. Macroeconomics is the study of the economy as a whole. • Its goal is to explain the economic changes that affect many households, firms, and markets at once. Macroeconomics

47. Macroeconomics answers questions like the following: • Why is average income high in some countries and low in others? • Why do prices rise rapidly in some time periods while they are more stable in others? • Why do production and employment expand in some years and contract in others? Macroeconomics

48. The Economy’s Income and Expenditure When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning.

49. IN ORDER TO EVALUATE THE PERFORMANCE OF OUR ECONOMIC SYSTEM IN TERMS OF: • How rapidly it is growing, • How stable it is, • How it allocates its productive resources to different end products- we need some measure of output & income

50. Strangely enough however, it was not until the 1930’s that reliable overall figures on Y & output were produced. • The main reason was that until the 1930’s most economists concerned themselves not so much with the overall performance of the economy (i.e. macroeconomics) but with the price system& the allocation of resources (i.e. microeconomics)