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Introduction to macroeconomics

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Ejike Udeogu

on 18 January 2018

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Transcript of Introduction to macroeconomics

INTRODUCTION TO MACROECONOMICS
What is Macroeconomics?
Macroeconomics is the study of the economy as a system
Determinants of economic health
Sectors of the economy
For ease of analysis, we group the economy into sectors
These are group of agents that perform similar economic functions
The real sector
The External Sector
These transactions are recorded in the external sector accounts - the
Balance of payments (BOP)
and the
International Investment Position (IIP)
The Economic Variables (the economy)
Growth
Inflation
Unemployment
Exogenous factors
War
Foreign exchange
Economic policies
Fiscal
Monetary
Structural
Intrinsic factors
Geographic location
the presence/absence of natural resources
population dynamism
Macroeconomic objective is to achieve a macroeconomic stability - i.e. a healthy economy
An economy is stable or healthy if it reaches -
internal balance
and
external balance
Internal balance
this has to do with how much the economy produces
internal balance is a situation where output is at full employment and inflation is low and stable
External balance
has to do with the transactions that the economy makes with the rest of the world
external balance means the
current account
can be financed in an orderly manner
Factors that could affect internal and external balance
Too much or too little demand
Too much or too little government expenditure
Too much or too little money
Uncertainty
Inflation
Bubbles
Wars
These factor can be grouped into three major areas
The Government sector
The government sector is concerned with -
how much the government collects from the rest of the economy - in form of taxes
how it spends
The transactions of the government are recorded in the
Government Sector Accounts (GSA)
The Monetary Sector
Consists of the financial institutions
The transactions in this sector are recorded in the Monetary Accounts.
The account records the
assets
and
liabilities
of deposit taking institutions
Who are main Players in this whole setup?
Households/consumers
Non-financial corporations
Financial corporations
General government
External markets
The scope of macroeconomics: some of the big issues.
The big picture: growth, unemployment and inflation
Economic stabilization - i.e. achieving a healthy economy (viz
internal
and
external
balance, long-term economic growth and reasonably equitable distribution of national income), has been seen as an explicit or implicit goal of government macroeconomic policy since the end of World War II
Macroeconomic objective
Generally, a healthy economy is seen as one where there is an overall balance (internal and external balance), growth is maximized and there is a reasonable equity in the distribution of national income
Internal balance: is the situation where output is at full employment and inflation is low and stable (has to do with how much the domestic economy produces)
External balance: has to do with the transactions that the economy makes with the rest of the world. External balance means the current account can be financed in an orderly manner.
These are levers used by governments and central banks to achieve a healthy economy .
Macroeconomic policies
Economic policies are broadly classified into three -
Fiscal
Monetary & Exchange rate
Structural
Fiscal Policy
This is mainly the use of government's revenues and spending (budget) to affect the economy
Monetary and Exchange rate policies
These refers to what the central bank does to influence the amount of money in the economy and the overall availability of credit
It often does so by mainly
controlling the overall availability of credit (through bank reserve requirements)
setting interest rates
Manipulating the exchange rate

Structural policies
These refer to the design of all types of regulations and institutions, which determine how the economy actually works
E.g. includes the 1980s Adjustment Programmes
Macroeconomic policies are usually intended to maximize growth while keeping down inflation and unemployment and ensuring balance of payment
These policies could also be either contractionary or expansionary
Such as - increasing spending through building infrastructures or cutting income taxes

There are two sides to it - expansionary or contractionary
The main economic agents are -
The links between the sectors
Conclusion
The general governments’ economic involves: creating an effective regulatory and legal framework; providing certain public goods, such as education, infrastructure, national security, and a social safety net; and levying taxes to finance government expenditures.
Conclusion
External balance has to do with the transactions that the economy makes with the rest of the world. External balance means the current account can be financed in an orderly manner.
Conclusion
• Structural policies refer to the design of all types of regulations and institutions which determine how the economy actually works.
It deals with broad aggregates; such as total demand for goods by households or total spending on machinery and building by firms.
The scope of macroeconomics is therefore to understand the interrelationship of the big issues that affect the economy - such as growth, inflation, unemployment, fluctuations and crises.
These are reflected in the macroeconomic data, which we will start learning about later.
Total output of goods and services produced by an economy; measured as the Gross domestic product (GDP) - is often seen as a measure of economic well-being
Economic growth is a rise in real GDP
Unemployment is measured as the proportion of the labour force without a job
Inflation measures the changes in price level
Is concerned with producing units within an economy. So the sector comprises all those productive units of the economy
When we analyze the real economy we will be interested in understanding
how much the economy produces
how much is consumed
how much the economy invests
The National Income and Product Account (NIPA) keeps record of the activities in the real sector.
What is recorded in this account is often called the Gross Domestic Product (GDP); which measures the final goods and services produced by an economy in a given period of time
Consists of the activities between an economy and the rest of the world.
When we analyze the external sector we are interested in understanding the transaction of the economy with the rest of the world
how much the economy consumes from the rest of the world (imports)
how much resources it provides to the rest of the world (exports)
Firms make factor payments
Y
to households
Disposable income
Y + B - Td
includes transfer payments
B
less direct Taxes
Td.
Disposable income goes on saving
S
or consumption
C
. This spending is augmented by injections of government spending
G
on goods and services and by investment spending
I
and by exports
X
, but is reduced by the additional leakage
Z
into imports
Macroeconomics examines the economy as a whole. It sacrifices individual detail to focus on the interaction of broad sectors of the economy.

There are five important groups of economic agents: Households, enterprises, financial intermediaries, the government, and non-residents.
Households supply the factors of production – land, labour, and capital – to producers in factor markets and demand goods and services in good markets. They make decisions about how much to spend on consumption, how much to save, and how much to invest in financial markets based on their perception of the prevailing economic environment and their expectations about future developments.
The enterprises (also known as the non-financial corporations) are mainly responsible for the production of market goods or non-financial services.
The financial intermediaries provide financial intermediation for the economy. Financial corporations are principally engaged in providing financial services, including insurance and pension funding services, to other institutional units.
Leakages from the circular flow are those parts of payment by firms to households that do not automatically return to firms as spending by households on the output of firms.
Leakages are saving (which goes to the financial sector), taxes net of subsidies (collected by the government) and imports (payments to foreign producers).
Injections are sources of revenue to firms that do not arise from household spending. Investment expenditure by firms, spending on goods and services by the government, and exports are injections. By definition, total leakages equal total injections.
The economic objective of any central government is to achieve a macroeconomic stability – i.e. a healthy economy: an economy is stable (or healthy) if it reaches internal and external balance.
Internal balance has to do with how much the economy produces. Internal balance is a situation where output is at is at full employment and inflation is low and stable
Factors that could undermine internal and external balance include – too much or too little demand, too much or too little government expenditure, too much or too little money, uncertainty, inflation and exchange risks and bubbles in asset prices.
• Economic policies are levers that a country has and can use to address the factors that undermine internal and external balance. These policies are broadly classified into three –
fiscal policy, monetary and exchange rate policies and structural policies.
Fiscal policy is the use of government revenues and spending to affect the economy
Monetary and exchange rate policies refers to what the central bank does to influence the amount of money in the economy, the overall availability of credit, interest rates, and the exchange rate.
Policy Instruments
Expenditure-changing policies
Alter the level of total spending (aggregate demand) for goods and services which are either produced domestically or imported
Can use fiscal and monetary policies to achieve this.
Expenditure-switching policies
Modifies the direction of demand: shifts demand between domestic output and imports
Can use exchange rate policies to achieve this
Direct Controls
Government restrictions in a market economy
Control particular items in the current account
Restrain capital outflows
Stimulate capital inflows
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