ECO121

• Macroeconomics


  The branch of economic theory which deals with the study of the national economy in aggregate terms
• Macroeconomics


  The study of the performance of the national economy as well as the policies that government use to try to improve that performance
• Macroeconomics


  In its broader sense, also includes the study of the international economy on an aggregate basis
• Macroeconomic theory


  The analysis of the relationships between the aggregate variables in the economy, such as consumption, savings, income, employment, exports and imports etc.
• Microeconomics is the foundation of Macroeconomics
• Both microeconomics and macroeconomics are concerned with the decisions of households and firms
• The tools of analysis are the same and macroeconomists use the same core principles that are used in microeconomics in their effort to understand and predict the economy
• Microeconomics


  Studies the behaviour of individual economic decision units; the consumers, households and firms and the way in which their decisions interrelate to determine relative prices of goods and factors of production and the quantities of these which will be bought and sold in the market
• Macroeconomics


  Studies broad economic aggregates such as consumption, income, employment, investment, general price level etc. and their interrelationships
• Macroeconomic theory


  The analysis of the hypothesized relationship between aggregate variables in the economy, such as national consumption, savings, income, employment, exports and imports
• Macroeconomic objectives


  Broad national objectives, which can change from time to time depending on the economic fortunes of a particular country
• Macroeconomic objectives


  • Stable domestic prices
  • Full employment
  • Rapid economic growth
  • Balance of payments equilibrium
  • Exchange rate stability
• Macroeconomic goals


  Milestones towards the desired macroeconomic objective
• Variables


  Quantities which vary during a specified period of time under consideration, can be exogenous or endogenous
• Parameters


  Influences which are not allowed to change in a relationship, assumed to have constant values
• Functions


  Relationships between two or more variables such that a change in the value of one variable is related to the change in the value of some other variables in some regular and predictable manner
• Equations


  Statements that two expressions are the same, can be definitional, behavioural or equilibrium conditions
• Stocks and flows


  Stock variables have magnitude at a point in time, flow variables have magnitude over a period of time
• Real variables


  Variables adjusted for inflation
• Nominal variables


  Variables measured in current prices
• Business cycle


  The upward or downward movement of economic activity or real GDP that occurs around the growth trend
• Phases of a business cycle

  1. Expansion

  2. Peak

  3. Downturn

  4. Recession

  5. Trough
• Short run


  Framework that focuses on demand and business cycles
• Long run


  Framework that focuses on supply and growth
• Macroeconomic variables


  • Aggregate consumption
  • Savings
  • Investment
  • Inflation rate
  • Unemployment rate
  • National income
  • Imports and exports
• Positive economic analysis


  Attempts to determine verifiable relationships among economic variables, yielding positive (factual) statements or relationships
• Normative economic analysis


  Deals with value judgements about what ought to be, what ought to have been or what ought to become
• Positive economic analysis


  Attempts to determine verifiable relationships among economic variables, thus yielding positive (factual) statements or relationships
• Positive economic analysis


  1. Formulate hypothesis (theory)

  2. Gather information/data

  3. Generate data from real world observations

  4. Hypothesis testing

  5. Knowledge

  6. Economic "Laws"

  7. Explanations

  8. Prediction
• Normative economic analysis


  Deals with value judgement about what ought to be, what ought to have been or what ought to become. It deals with such generalised notions as welfare, happiness, freedom, fairness, justice, equality and progress.
• Normative economic analysis


  Uses the knowledge derived from positive economic analysis as a basic building block
• When 'what is' is compared to 'what ought to be' as reflected in our desired goals

  Problems may then be identified
• Policy proposals


  1. The government might be called upon to stop doing some things that the private sector can do best

  2. The government might be called upon to do something so as to correct for some perceived problems within the market economy.
• Consumption


  The act of using goods and services to satisfy human wants. It refers to household's expenditure on goods and services, which yield utility in the current period.
• Savings


  The difference between income and consumption. The amount of income per time period that is not consumed by economic units.
• Marginal Propensity to Consume (MPC)


  The fraction of additional disposable income that is consumed.
• Marginal Propensity to Save (MPS)


  The fraction of additional disposable income that is saved.
• Average Propensity to Consume (APC)

  The fraction of total income that is spent on consumption.
• Average Propensity to Save (APS)


  The proportion of income that is devoted to saving.
• Consumption Function


  Expresses the functional relationship between consumption expenditure and all its determinants.