BECON 6 - Intro to Macroeconomics

8/13/2019 BECON 6 - Intro to Macroeconomics

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Module Code and Module Title Title of Slides

Learning Outcomes

At the end of the lesson, you should be able to:

1. Define Macroeconomics and differentiate with microeconomics

2. Explain major issues in macroeconomics

3. Discuss economics policies and major components in macroeconomics

4. Draw and discuss circular flow in Macroeconomics.


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What is Macroeconomics?

Macroeconomics is :

study of the economy as a whole

concerns itself not with individual prices but theprice level as a whole ; it attempts to explainoutput as a whole not that of individual products ;it attempts to explain employment in the

economy as a whole not in individual companiesor industries.

Macroeconomics has a broad focus.


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The major macroeconomic issues

1 . Economic Growth

a growing economy means that there will bemore good and services for people to consume.


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2. Economic Development

- Is the improvement in the standard of living in anation's population with sustained growth from asimple, low-income economy to a modern, high-income economy.- focusing basic needs, education, healthcare, lifeexpectancy, security, poverty level and so on.


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3. Inflation- A general rise in price throughout the economy.- Changes in the general level of prices affectsoutput, which in turn affects employment.


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The major macroeconomic issues 5. Balance of Payments

account records all transactions between theresidents of that country and the rest of the world.

Transactions enter as either debit items or credit items.

Debit items - all payments to other countries: countryspurchases of imports, the spending on investment itmakes abroad and the interest and dividends paid to

foreigners who have invested in the country.Credit items include all receipts from other countries:from the sales of exports, from investment expenditureby foreigners in the country and interest and dividendsearned from abroad.


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Microeconomic policy this relates to theallocation of resources from the viewpoint ofefficiency and equity

Macroeconomic policy this relates to the

economy as a whole and covers one or more ofthe following:

General level of unemployment General level of prices Rate of economic growth Balance of payments



Three (3) Important instruments of economic policy :

1. Measures related to efficiency Policies directed at the private sector, where governmentengages in intervention to help certain industries and toregulate others . Examples : subsidies to industry in need of special assistance.

2. Measures Related to Equity Governments remit - try and make the allocation of

resources fairer between individuals. 2 instruments :

redistribution of income- giving people the freedom to spend their income as they see fit. provides certain goods and services to all that want them, regardless of income.

2 ways of redistribution of income are taxes and subsidies



3. Control of the Economy as a Whole

Governments have taken on the responsibility of

influencing the rate of inflation, the level ofunemployment, the rate of economic growth and thebalance of payments between the own country and therest of the world.

The t ools available to government in these tasks are:

Fiscal policy which seeks to influence totalspending through the governments own budget changes in taxation and expenditure as required.(saving and investment)

Monetary policy operated by the Central Bankwhich tries to influence spending through interestrates and the supply of money ( liquidity and moneysupply)



Components of Macroeconomics

Households

Households own all the factors of production: land, labour,capital and entrepreneur. Households provide the services offactors of production to firms and the government and receivepayments in the form of rent, wages, interest and profit.

Firms

An organization that buys the factors of production from

households and then produces and sell goods and services.Firm will sell their goods and services to households and thegovernment and earn a revenue from the sales. A firm will paywages, rent, and interest to households for the services of thefactorsp of production and also pays taxes to the government.

Government

Government will collect taxes from households and firms.Government revenue will be spent on development and foroperational purposes. The government also buys factors ofproduction from households for public consumption.



The Circular Flow of Income

ABROAD

ImportExpenditure

ExportExpenditur e

GOVERNMENT

GovtExpenditure

Taxes

BANK etc

Saving

Investmentfactors

payments

Consumption ofdomesticallyproduced

goodsandservices

InnerFlow



The Inner Flow

Firms pay money to households in the form of wages andsalaries, dividends of shares, interest and rent.

These payments are in returns for the services of the factorsof production land, labour and capital ( which are suppliedby households).

Money flows directly from firms o households as 'factorspayments' ( left hand side of inner flow)

Households in return pay money do domestic firms when

consume domestically produced goods and services. ( righthand side inner flow).

There is thus a circular flow of payments from firms tohousehold to firms and so on.



Withdrawls Part of the incomes received by households will be spend

on the goods and services of domestic firms Part of the incomes generated by firms will be paid todomestic households.

There are three forms of withdrawls :

Saving Income that households choose not to spend but to put asidefor the future. Savings are normally deposited in the financialinstitutions like banks and building society.

TaxesWhen people pay taxes ( to either central or localgovernment) this represents a withdrawls of money from theinner flow in much the same way as saving; only in this case,people have no choice.

ImportExpenditure

Households spend some of their incomes on imported goodsand services, or on goods and services using importedcompenents. Although the money that consumers spend onsuch goods initially flows to domestic retailers, it willeventually find its way abroad.



Injections Part of the demand for firm's output arises from

consumers' expenditure. The reminder comes fom other outsides the inner flow. There are three forms of injections :

Investment

The money that firms spend after obtaining it from variousfinancial institutions - either past savings or loans orthrough a new issues of shares. They may invest in plantand equipments or may simply soend they money onbuilding up stocks of inputs , semi finidhed and finishedgoods

GovernmentExpenditure

When the government spends money on goods and

services produced by firms

this counted as injections.Like government spends on public goods such as road,hospitals, schools and etc.

ExportExpenditure

Money flows into the circular flow from abroad whenresidents abroad buy our exports of goods and services.



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BECON 6 - Intro to Macroeconomics

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