Chapter1 - Overview - Eng

8/10/2019 Chapter1 - Overview - Eng

1/37

MACROECONOMICSL PhngThoQunh

FACULTY OF INTERNATIONAL ECONOMICS

Mobile: 0987027398

Email: [email protected]


2/37

UNIT ASSESSMENT

Note: Presentation is elective, + 0.5 to 1 point to mid-termexam for doing presentation

Participation 10%

Mid-term exam 30% Multiple choices +short answer

Final exam 60% Theory + exercises


3/37

TEXTBOOKS

Macroeconomics, Gregory Mankiw, 2009

Macroeconomics, Paul Krugman, 2012


4/37

LECTURE1: OVERVIEWOF

MACROECONOMICS

I. Overview of economics

The word economycomes from

a Greek word for one who

manages a household.

A household and an economy

face many decis ions:

- 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?


5/37

SOCIETYANDSCARCERESOURCES

Society and Scarce Resources.

- Scarcity. . . means that society has

limited resources and therefore:

-The management of societys

resources is important because

resources are scarce cannot produce

all the goods and services people wish

to have.

Economicsis the study of how society manages its scarce resources.


6/37

TEN PRINCIPLES OF ECONOMICS

1. People face trade-offs: To get one thing, we usually have to

give up another thing


7/37

PEOPLE FACE TRADE - OFFS


8/37


9/37

TEN LESSONS FROM ECONOMICS

4. People respond to incentives. Eg: the increase in gas price

5. Trade can make everyone better off

6. Markets are usually a good way to organise economic activity:

Firms decide who to hire and what to produce.

Households decide what to buy and who to work for.


10/37

TEN LESSONS FROM ECONOMICS

7. Government can sometimes improve market outcomes

8. A country standard of living depends on its productivity9. Prices rise when government prints too much money

10. In short-run, society faces the trade off between inflation and

unemployment


11/37

POSITIVEANDNORMATIVEECONOMICS

Posi t ive economics is the branch of economics that

concerns the description and explanation of economic

phenomena. It concerns what "is", "was", or "will be.

Normat ive econom ics (as opposed to positive economics)makes prescriptions about the way the economy should work.


12/37

POSITIVEORNORMATIVEECONOMICS?

1. The government should invest in infrastructure for

better economic growth.

2. Inflation reduces the real income.

3. The interest rate should be decreased to stimulateaggregate demand.

4. Recession leads to higher unemployment rate.


13/37

MICROECONOMICSANDMACROECONOMICS

Microeconomics: is the study of how individual households

and firms make decisions and how they interact with one

another in markets.

Interaction between individual buyers and sellers

The factors that influence the choices made by buyers and

sellers in individual markets (e.g. coffee industry).


14/37


Macroeconomics:

Macroeconomics is the study of the economy as a whole

(the aggregate economy).

Examine economy-wide phenomena: unemployment,national income, rate of growth, gross domestic product,

inflation and price levels.

Its goal is to explain the economic changes that affect

many households, firms, and markets at once.


15/37



16/37


17/37

MACROECONOMICSISRELATEDTOPOLITICAL?

Macroeconomics is inherently political because it raises

questions about the appropriate role of government.

a. Conservative (or classical) economics: Adam Smith with

The invisible hand:1) Primary value: individual freedom

2) Markets almost always work well

3) Government intervention into the

economy usually counterproductive


18/37

MACROECONOMICSISRELATEDTOPOLITICAL?

b. Liberal (or Keynesian) economics (The visible hand)

1) Primary value: social well-being

2) The market system can fail, sometimes catastrophically

3) Government intervention & economic management are

needed to promote stability & growth


19/37

MACRO-ECONOMICSYSTEM

P.A.Samuelson: Inputs, outputs and black box


20/37

MACRO-ECONOMICSYSTEM

1. Inputs of macroeconomic system:

- Exogenous factors: the factors that affect the operation of

one country economy but the government can not control.

Weather War

Population Technology


21/37


22/37

2. BLACKBOXOFMACROECONOMICSYSTEM

AD- AS MODEL

Black box includes 2 forces: aggregate supply (AS) and

aggregate demand (AD)

A t D d AD


23/37

Aggregate Demand- AD

Aggregate demand (AD) is the total demand for final goods andservices in the economy at a given time and price level. It

specifies the amounts of goods and services that will be

purchased at all possible price levels.

AD determ inants:- Price : PAD

- Income: IncomeAD

- Population: Pop AD

- Expectation


24/37


25/37


26/37

AGGREGATESUPPLYAS

Determinants o f AS:

Price: PAS

Production costs (P of inputs): PC AS

Y*- Potential Yield: Y*AS

(Y* is the maximium yield an economy can produce at full

employment)


27/37

AS CURVE

Long run AS (LRAS): The LRAS is shown as perfectly

vertical, reflecting economists' belief that changes in

aggregate demand (AD) have an only temporary change on

the economy's total output.


28/37

AS CURVE

Short run aggregate supply (SRAS): SRAS slopes

upward, which shows a positive correlation

between price level and output.


29/37


30/37

3. OUTPUTSOFMACRO-ECONOMICSYSTEM

Outputs of macroeconomic system include the variables

measuring the results of economic activities: yield (GDP),

employment, price, inflation, import-export, etc.


31/37

MACROECONOMICGOALSANDPOLICIES

1. Macroeconomic goals:

- General goals: stability, growth and equality

- Specif ic goals: high yield, high economic growth, moreemployment creation, moderate inflation, foreign exchange

stability, equality in distribution etc.


32/37

2. MACROECONOMICPOLICIES

Fiscal policy

Monetary policy

Incomes policy

Foreign trade policy)


33/37

FISCALPOLICY

Fiscal policy refers to the use of taxation and government

spending to influence economic activity.

Instruments: government spending (G) v taxation (T).

- G: (for education, military, etc): G increases => AD and Y rise

- T: T increases => disposable income reduces => consumption

goes down => AD and Y goes down


34/37

MONETARYPOLICY

Monetary policy is the process by which the monetary

authority of a country controls the supply of money, often

targeting a rate of interest for the purpose of promoting

economic growth and stability.

The official goals: relatively stable prices and low

unemployment.

Instruments: money supply (MS) and rate of interest (i).


35/37

MONETARYPOLICY

MS: is the total amount of monetary assets available in an

economy at a specific time.

MSprivate investmentAD and Y

Interest rate:- low iinvestment increasesAD and Y

- high iinvestment reducesAD and Y decrease


36/37

INCOMEPOLICY

Incomes policies in economics are economy-wide wage and

price controls, most commonly instituted as a response to

inflation.


37/37

FOREIGNTRADEPOLICY

Goals: stabilize foreign exchange rate, low trade deficit

Tools: taxations, trade barriers, foreign exchange policies etc.

Chapter1 - Overview - Eng

Documents

Transcript of Chapter1 - Overview - Eng