5 Competencies in PORTMAN College

1. Personal/Self Motivation Skill

2. Communication & Presentation Skill

3. Problem Solving & Decision Making

4. Leadership Skills

5. Team Working Skills

INTRODUCTION TO MACRO ECONOMICS

Course Objectives

1. Understand the differences between micro and macro economics

2. Understand the theories applied under macro economics

3. Become knowledgeable on policies

Learning Outcomes

After successfully completing the course, the students are expected to understand :

1.The goods market

2.Financial market

3.Labor market

4.AD-AS model

5.Unemployment and inflation

6.The open economy

Macroeconomic Objective

To achieve full employment To obtain a satisfactory rate of economic growth To maintain the stability of the general price level To ensure the balance of payment equilibrium To ensure an equal distribution of income

The World Economy – An Overview

According to World Bank report, global growth in 2014 was lower than initially expected, which grew at 2.6 percent only from 2.5 percent in 2013

Disappointing growth in other developing countries in 2014 reflected weak external demand, but also domestic policy tightening, political uncertainties and supply-side constraints.

A sharp decline in oil prices since mid-2014 will support global activity and help offset some of the headwinds to growth in oil-importing developing economies.

However, it will dampen growth prospects for oil-exporting countries, with significant regional repercussions.

The World Economy – An Overview

The World Economy – An Overview

Overall, global growth is expected to rise moderately, to 3.0 percent in 2015, and average about 3.3 percent through 2017.

The Malaysian Economy - Overview

Occurred external shocks in the fourth quarter of 2014 whereby commodity export prices were falling, especially crude oil, while the ringgit exchange rate depreciated across- the-board against currencies of Malaysia's major trading partners, most notably against the US dollar, Chinese Yuan, Thai Baht and Singapore dollar as well. 

The Malaysian Economy - Overview

While short-term demand imbalances (weak demand and excess supply) in the world oil market explained to a large extent the plunging crude oil prices, portfolio re-allocation by foreign investors and acquisition of foreign portfolio assets by local institutional investors, taking advantage the strengthening of the US economy and expectations of higher real interest rates were seen as the major contributory factors to depreciating ringgit.

The Malaysian Economy - Overview

Apart from these sudden economic clouds, heavy rains and severe flooding also occurred in late December 2014, affecting many states in both Peninsular Malaysia and in Sabah as well.

If not managed properly and in a timely manner, the external shocks and traumatic events like severe flooding could affect productivity and potentially lower the potential output of the economy

Stages of Market Development The World Bank has defined three categories of development using Gross National Income (GNI) as a base.

The main classifications provided are by geographic region, by income group, and by the operational lending categories of the World Bank Group.

Stages of Market Development

As of 2013, Low income economies are defined as those with a GNI per capita of $1,045 or less Middle income economies are those with a GNI per capita of more than $1,045 but less than $12,746 High-income economies are those with a GNI per capita of $12,746 or more.

1. Low Income Countries•Examples: Madagascar, Afghanistan, Nepal, Myanmar•Characteristics:

Limited industrializationHigh percentage of population involved in farmingHigh birth ratesLow literacy ratesHeavy reliance on foreign aidPolitical instability and unrest

2. Lower-Middle Income Countries

•Examples: Philippines, Vietnam, Morocco, Papua New Guinea

•CharacteristicsRapidly expanding consumer marketsCheap laborMature, standardized, labor-intensive industries like textiles and toys

3. Upper-Middle Income Countries

•Also called newly industrializing economies (NIEs) or developing countries•Examples: MALAYSIA, Thailand, Maldives, Turkey•Characteristics:Strong political leaders A switch from agricultural to industrial economies, especially in the manufacturing sectorAn increasingly open-market economy, allowing free-trade with other nations in the world.Large national corporations operating in several continents.Strong capital investment from foreign countries.Political leadership in their area of influence.Rapid growth of urban centres and population

4. High-Income Countries

•Also called developed countries•Examples: South-Korea, Japan, United States•Characteristics:Knowledge and innovation-intensive economic activityCompetition-driven private sector-led economyGovernment as a facilitator of economic growthGreater balance between domestic and external demand Deeper global and regional integration

Government PoliciesThe government manages the economy by implementing three kinds of policies:

1.Fiscal Policy – gov policy concerning taxes and expenditure: to stabilize the economy

2.Monetary Policy – tools used by the gov through the Central Bank to control the supply of money: to maintain the overall price level, to achieve higher economic growth, to remove fluctuations in production & to achieve full employment

3.Growth Policy

Basic Economic ConceptsComponents of Macroeconomics Aggregate Output

Gross Domestic Product (GDP)Nominal GDPReal GDP

Unemployment RateInflation Rate

Components of macroeconomics

1. Households

2. Government

- Own all factors of production (land, labor, capital, entrepreneur)- Provide the service of factors of production to firms and the government and receive payments in the form of wages, rent, interest and profit

- Collect taxes from households and firms-Gov revenue will be spent on development and operational purposes- Gov also buys factors of productions from households for public consumption

Components of macroeconomics3. Firms

4. International Trade Activities

-Buys the factors of production: land, labor, capital, entrepreneur- Produces goods and sells goods and services-Firm will sell their goods and services to households and the gov and earn revenue from the sales- Pays wages, rent and interest to households for the services of the factors of production and pays taxes to gov

- Refers to foreign sector which involved imports and exports of goods and services

Aggregate Demand and Aggregate Supply

Aggregate Demand – total quantity of output demanded at alternative price levels during a given period of time, ceteris paribus.

Aggregate Supply – total quantity of output supplied at alternative price levels in a given period of time, ceteris paribus

The Circular Flow Diagram

Showing you the economic interactions between four sectors (macro components – households, firms, government and international trade) in the economy

The Circular Flow Diagram, cont.

Explanations on Circular Flow

1. Households work in the firm and for the government. As a return, they receive wages for their services. Households also receive payments from gov such as transfer payment and subsidies (pensions, Social security benefis, welfare payments)

2. Household spend their income by buying goods and services produced by firms and paying taxes to gov.

Explanations on Circular Flow

3. As a production unit, firms will buy factors of production (land, labor) from households to produce goods and services. The firms will need to pay the services of factors of production in terms of wages, rent, interest).

Then the firms will sell these goods and services to households and the gov in output market.

Explanations on Circular Flow

4. The gov will collect taxes from households and firms. The revenue will be spent on welfare activities, provision of public utility services, economic development and so on. The gov will also make payments to households in the forms of wages, interest and transfer payments (SOCSO, pension) as well as buying goods and services from firms.

Explanations on Circular Flow

5. Households will also spend some of the income to buy imported goods and services from the rest of the world. People in foreign countries will also buy exported goods from domestic firms.

What is GDP?

What is Nominal GDP?

What is Real GDP?

Gross Domestic Product (GDP)

Total money value of the all the final goods and services produced within a country in a given time period. It EXCLUDES goods and services produced by Malaysian citizens working OVERSEAS and INTERMEDIATE goods

GDP DOES NOT INCLUDE net income from abroad

GDP, cont. It can be measured at current prices or constant prices (base year). For example, the GDP of Malaysia Malaysia at current price as at 2004 was RM449, 609 million whereas the GDP of Malaysia at constant price was RM248, 954 million in 1987- base year.

Gross National Product Total market value of all final goods and services produced by the residents of a country during a given period of time. For example, income earned by Malaysians working abroad in countries like Singapore, Japan, United States, etc will be included in GNP. But the income earned by foreign workers working in Malaysia will not be included in GNP.

Measures the value of all the goods and services produced in a country which expressed in current prices without taking into account an inflation factor.

Measures the value of all the goods and services produced in a country which expressed in the prices of some base year. Shows how well the country actually grew after taking into account the inflation factor

NOMINAL GDP REAL GDP

NOMINAL VS REAL GDPAssume a country is producing only apple in the country. How to differentiate between nominal GDP and real GDP? (measures in dollars)

GDPyear1 = $1000 GDPyear2 =$1200

P1 = $0.50 / 1b P2 = $0.55 / 1b

Nominal GDP in year 2 is $1200

Real GDP in year 2 for adjusted year 1( year 1 basis) is $1200/$0.55 x $0.50 = $1091

Unemployment

Definition:

Labor force participants being available and willing to work but are unable to find jobs.

Unemployment Rate:

The percentage of labor force who are unemployed and are actively and willingly seeking for employment.

How to calculate Unemployment Rate (UR) in a

country?

Unemployment Rate (%) = Number of Unemployed

Labor Force100%X

Types of Unemployment

A. Frictional Unemployment

Occurs when people are in between jobs, entering and reentering the labor force.

B. Cyclical Unemployment

Occurs when there is a lack of jobs because of a downsizing in a business cycle or a recession.

Types of UnemploymentC. Structural Unemployment

Occurs due to structural changes in the economy of a country - mismatch between the jobs available in the market and the skills of the available workers in the market.

D. Seasonal Unemployment

Occurs due to seasonal variation in the activities of particular industries

Inflation Definition:

A continuous increase in the general price level of goods and services in the economy

How to measure?

By using Consumer Price Index (CPI) – index that measures changes in the average price of consumer goods and services – describe the cost of living

Inflation Rate The rate of inflation is computed as a percentage of change in CPI from one year to the next, as shown below:

Inflation Rate = CPI base year – CPI current year

CPI current yearX 100%

Thank you.