MacroeconomicsMacroeconomicsBased on “Macroeconomics” by Based on “Macroeconomics” by

Dornbusch and Fischer andDornbusch and Fischer and““Elements of Economics” by TullaoElements of Economics” by Tullao

DefinitionDefinition

a social science that a social science that deals with the efficient deals with the efficient allocation of scarce allocation of scarce resources among its resources among its alternative uses to alternative uses to satisfy unlimited satisfy unlimited human wants and human wants and needsneeds

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DefinitionDefinition ““As an allocation of wealth (arising As an allocation of wealth (arising

from the scarcity of resources)”from the scarcity of resources)” ““As creation and consumption of As creation and consumption of

wealth (expansion of wealth)”wealth (expansion of wealth)” ““As a science of choice”As a science of choice”

DefinitionDefinition

Looks at the Looks at the economy as a wholeeconomy as a whole Concerned with the Concerned with the

national national product/output (i.e., product/output (i.e., GNP/GDP)GNP/GDP)

Aggregate price levelAggregate price level Employment and Employment and

unemployment rates unemployment rates in the economyin the economy

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The Economy as a The Economy as a SystemSystem Definition: “a group of interrelated Definition: “a group of interrelated

parts that work to achieve a parts that work to achieve a particular objective”particular objective”

Elements:Elements:Needs: “articulated by means of a Needs: “articulated by means of a

problem that has to be answered in problem that has to be answered in different ways”different ways”

Objective: “elaboration on how the Objective: “elaboration on how the needs or problems can be answered in needs or problems can be answered in specific and measurable terms”specific and measurable terms”

Based on Dr. Tereso Tullao’s textbook entitled, “Elements of Economics”Based on Dr. Tereso Tullao’s textbook entitled, “Elements of Economics”

The Economy as a The Economy as a SystemSystem continuation ofcontinuation of Elements: Elements:

Limitations: “constraints that may Limitations: “constraints that may prevent society in answering fully its prevent society in answering fully its problems or needs”problems or needs”

Alternative choices: “list of alternative Alternative choices: “list of alternative programs, activities, and ways that programs, activities, and ways that society may choose in addressing its society may choose in addressing its problems and needs”problems and needs”

Based on Dr. Tereso Tullao’s textbook entitled, “Elements of Economics”Based on Dr. Tereso Tullao’s textbook entitled, “Elements of Economics”

The Economy as a The Economy as a SystemSystem continuation ofcontinuation of Elements: Elements:

Decision-making framework: “basis that Decision-making framework: “basis that will be used in making a choice from will be used in making a choice from among the alternative answers to the among the alternative answers to the problems or needs”problems or needs”

Feedback mechanism: “process of Feedback mechanism: “process of evaluating the chosen alternative evaluating the chosen alternative pursued in responding to the social pursued in responding to the social problem and need”problem and need”

Based on Dr. Tereso Tullao’s textbook entitled, “Elements of Economics”Based on Dr. Tereso Tullao’s textbook entitled, “Elements of Economics”

Primary Economic Goal: Material SurvivalPrimary Economic Goal: Material Survival

Two important tasks:Two important tasks:““production activities that describe the production activities that describe the

arrangements of humans and other arrangements of humans and other resources, institutions, and sectors in resources, institutions, and sectors in creating goods, services, and resources creating goods, services, and resources from the utilization of the wealth of the from the utilization of the wealth of the economy”economy”

““distribution activities that illustrate how distribution activities that illustrate how the allocation and division of the goods, the allocation and division of the goods, services, and resources to the members services, and resources to the members of society are carried out for these of society are carried out for these members to live and prosper materially”members to live and prosper materially”

Based on Dr. Tereso Tullao’s textbook entitled, “Elements of Economics”Based on Dr. Tereso Tullao’s textbook entitled, “Elements of Economics”

Macroeconomic ConcernsMacroeconomic Concerns Aggregate Price levelAggregate Price level

increases in the overall price level increases in the overall price level (inflation) are a great concern to (inflation) are a great concern to policymakers, to citizens at large as well policymakers, to citizens at large as well as to economistsas to economists

Aggregate OutputAggregate Outputa concern particularly when the a concern particularly when the

economy does not seem to be producing economy does not seem to be producing as much as it is capable of producingas much as it is capable of producing

Macroeconomic ConcernsMacroeconomic Concerns Total EmploymentTotal Employment

related to the previous concern, the related to the previous concern, the economy may not be producing as much economy may not be producing as much as it is capable of producing because it as it is capable of producing because it is not employing all the people who is not employing all the people who want jobs want jobs

The rest of the world (ROW) and its The rest of the world (ROW) and its relationship with the domestic relationship with the domestic economyeconomy

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Circular Flow of Products, Income, Circular Flow of Products, Income, and Money in a Simple Economyand Money in a Simple Economy

composed of the households (HH) composed of the households (HH) and the firmsand the firms

linked by the market for factor inputs linked by the market for factor inputs and the market for final goods and and the market for final goods and servicesservices– HHs own the factors of production; HHs own the factors of production;

primary consumers in the economy primary consumers in the economy – firms are the primary producers in the firms are the primary producers in the

economyeconomy

Circular Flow of Products, Income, Circular Flow of Products, Income, and Money in a Simple Economyand Money in a Simple Economy

Circular flowsCircular flows– flow of resources, goods and services flow of resources, goods and services

wherein HHs sell the services of their wherein HHs sell the services of their resources in the factor marketsresources in the factor markets

– flow of money, income and expenditures flow of money, income and expenditures is the flow of payments in terms of rent, is the flow of payments in terms of rent, wages, and interest as well as the flow wages, and interest as well as the flow of payments for the purchase of final of payments for the purchase of final goods and services goods and services

Circular Flow of Products, Income, Circular Flow of Products, Income, and Money in a Simple Economyand Money in a Simple Economy

AssumptionsAssumptions– the economy is stationary or is not the economy is stationary or is not

growinggrowing– the expenditures of one sector is the the expenditures of one sector is the

income of another sectorincome of another sector– total income must equal total total income must equal total

expenditures to attain stabilityexpenditures to attain stability– savings and investments are equal in savings and investments are equal in

equilibrium equilibrium

Expanded Circular Flow of Expanded Circular Flow of Products, Income, and MoneyProducts, Income, and Money

composed of the households (HH), composed of the households (HH), the firms, government, and the the firms, government, and the external sectorexternal sector– government’s primary role is to provide government’s primary role is to provide

services for the publicservices for the public– external sector is a source of resources, external sector is a source of resources,

final goods and services, investment, final goods and services, investment, and tax revenues and tax revenues

Instruments of Macroeconomic PolicyInstruments of Macroeconomic Policy

Fiscal PolicyFiscal PolicyOne of the major ways the government One of the major ways the government

affects the economy is through tax and affects the economy is through tax and expenditure decisions. The government expenditure decisions. The government collects taxes from the business and collects taxes from the business and household sectors. Both the magnitude household sectors. Both the magnitude and composition of these taxes and and composition of these taxes and expenditures have major effects on the expenditures have major effects on the economy.economy.

Instruments of Macroeconomic PolicyInstruments of Macroeconomic Policy

Monetary PolicyMonetary PolicyThe government can, likewise, affect the The government can, likewise, affect the

economy by controlling the quantity of economy by controlling the quantity of money in the economy.money in the economy.

Income PoliciesIncome PoliciesThese are direct attempts of the These are direct attempts of the

government to control prices and government to control prices and wages. They generally take the form of wages. They generally take the form of regulations specifying the maximum regulations specifying the maximum amount by which prices or wages are amount by which prices or wages are permitted to rise.permitted to rise.

Instruments of Macroeconomic PolicyInstruments of Macroeconomic Policy

Supply-side PoliciesSupply-side PoliciesPolicies that focus on Policies that focus on

aggregate supply and aggregate supply and increasing increasing production. In production. In practice, the main practice, the main instrument of supply-instrument of supply-side policy has been side policy has been the tax system (i.e., the tax system (i.e., to increase labor to increase labor supply)supply)

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Schools of Thought in Schools of Thought in Macroeconomics: NeoclassicalMacroeconomics: Neoclassical

Proponents include Milton Friedman, Proponents include Milton Friedman, Robert Lucas, and Thomas SargentRobert Lucas, and Thomas Sargent

Assumptions: 1) economic agents Assumptions: 1) economic agents maximize optimal decisions based on maximize optimal decisions based on available information; 2) expectations are available information; 2) expectations are rational; and 3) markets clear rational; and 3) markets clear

Asserts that markets work best if they are Asserts that markets work best if they are left to themselves. Individuals act left to themselves. Individuals act rationally in their self-interest in markets rationally in their self-interest in markets that adjust rapidly to changing decisions.that adjust rapidly to changing decisions.

Schools of Thought in Schools of Thought in Macroeconomics: New KeynesianMacroeconomics: New Keynesian

Proponents include Franco Modigliani, Proponents include Franco Modigliani, James Tobin, and George AkerlofJames Tobin, and George Akerlof

Assumptions: markets do not clear even Assumptions: markets do not clear even when individuals look out for their own when individuals look out for their own interest because of imperfect information interest because of imperfect information and price rigidities and price rigidities

Asserts that government intervention can Asserts that government intervention can significantly improve the operation of the significantly improve the operation of the economy.economy.