Introduction to Macroeconomics Chapter 1 Introduction to Macroeconomics 1. 1 INTRODUCTION • • • • • • • Economics is divided into two main branches: microeconomics and macroeconomics. Macro means large, and micro means small. Microeconomics takes a close-up view of the economy by concentrating on the choices made by individual participants in the economy such as consumers, workers, business managers and investors. Microeconomics stresses on the role of prices in business and personal decisions. One of its major goals is to understand how prices of particular goods and services are determined and how prices influence decisions.
Because of this reason, microeconomics is sometimes called price theory. Macroeconomics looks at the economy from a broader perspective by considering its overall performance. It is the study of aggregate economic activity. Aggregate economic activity is the performance of the economy as a whole – the economy in the aggregate. Examples are people’s incomes and living standards, unemployment; inflation – rising prices – and changes in the value of money. Examples of Differences between Micro and Macro: Micro The study of smaller scope Individual decision making units
Household income Production of particular product Individual prices Attention to specific units Macro The stud of bigger scope Aggregate decision National income National output/product Overall general price level Units as an Aggregate Introduction to Macroeconomics 1. 2 OBJECTIVES OF CONVENTIONAL MACROECONOMICS They are as follows: ? To achieve full employment ? To achieve price stability ? To achieve economic growth ? To achieve equilibrium in foreign sector ? To achieve equitable distribution of income (a) To Achieve Full Employment • • •
The more fully resources are employed, the greater the level of output of goods and services and higher standard of living. High unemployment causes poverty. People become dissatisfied with the government and this will lead to political upheaval. Standard of living worsens. Increased crime and even violent revolution can result from failure to attain the macro economic goal of full employment. Unemployment in the economy means that existing factors of production are not used to produce goods and services. This results in ultimate inefficiency and wastage to the country.
Unemployment Rate – Definition: The percentage of labor force that is out of work and seeking jobs or a temporary layoff. Thus, full employment is a situation in which unemployment exists only because of normal market adjustments to changing demand or supply or outmoded skills of workers. This is sometimes called the natural rate of unemployment. (b) To Achieve Price Stability (Control Inflation Rate) • A situation of no inflation or deflation in the economy. This means that there is no overall change in the level of prices of goods, services and resources.
Three main problems associated with inflation are: i) Redistribution effects. ii) Uncertainty about future prices iii) Money loses its function as a medium of exchange. (c) To Achieve Economic Growth • Rate of economic growth is defined as the percentage increase in output over a twelve-month period. Economic growth refers to the growth of real Gross National Product (GNP). Real (GNP) is a measure of the quantity of the income of all the individuals in the economy – a measure of living standard. Introduction to Macroeconomics • • • Economic growth can be classified as actual and potential.
Actual growth the growth in what is actually produced. When statistics on growth rates are published, it is actual growth they are referring to. Potential growth is the speed at which the economy could grow, if it were to use all its resources. Two major factors contributing to potential economic growth are: i. An increase in resources ii. An increase in the efficiency, with which these resources are used, through advances in technology, improved labor skills or improved organizations. Differences in growth rates of real GNP produce large differences in living standards between countries.
The cycle of booms and recessions is known as the trade cycle or business cycle. (d) To Achieve Equilibrium in Foreign Sector • A country will try to get an overall surplus balance of payment (more money coming in than money going out). If we have a deficit, this means that the country will have to borrow from abroad or attract deposits from abroad. This results in paying high interest rates and increasing country’s debt. • Macroeconomics tries to understand what determines the scale and balance of our international economics transactions – our international balance of payments. e) Equitable Distribution of Income • Most countries/government seeks to narrow the range of the size distribution of income, reducing the incomes of those at the upper end and raising the incomes of those at the lower end. Methods to change the size distribution of income are: • Tax policy - The most effective is progressive taxation. • Expenditure policy - This includes subsidies, transfer payment and educational scheme. The benefits received tend to vary with income. Many transfer payments benefit lower income group. Other expenditures such as higher education tend mainly to benefit middle-income groups. . 3 OBJECTIVES OF ISLAMIC MACROECONOMICS. In an Islamic economic system, the basic policy objectives are: ? ? ? ? To achieve social justice and distribution of income and wealth Universal education To achieve optimal rate of economic growth To maximize employment generation (a) To Achieve Social Justice in Distribution of Income and Wealth Introduction to Macroeconomics • • a. b. • Islamic Economy (definition): A science that studies about human behavior in using or organizing resources for man’s needs of society in order to get blessing of the almighty Allah.
The economic doctrine of Islam is very well reflected in its concepts of TAUHID. According to Al-Quran, this concept of TAUHID encompasses two integrated aspects: The relationship between man and man (Hablunminannaas) The relationship between man and his Creator or God (HablumminaAllah) The economic agents in an Islamic society believe in the following philosophic foundations: i. Rububiyyah -Belief that Allah alone determines the sustenance and nourishment of His creation and will direct those who believe in Him towards success. ii. Khalifah -Is man’s role as God’s vicegerent on earth. iv. Tazkiyyah - Refers to the growth and purification of man as a necessary prerequisite before man undertakes the responsibilities laid out to him iv. - Ukhwah The principles of ukhwah or brotherhood has many aspects which gives the Muslim society an active and positive quality and the character of equality and cooperation. Based on these philosophic foundations, some of the features of an Islamic economic system can thus be summarized as follows: 1.
All economic decision undertaken as to earn the approval of Allah. 2. The objectives of the economic agents is to achieve al-falah (definition: Prosperity/success in this world and in the hereafter) rather that maximizing one’s Own self-interest. 3. The concept of private ownership in an Islamic Society is in line with man’s role as the vicegerent of God. 4. An Islamic economy is different from the other economic system as it calls for institutional set up and a unique government to achieve the goals of the Islamic society. 5.
Haram goods and services are not produced in an Islamic economy. Thus, the consumption basket of a Muslim is smaller than that of non-Muslim. (b) Universal Education Introduction to Macroeconomics • To acquire knowledge is obligatory in Islam. Thus every child, irrespective of his birth must receive an equal opportunity to education. Thus in an Islamic economy, government must subsidize or provide free of charge education so hat education can equalize man who are endowed differently in terms of wealth and property. (c) To Achieve Optimal Rate of Economic Growth Economic growth an Islamic economy is quantitatively different from the conventional perspective, as it is more comprehensive in its concept. It will emphasize more on human capital information and include the moral, spiritual and material aspects of man’s life. (d) To maximize Employment Generation. • An Islamic government must ensure that economic growth results in a “maximum” contribution to the creation of new employment opportunities. However, additional employment created must be in the long run & be generated in a technically efficient fashion.
Thus, research must be done to evolve a suitable technology in line with each individual country’s resource endowment. Education with emphasized on technology and scientific knowledge should be implemented. 1. 4 TOOLS OF STABILIZATION POLICY i. Fiscal Policy - Uses variations in the levels of government purchases of goods and services (Government expenditure) and taxes to influence the state of the economy. ii. Monetary Policy - Uses variations in the nation’s money supply and in interest rates to influence the state of the economy. ii. Direct Control - Are specific laws, rules and regulations designed to modify the way people behave. Direct controls stem form laws passed by the government. Stabilization Policy Goals The goals of stabilization policy are called macroeconomics policy targets. These targets are generally agreed to include: i. ii. iii. iv. A high and sustained growth rate of real income (GNP) A low unemployment rate Mild fluctuations n the growth rate of real income and the unemployment rate A low inflation rate