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Topic 4 Macroeconomics

Macroeconomics studies the overall behavior and performance of economies, focusing on long-run growth and short-run fluctuations. Key indicators include Real GDP, unemployment rate, and inflation, which are interconnected and inform macroeconomic policies. Saving and investment are crucial for long-term growth, while economic shocks can lead to fluctuations in the business cycle.

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10 views10 pages

Topic 4 Macroeconomics

Macroeconomics studies the overall behavior and performance of economies, focusing on long-run growth and short-run fluctuations. Key indicators include Real GDP, unemployment rate, and inflation, which are interconnected and inform macroeconomic policies. Saving and investment are crucial for long-term growth, while economic shocks can lead to fluctuations in the business cycle.

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rpwbloom
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Economic

Development
(AC 2203)

T O PI C 4 - I N T R OD UCTION T O
M AC ROECONOMICS
S.Y. 2024-2025 SECOND SEMESTER
What is Macroeconomics?
Macroeconomics is a branch of economics that studies the
behavior and performance of an economy as a whole rather
than on individual markets. It examines large-scale economic
factors and issues.

It seeks to answer important questions such as why some


countries are wealthy while others are not, why do economies
experience booms and recessions, and how governments can
improve economic performance and living standards.

These questions are explored through two primary areas: Long-


run economic growth – How economies increase their output
over time; and Short-run economic fluctuations – How business
cycles affect output and employment.
Three Key Economic Indicators
➢ Real GDP (Gross Domestic Product)
• Measures the total value of final goods and services produced within a
country.
• Adjusted for inflation to accurately reflect economic growth.
• Higher GDP indicates better economic performance.
➢ Unemployment Rate
• Measures the percentage of people actively looking for jobs but unable
to find one.
• High unemployment means underutilized resources and lost potential
output.
• Unemployment is linked to social problems like crime and poverty.
➢ Inflation
• Represents the overall increase in price levels.
• Reduces purchasing power, especially if wages do not increase
accordingly.
• Unexpected inflation erodes savings and creates economic uncertainty.
Interconnectedness of the 3 Indicators
• Business Cycle Dynamics. The relationships among GDP, inflation, and
unemployment are often illustrated through a trade-off between inflation and
unemployment in the short run. For example, low unemployment may
accompany higher inflation as demand for goods and services increases.

• Policy Formulation. These three indicators are interdependent; for example, if


GDP growth accelerates and leads to reduced unemployment, inflation may
eventually rise, prompting central banks to adjust interest rates to stabilize
prices.

• Macro Policy Objectives. Economists focus on these metrics to inform


macroeconomic policies aimed at managing growth, controlling inflation, and
reducing unemployment. By monitoring these indicators, governments can
implement fiscal and monetary policies aimed at promoting sustainable
economic health.
The Role of Saving and Investment
✓ To achieve long-term growth, economies must:
• Save
• Consume less today to set aside resources for the future.
• Invest
• Use saved resources to develop new technologies,
infrastructure, and capital.

✓ Financial Institutions' Role:


• Banks, stock markets, and investment funds channel household
savings into business investments.
• A well-functioning financial system supports economic stability
and growth.
How Saving and Investment
Impact Future Living Standards?
▪ More capital goods → Higher productivity
-Investment in better machinery and technology makes
workers more productive.
-This results in higher wages and improved standards of
living.
▪ More infrastructure → Economic expansion
-Roads, ports, and communication networks enhance
trade and efficiency.

▪ More research and development → Innovation


-Investment in new technologies leads to cheaper and better
products.
Economic Shocks and Short-Run Fluctuations
• Economic fluctuations are driven by unexpected events (shocks).
1. Demand Shocks – Sudden changes in consumer demand.
2. Supply Shocks – Unexpected disruptions in production.

• Price Stickiness (why firms don’t always change prices immediately).


1. Consumers prefer stable prices.
2. Firms avoid price wars with competitors.
3. Wages are "sticky" because cutting wages demotivates workers.

• Impact of Sticky Prices on the Economy.


1. When demand unexpectedly drops, businesses reduce output
and lay off workers instead of lowering prices.
2. This leads to business cycle fluctuations like recessions.
Prices Vary in Stickiness Across
Different Industries

Very sticky

Moderately sticky

Moderately sticky

Somewhat flexible

Somewhat flexible

Very flexible
The Role of Financial Institutions
• Households are the primary source of savings.

• Businesses are the primary source of investment.

• Banks and other financial institutions (such as mutual funds,


pension funds, and insurance companies) act as intermediaries,
channeling household savings into productive investments.

➢ Impact
• A well-functioning financial system ensures that savings
are directed toward the most productive investments,
helping to sustain long-term economic growth.
• A poorly functioning financial system can slow growth by
failing to efficiently allocate savings.
Economic Investment vs. Financial Investment
• Economic Investment- Spending on new capital goods,
infrastructure, and technology, which directly increases productive
capacity.
• Financial Investment- The purchase of stocks, bonds, or real estate
for personal financial gain, which does not necessarily contribute to
economic growth.

Why Economic Investment Matters More for Growth?


• While financial investment may benefit individuals, it does not
directly increase future output.
• Economic investment increases an economy’s productive capacity,
leading to higher incomes and better living standards over time.

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