Introduction to

Macroeconomics
 1.
Branches of &
Approaches to
Economics
 Quiz no. 1 AE 104
Identify the relationship of the following pairs of variables.
Write letter D if the variables are directly related or I if
inversely related.
1. Inflation Rate and Consumption Level
2. Tax Rate and Consumption level
3. Tax exemption and consumer purchasing power
4. Inflation Rate and Savings
5. Tariff Rate and Consumption
6. tax reforms and government revenue
7. Money supply and Price level
8. Interest rate and investment level
9. Employment Rate and Consumption
10. Interest Rates on Deposit and Savings
 Quiz no. 1 AE 104
: Identify what ECONOMIC SYSTEM corresponds to
the following statements. Write

A- if it refers to Traditional Economy

B- if Free Market Economy
C- if Command Economy
D- if Mixed Economy

1. Cuba
2. United States of America
3. Japan
4. Sweden
 Quiz no. 1 AE 104
5. Market processes serve as signals to the
producers about what goods to produce and
how much of these goods should be produced.

6. The system works under the principle that the

interest of society should prevail over that of
the individual.

7. Production decisions are made according to

customs and traditions.
 Quiz no. 1 AE 104
8. Any individual can engage in any enterprise in
which he thinks will yield him a profit in
competition with other businesses.

9. A central planning agency dictates on what to

produce, how to produce and for whom to
produce

10. The private capitalist and the government

play a major role in solving the basic problems of
the economy for the benefits of the consumers
 Quiz no. 1 AE 104
Identify what BRANCH/ APPROACHES OF
ECONOMICS corresponds to the following words /
phrases / sentences. Write:
A- if it refers to Microeconomics
B- if it refers to Macroeconomics
C- if Normative
D- if Positive

1. The real gross domestic product (GDP) should

grow between 1.8 to 2.8 percent in the first quarter
of this year.
2. a household’s decision about what to buy

6. a worker’s decision regarding how much to

 Quiz no. 1 AE 104
4. The unemployment is slightly higher than last
year.
5. price of fuel in the world market
6. Philippine’s inflation for the first four months in
2018 reached 6.4 percent, slightly higher than the
previous year’s 6.2 percent.
7. designing a corporate policy to increase
employment
8. Gross National Product
9. labor force and employment
10. The real gross domestic product (GDP) should
grow between 1.8 to 2.8 percent in the first quarter
of this year.
 Approaches: Study of
Macroeconomics
1. Macroeconomic Problems
2. Macroeconomic Theories
3. Macroeconomic Policies
4. Different Views of How the economy works
 Macroeconomic Problems

1. High inflation rate

2. High unemployment rate
3.High interest rate
4.Low economic growth
What is the cause of the problem?
What needs to be done to end the problem?
 Macroeconomic Theories

Attempt to explain such things as changes in

the price levels, changes in unemployment,
changes in interest rates, and so on.
Note: Keep in mind that not all
macroeconomists agree on the causes of
certain macroeconomic problems.
 Macroeconomic Policies
To solve macroeconomic problems,
economists often propose certain types of
policies.
Example:
1. Propose cutting tax rates to revive the
economic growth (Fiscal Policy)
2. Cutting growth rate in the money supply to
lower prices (Monetary Policy)
Different views of how the economy
works
Some economists believe that the economy is
inherently stable and self-regulating.
Some economists do not believe the economy
is self-regulating. There are forces within it
that can cause it to get “ill” on its own.
Macroeconomics studies the economy as a whole
or its aggregates.

It seeks to obtain an overview, or general outline,

of the structure of the economy and the
relationships of its major aggregates.

Macroeconomics is also known as the “Theory of

the Economy” .
It speaks of total output, total
employment, total income, aggregate
expenditures, general level of prices,
trade performance with other
countries, relative success or failure
of government economic policies,
money flows and movement of goods
and service
Macroeconomics vs. Microeconomics

Macroeconomics
- branch of economics that studies how the
aggregate economy behaves

Microeconomics
- branch of economics that analyzes the
market behavior of individual consumers and
firms in an attempt to understand the
decision-making process of firms and
households
 Branches of Economics
Macroeconomics Microeconomics
• studies national income • studies individual income
• analyzes total • analyzes demand and
employment in the supply of labor
economy • deals with households
• deals with aggregate and firms decisions
decisions • studies individual prices
• studies overall price level • analyzes individual
• analyzes aggregate demand and individual
demand and aggregate supply
supply
Approaches to Economics

Positive Economics Normative Economics

- Studies the way the world - Studies the way the world
is: “what is” of economics should be: “what ought to be”
- Factual, objective and is - Subjective and judgmental
used to describe the
occurrence of a
phenomenon
- Usually quantified - Far more difficult to quantify
- More descriptive than - More predictive than
predictive in its usage descriptive in it usage
 2.
Economic Systems
Economic Systems

The economy is a system for coordinating a

society’s productive and consumptive activities.

Due to scarcity, every economic system in the

world, past and present, has to answer these
questions:
• What should be produced?
• How will society produce it?
• For whom should society produce?
Traditional Economic System

• People produce goods and services for their

own consumption
• Decisions are based on customs and traditions
• Allocation of scarce resources stems from
ritual, habit, or customs
Market Economic System

• Production, distribution, pricing, and investment

decisions are made by the private owners of
the factors of production based upon their own
interests.
• Business enterprises are owned and controlled
by private individuals.
• Inherent in a market is freedom from
government control.
Command Economic System
• Central government makes all decisions on the
production and consumption of goods and
services.
• Central government controls all major sectors
of the economy and formulates all decisions
about their use
• Government decides what should be produced
and direct enterprises to produce those goods
• Works based on the interest of the country and
not of the individual
Command Economic System

Socialism
• an economic system based on government
ownership of property and control of economic
decisions but where most small or nonessential
enterprises remain privately owned
Mixed Economic System

• Incorporates a mixture of private and

government ownership or control, or a mixture
of market and command economy.
• The private capitalist and the government play
a major role in solving the basic problems of the
economy for the benefits of the consumers.
• The government sets laws and rules that
regulate economic life, produces educational
and police services and regulates pollution and
business.
 3.
Business
Cycle
Business Cycle
A business cycle is the periodic but irregular
up and down movements in economic activity,
measured by fluctuations in real GDP and
economic growth.
Business Cycle
Some factors:
• Changes in interest rates
• Consumer confidence
• Business confidence
• Fiscal policy
 4.
Inflation and
Hyperinflation
Inflation
• It is a rise in the general level of prices of goods and
services in an economy over a period of time. When
the general price level rises, each unit of currency
buys fewer goods and services.

• Inflation also reflects an erosion in the purchasing

power of money – a loss of real value in the internal
medium of exchange and unit of account in the
economy.
Causes of Inflation
Cost-push inflation: results from shocks to
aggregate supply (e.g., increase in the price of oil or
steel)
Causes of Inflation
Demand-pull inflation: results from shocks to
aggregate demand (“Too much money chasing too
few goods.”)
Hyperinflation
• If inflation gets totally out of control (in the upward
direction), it can grossly interfere with the normal
workings of the economy, hurting its ability to supply
goods.

• Hyperinflation can lead to the abandonment of the

use of the country's currency, leading to the
inefficiencies of exchange.
Measures of Inflation
• Inflation is usually estimated by calculating the
inflation rate of a price index, usually the Consumer
Price Index.

• The Consumer Price Index measures prices of a

selection of goods and services purchased by a
"typical consumer". The inflation rate is the
percentage rate of change of a price index over
time.
Consumer Price Index
The computation of the CPI involves consideration of
the
following important points:

• Base Period. Since the CPI measures the average

changes in the retail prices of a fixed basket of
goods, it is necessary to compare the movement in
prices in the current year to movements in previous
years back to a reference date at which the index is
taken as equal to 100.

• Market Basket. A fixed list of commonly purchased

items used to track inflation.
Consumer Price Index
Steps involved in measuring the CPI:

• Survey consumers to determine the relevant

“basket of goods”.
• Record the price of each good in each year.
• Compute the cost of the basket in each year.
• Choose a base year and compute the CPI for the
current year.
• Compute the inflation rate as the percentage
change in the CPI from one year to the next.
Consumer Price Index
The value of the CPI for any other period is calculated
by
taking the ratio of the current cost of a market basket
of
goods to the cost of the same market basket of goods
in
the reference base period and multiplying by 100.

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑒𝑟𝑖𝑜𝑑

𝐶𝑃𝐼 = 𝑥100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑚𝑎𝑟𝑘𝑒𝑡 𝑏𝑎𝑠𝑘𝑒𝑡 𝑖𝑛 𝑏𝑎𝑠𝑒 𝑝𝑒𝑟𝑖𝑜𝑑
Consumer Price Index
Market Base Base Base
Basket Year Year 2011 Year 2012
2010
2010 P 200
2011 P 400
2012 P 500
Consumer Price Index
Market Base Base Base
Basket Year Year 2011 Year 2012
2010
2010 P 200 100 50 40
2011 P 400 200 100 80
2012 P 500 250 125 100
Consumer Price Index
The main purpose of the CPI is to measure inflation.

The inflation rate is the percentage change in the

price level from one year to the next.

𝐶𝑃𝐼𝑇ℎ𝑖𝑠 𝑌𝑒𝑎𝑟 − 𝐶𝑃𝐼𝐿𝑎𝑠𝑡 𝑌𝑒𝑎𝑟

𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = 𝑥 100
𝐶𝑃𝐼𝐿𝑎𝑠𝑡 𝑌𝑒𝑎𝑟
 5.
Unemployment
Unemployment
 Unemployment is a macroeconomic problem.
Loss of job

reduced living standard

psychological distress
 Economists study unemployment to identify its
cause and to help improve the public policies that
affect the unemployed.
 All free-market economies experience some
unemployment.
Unemployment
Who is the unemployed?
 includes people who were not employed, were
available for work, and had tried to find employment
during the previous 4 weeks, as well as those who
were temporarily laid off and waiting to be recalled
𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 = 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 +
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 = 𝑥 100
𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒
 Types of Unemployment
a. Frictional unemployment
- temporary for an individual, but is ongoing within the
economy as a whole
- caused by people moving in between jobs
- probability of getting a job is high in a developed
economy and this lowers the probability of frictional
unemployment
 Types of Unemployment
b. Structural unemployment
- occurs due to the structural changes within an
economy
- occurs when there is a mismatch of skilled workers
in the labor market
o geographical immobility
o occupational immobility
o technological change
 Types of Unemployment
c. Seasonal unemployment
- caused by seasonal shifts in the labor supply and
demand

d. Cyclical unemployment
- occurs due to fluctuations in the business cycle
 Unemployment
Why is there unemployment?
a. Job Search
- process by which workers find appropriate jobs
given their tastes and skills
b. Wage Rigidity
- failure of wages to adjust until labor supply equals
labor demand
- wages are inflexible
- caused by minimum wage laws, monopoly power of
unions, efficiency wages
Reasons for Unemployment
1. JOB LOSER- person employed in the civilian
labor force and was either laid-off or fired
2. JOB LEAVER- employed by the civilian labor
force who quits his job.
3. Re-entrant- person previously employed, has not
work for sometime and currently re-entering the
labor force.
4. New Entrant- person who never held s full time
job for two weeks or longer and is now in the
civilian labor force looking for a job.
 Discouraged Workers
• Those who stop looking for a job, not counted in the
unemployment rate
• People whose income is primarily from illicit activities
could be categorized as discouraged workers.
 Full Employment
• Full employment is the level of employment where
there is no cyclical unemployment.
• Full employment does not necessarily mean zero
unemployment.
• A 4%-6% unemployment rate is considered full
employment.
 Inflation and Unemployment
• In the long run, inflation and unemployment are
unrelated:
o The inflation rate depends mainly on growth in the
money supply.
o Unemployment depends on the minimum wage, the
market power of unions, efficiency wages, and the
process of job search.
• In the short run, society faces a trade-off between
inflation and unemployment.
 The Phillips Curve
• 1958: A.W. Phillips showed that nominal wage growth
was negatively correlated with unemployment in the U.K.

• 1960: Paul Samuelson & Robert Solow found a negative

correlation between U.S. inflation and unemployment;
named it “the Phillips Curve”.
The Phillips Curve

• The Phillips curve is a curve that shows the

short-run tradeoff between inflation and
unemployment.