Contents of Course u Module 1.fundamental concepts in Macroeconomics u Module 2.Measuring Economic Activity u Module 3.Consumption, Savings and Investment u Module 4.Employment theory. u Module 5.Inflation, deflation and unemployment. u Module 6. Monetary Policy: Money, Inflation and Central Banks. u Module 7. international trade(commerce).

Fundamental concepts in Macroeconomics Chapter 1

Economics Economics is the study of how society manages its scarce resources.

Scarcity... means that society has limited resources and therefore cannot produce all the goods and services people wish to have.

Society and Scarce Resources 4 The management of society’s resources is important because resources are scarce.

Society economic problem and scare resources u land ä natural resources, the “free gifts of nature” u labor ä Consists of the physical and intellectual services provided by human beings

Society economic problem: resources scarcity u capital ä plant and equipment u entrepreneurial ability ä Refers to the ability to organize production and risks

Resource payments Economic ResourceResource payment landrent laborwages capitalinterest entrepreneurial abilityprofit

Microeconomics and Macroeconomics u Microeconomics study of the behavior of individual decision-making units (households), and business firms.

Microeconomics and Macroeconomics u Macroeconomics Deals with the economy as a whole. Macroeconomics focuses on the determinants of total national income, with aggregates such as aggregate consumption and investment, and looks at the overall level of prices.

Macroeconomics concern Three of the major concerns of macro- economics are: Inflation: ■Inflation: An increase in the overall price level Output growth: ■Output growth: The total quantity of goods and services produced in an economy in a given period. Unemployment: ■Unemployment: condition of one who is able to work but unable to find work.

Government in macro economy u Economic policy: u Economic policy: Economic policy refers to the actions that government take in order to influence the economic activity. u The three kinds of policy that government has used to influence macro-economy are: 1. Fiscal policy 2. Monetary policy 3. Growth or supply-side policies

GOVERNMENT IN MACRO- ECONOMY u fiscal policy: Government policies concerning taxes and expenditures (spending). u monetary policy: The tools used by the monetary authority of a country to control the quantity of money in the economy.

The components of macro economy u Macroeconomics focuses on four groups: (1)households and (2)firms, which together compose the private sector, (3)the government (the public sector), and (4)the rest of the world (the international sector).

Aggregate Demand (AD)  Aggregate Demand :The total demand for goods and services in an economy (Y) at a given time and price level.

Components of Aggregate demand AD = C+I+G+(X-M) where u C is consumption (may also be known as consumer spending) u I is Investment spending, u G is Government spending, u NX is Net export, äX is total exports, and äM is total imports

Aggregate Demand Curve Real National Income AD Price Level

Nonprice determinants of AD u Anything that changes C, I, G, or X at a given price level will cause the AD curve to shift u Effects of: äExpectations (consumer and investor confidence) äForeign income and price levels äGovernment policy

Aggregate Supply (AS) In economics, aggregate supply is the total amount of goods and services that firms are willing to sell at a given price level in a national economy during a specific time period.

Aggregate Supply Curve Real National Income AS Price Level

Macroeconomic Equilibrium Real National Income AS AD Price Level P* Y*

Rate of exchange u In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency