College of Business – Rabigh HBC608HBC608 ECON582 HBC608 FINA 353 Principles of Macroeconomics Lecture 1 Topic 1: Introduction Topic 2: Circular Flow Topic 3: Macroeconomic Goals College of Business – Rabigh Dr. Mazharul Islam Finance NotesFinance notes Finance notes 1

Lesson Plan Introduction – (Me and You)-15 minutes ECON582 Lesson Plan Introduction – (Me and You)-15 minutes Overview of the Course – 15 minutes Introduction to Economics - 50 minutes Circular Flow – 50 Minutes Macroeconomic Goals – 20 Minutes Dr. Mazharul Islam

Teaching Methods & Assessment Lectures (interactive) Class Exercise Text Book (Parkin, Macroconomics : 10th edition, Pearson) Other References (McConnell and Brue, Economics : Principles, Problems and Policies 16th edition, McGraw-Hill 2002) Individual and Group assessments – Class participation (10%) – Home work (20%) – Quiz (10%) – Midterm exam (20%) – Final Exam (40%) http://www.kau.edu.sa/DRS-0061123.aspx Dr. Mazharul Islam

Lesson Objectives To provide you with information about To learn about HBC608HBC608 HBC608 ECON582 Lesson Objectives To provide you with information about The Topics that we shall cover in this course The learning teaching and assessment arrangements for this course. To learn about the key tools and terms of economics that is essential to know to understand economics clearly. how an economy works –Circular Flow Model Macroeconomic Goals Dr. Mazharul Islam Finance NotesFinance notes Finance notes 4

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics ECONOMICS It is the social science concern. It is a study of how people use their scarce resources to satisfy their unlimited wants. It is categorized mainly into two parts such as Macroeconomics and Microeconomics MICROECONOMICS Microeconomics is the study that deals with an individual industry, firm or household. It means it talk about individual decision maker. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 5

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics MACROECONOMICS: It is a study that examine the economy as a whole. It means that it is concerned with the overall performance of the economy Such as it does not discuss about the market for Al Baik but about the market for everything produced in the economy; not about the price of Al Baik but about the average price of all goods and services produced in the economy. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 6

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics ECONOMIC PROBLEM Basic economic problem is wants are virtually unlimited while the resources available to satisfy these wants are scarce. SCARCITY Lack of enough resources to satisfy our all desired uses of those resources. Resource are scarce when they are not freely available  alternatively we can say when its price exceeds zero Dr. Mazharul Islam Finance NotesFinance notes Finance notes 7

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics SCARCITY Since human and property resources are scarce, it follows that the goods and services we produce must also be limited. CHOICE Due to scarcity, we can’t have all that we want. We must decide what we will have, and what we must forgo. That is why we make choices. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 8

Key Tools & Terms of Economics HBC608HBC608 ECON582 HBC608 Key Tools & Terms of Economics TWO BIG ECONOMIC QUESTIONS How do choices end up determining what, how, and for whom goods and services get produced? When do choices made in the pursuit of self-interest ? Dr. Mazharul Islam Finance NotesFinance notes Finance notes 9

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics What, How, and For Whom? Goods and services are the objects that people value and produce to satisfy human wants. What? In 2011, Agriculture accounts for 2% of total Saudi Arabian production, Industry goods for 69.1%, and Services for 28.9% (Source: CIA World Factbook 2012). Dr. Mazharul Islam Finance NotesFinance notes Finance notes 10

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics How? Goods and services are produced by using productive resources that economists call factors of production. Factors of production are grouped into four categories: Land Labor Capital Entrepreneurial Ability Dr. Mazharul Islam Finance NotesFinance notes Finance notes 11

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics LAND It does not refer only a plots of ground but also includes all other natural resources such as crude oil, water, air, and minerals etc. LABOR It is not simply the number of human bodies but it refers to the work time and work effort that people devote to producing goods and services. It categorized into two parts– physical and mental (9.56 millions out of 26.53 millions in 2010 where about 80% of the labor force is non-national - Source: CIA World Factbook 2012). Dr. Mazharul Islam Finance NotesFinance notes Finance notes 12

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics CAPITAL In economics the term capital refers to final goods produced for use in further production. It also categorized into two parts. These are: Physical capital: factories, machines, tools, buildings, airports, highways and other manufactured items employed to produce goods and services. Human capital: consists of the knowledge and skill people acquire to enhance their labor productivity. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 13

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics ENTREPRENEURIAL ABILITY Special kind of human skill Talent required to dream up a new product or find a better way to produce an existing one. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 14

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics PAYMENTS FOR RESOURCES Wages  payment for use of labor Interest  payment for the use of capital Rent  payment for use of land Profit  reward for entrepreneur’s effort Dr. Mazharul Islam Finance NotesFinance notes Finance notes 15

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics FOR WHOM? Who gets the goods and services depends on the incomes that people earn. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 16

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics When is the Pursuit of Self-Interest? Economics assumes that human behavior reflects “rational self-interest”. It means that people always try to make the best choices they can, given the available information. Moreover, Individuals try to maximize the expected benefit achieved with a given cost or minimize the expected cost of achieving a given benefit. Peoples allocate their time, energy, and money to maximize it. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 17

Key Tools & Terms of Economics HBC608HBC608 HBC608 ECON582 Key Tools & Terms of Economics GOODS AND SERVICES Goods Tangible items Require scarce resources Satisfy human wants Services Intangible items Dr. Mazharul Islam Finance NotesFinance notes Finance notes 18

HBC608HBC608 HBC608 ECON582 Circular-Flow Model The interaction between four decision makers (Households, Firms, Government, and Rest of the world) and two broad markets (Goods/Products, and Resources/Factors) can be conveyed by the circular flow model. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 19

Circular-Flow Model Dr. Mazharul Islam ECON582 HBC608 HBC608HBC608 Circular-Flow Model Households supply resources in the resource market and demand goods and services in the product market Firms supply goods and services in product market and demand resources in the resource market Money flows in resource market determine wages, interest, rents, and profits which flow as income to households Product markets determine the prices for goods and services which flow as revenue to firms Dr. Mazharul Islam Finance notes Finance NotesFinance notes 20

CIRCULAR FLOW MODEL $ COSTS $ INCOMES RESOURCES INPUTS GOODS & MARKET RESOURCES INPUTS BUSINESSES HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

Circular-Flow Model Households HBC608HBC608 HBC608 ECON582 Circular-Flow Model Households As consumer, households demand the goods and services produced. As resource owners they supply labor, capital, land, and entrepreneurial ability to firms, governments, and the rest of the world Firms, governments, and the rest of the world Demand the resources Supply the goods and services Rest of the world  foreign households, firms and governments Dr. Mazharul Islam Finance NotesFinance notes Finance notes 22

Circular-Flow Model Product/Goods markets HBC608HBC608 HBC608 ECON582 Circular-Flow Model Product/Goods markets Markets in which goods and services are bought and sold. Resource/Factors Markets Markets in which the resources are exchanged Labor, or job market is the most important of the resource markets. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 23

Circular-Flow Model MARKET HBC608HBC608 HBC608 ECON582 Circular-Flow Model MARKET Means by which buyers and sellers carry out exchanges Bring together the two sides of exchange to determine price and quantity by providing information about the quantity, quality, and price of products offered for sale. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 24

ECONOMIC GOALS What are our goals and objectives?

MACRO ECONOMIC GOALS Economic Growth Full Employment Economic Efficiency Price-Level Stability Economic Freedom Equitable Distribution Economic Security Balance of Trade

Macroeconomic Goals Economic Growth HBC608HBC608 HBC608 ECON582 Macroeconomic Goals Economic Growth Produce more and better goods and services. It could be positive or negative. If the output deference between last year and current year is positive it means positive growth if negative means negative growth. Full Employment Provide suitable jobs for all citizens who are willing and able to do work. It does not mean zero unemployment. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 27

Macroeconomic Goals Economic Efficiency HBC608HBC608 HBC608 ECON582 Macroeconomic Goals Economic Efficiency Achieve maximum output by using limited available resources. Price-Level Stability Avoid upswings and downswings in the general price level; that is avoid inflation and deflation. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 28

Macroeconomic Goals Economic Freedom HBC608HBC608 HBC608 ECON582 Macroeconomic Goals Economic Freedom Government’s guarantee to businessman, workers and consumers to have a high degree of freedom in their economic activities. Equitable Distribution Ensure that no group of citizens faces poverty while ,most others enjoy large wealth. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 29

Macroeconomic Goals Economic Security HBC608HBC608 HBC608 ECON582 Macroeconomic Goals Economic Security Provide benefits for those who are chronically ill, disabled, laid off, aged, or otherwise unable to earn minimal levels of income Balance of Trade Seek reasonable overall balance with the rest of the world in international trade and financial transactions. Dr. Mazharul Islam Finance NotesFinance notes Finance notes 30

Now it’s over for today. Do you have any question? HBC608 ECON582 HBC608HBC608 Now it’s over for today. Do you have any question? Dr. Mazharul Islam Finance NotesFinance notes Finance notes 31