Macroeconomic Fundamentals PDF

MACROECONOMIC FUNDAMENTAL Macroeconomics goal and instrument Macroeconomics is a study on the behavior about the entire economy. It evolves around the business cycle which includes GDP, unemployment and inflation as well as long term trends in output and living standards. Macroeconomic go...

MACROECONOMIC FUNDAMENTAL Macroeconomics goal and instrument Macroeconomics is a study on the behavior about the entire economy. It evolves around the business cycle which includes GDP, unemployment and inflation as well as long term trends in output and living standards. Macroeconomic goals Output growth. Sustainable income due to sustainable production in goods and services. Employment. Full employment. No wastage in resources. Reduce involuntary unemployment. Stability in prices. Balanced in export and import to maintain exchange rate stability. Output growth The ultimate aim of macroeconomics is to experience growth in output. The economy will be able to produce the goods and services desired by the population. Or it can be referred as economic growth where output produced based on demand where it creates employment and increases standard of living due to increase purchasing power. Economic growth is measured using the percentage increase in GDP percapita.(GDP/ saiz of population) or the percentage increase in real GDP. (Nominal GDP adjusted by price) GDP Total value of goods and services produced within a time period usually in 1 year. Nominal GDP is the value of goods and services measured using the actual price. Real GDP is the deflated value of goods and services measured using the stable price. Potential GDP is the long term GDP potentially can be produced with the available resources and a stable price. Methods to calculate GDP Expenditure Approach. Consumer Expenditure Investment Government Expenditure Export Import __________________________________________________________ Gross Domestic Expenditure at market price Net property income from abroad Gross National expenditure at market price - Tax - + Subsidy Gross National Expenditure at factor cost Methods of calculating GDP Output method Agriculture Manufacturing Service Others __________________________________________________________ Gross Domestic Product at market price. Net property income from abroad Gross National Product at market price -Tax + Subsidy Gross National Product at factor cost. Methods in calculating GDP Income method Rent Wages Profit __________________________________________________________ Gross Domestic Income at factor cost Net property income from abroad Gross National Income at factor cost Question Is GDP a good indicator to measure the standard of living in a country? Discuss. Employment Unemployment is the fraction of labour force who is willing to work and is able to work but cannot find jobs. There are many types of unemployment, technological unemployment, seasonal unemployment, structural unemployment and cyclical unemployment. Labour force are those who are employed and unemployed between 16 to 64 years old. Underemployment are those who are performing or working in a job not related to their academic qualification or expertise. Question What is the impact of unemployment in the economy? Stable Price Price stability determines the economic value of goods and services. When there is a general increase in the price of goods and services, inflation. ( The rate of inflation increases) Sometimes there is a decrease in the rate of inflation, it is known as dis inflation. Deflation is a decrease in the general price level. CPI Consumer price index is an index used to measure the changes in price level on certain goods and services consumed by the population. If the value of index is above 100, it is inflation. If the value of index is below 100 it is deflation. (Current price index-Previous price index)/ Previous price index X 100 Inflation is an indicator on mismanagement of resources, leakages (bribery), cost of living, unequal distribution of income and low purchasing power in the economy. International trade International trade has become increasingly important. International trade deals with export and import of goods, services, capital mobility, lending and borrowing. When export is greater than import, the trade is in surplus. The exchange rate will appreciate. When import is greater than export, there is a trade deficit. The exchange rate will depreciate. Exchange rate appreciation can increase the value of export. We can buy more imported goods from the sale of export which is known as favourable term of trade. Exchange rate depreciation can increase the value of import. We can buy less imported goods from the sale of export which is known as unfavourable term of trade. Balance of payment Balance of payment is the summary of transaction between one country and the rest of the world. Current account. It deals with visible and invisible goods. Capital account. It deals with short term capital and long term capital. Short term capital is distinguished into savings and investment meanwhile long term capital looks into inflow and outflow of FDI. Error and omission. Reserve consists of assets, foreign currency. When money is withdrawn from reserve it is called special drawing rights. The value will be positive and vice versa. Macroeconomic instruments Fiscal policy. It is the use of government expenditure and tax to influence aggregate demand and supply. Government expenditure refers to expenditure made by government to buy goods and services, construction and the salary of civil servants. Taxation can be divided into direct and indirect tax. Direct tax is income tax. The higher the income the higher the amount of tax paid. Indirect tax is paid by the customer to the supplier which goes indirectly to government. Taxation is a source of income for the government. Fiscal Policy. When government spends more than it collects in the form of tax, it is called expansionary fiscal policy. It helps to expand the economy through consumption. When tax collected is more than government spending, it contracts the economy. Thus it is called contractionary fiscal policy. Tax is a leakage and government expenditure is an injection. Monetary policy Monetary policy is an instrument used to control the money supply in the country using monetary tools. The amount of money supply in the market can maintain price stability. Monetary policy can be distinguished into expansionary and contractionary. Expansionary monetary policy can increase money supply through decreased savings rate, reduced lending rate, moratorium and less reserve. Contractionary monetary policy can decrease money supply by increasing savings rate, decreased lending rate, no moratorium and more reserve. Monetary policy The effectiveness of the monetary policy can be seen using the monetary transmission channels. There are 4 important channels. The money channel, the credit channel, the interest rate channel and the exchange rate channel. The money channel looks at how expansionary or contractionary of money supply has an impact on ÀD. If there is an impact, money is not neutral but if there is no impact, money is neutral. The impact can also be measured for the short run and long run. The credit channel now looks at money as a credit. Whether it increases the value of the firm or influences the net worth of the firm. Monetary policy The interest rate channel overlooks the option of shifting the demand for assets from the capital market to the money market and vice versa. The exchange rate channel looks into the inflow of fund or money due to return on investment and also cost of buying goods. International trade policy Trade policies like embargo, quota, tariff and so on Exchange rate setting policy. Income Policy Government attempts to moderate the impact of inflation through subsidy, price control and also minimum wage. It is the most controversial policy.