What Macroeconomics is about Structure and performance of national economies Policies that governments formulate and use to affect economic performance.

What Macroeconomics is aboutStructure and performance of national

economiesPolicies that governments formulate and use

to affect economic performance Some notable issues that macroeconomics

addresses: Sources of growth Reasons of fluctuation in economies Inflation and unemployment Government policies Growth of economies

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Growth of economiesBetween

1960 and 2002 the size of US economy as well as per capita income grew steadily. Why?

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Fluctuation in the growth processIn certain

periods US economy faced fluctuations in per capita income. Why?

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Expansion and Contraction:The Business Cycle

An expansion, or boom, is the period in the business cycle from a trough up to a peak, during which output and employment rise.

• A contraction, recession, or slump is the period in the business cycle from a peak down to a trough, during which output and employment fall.

InflationInflation in

Bangladesh fluctuated quite a bit during the period 1987 and 2002. When did it go up? Why? When did it go down? Why?

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1998: Flood

1990: Regime change

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UnemploymentThe unemployment rate is the

percentage of the labor force that is unemployed.

The unemployment rate is a key indicator of the economy’s health.

The existence of unemployment seems to imply that the aggregate labor market is not in equilibrium.

Relationship between Inflation and UnemploymentA W Philips

(1958) observed that there was an inverse relationship between unemployment rate and inflation….

WHY???

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Rate of change in inflation

Unemployment rate

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Government PoliciesThere are three types of policy that the

government uses to influence economy.

Fiscal policyMonetary policyGrowth policy

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Government Policies

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Fiscal policy refers to government policies concerning taxes and spending.

Monetary policy consists of tools used by the Federal Reserve to control the quantity of money in the economy.

Growth policies are government policies that focus on stimulating economic growth.

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Exchange Rate

Exchange rates are quoted as foreign currency per unit of domestic currency or domestic currency per unit of foreign currency.

Why Exchange Rate is ImportantDetermines the value of our goods in

terms of international currenciesWe can compare prices of same goods

produced in different countriesChange in the exchange rate has impact

on the import-export flows

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Demand and Supply in Macroeconomics

Aggregate demand is the total demand for goods and services in an economy.• Aggregate supply is the total supply of goods and services in an economy.

• Aggregate supply and demand curves are more complex than simple market supply and demand curves.

Four Sectors of Macroeconomics1. Real sector: Encompasses activities related to the aggregate

supply and aggregate demand in an economy. Data on this sector cover gross domestic and national product, consumption, savings, inflation and capital formation.

2. Fiscal sector: Encompasses government income and expenditure related activities

3. Monetary sector: Encompasses activities related to money demand, money supply, interest rate.

4. International sector: Encompasses activities related to export, import, capital flows, exchange rate.

When we analyze data to estimate macroeconomic scenario, now-a-days we use data from these four sectors. However, for theoretical purpose, economists historically use three markets to analyze macroeconomic problems. These are:1.Labor market2.Goods market3.Asset market

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Schools of Macroeconomics

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Which one do you think fit the real world better?During Great Depression, US as well as the world economy

did not adjust quickly to overcome the depression. Stagnation stayed for a long time… more than a decade. At that time Keynesian theory very neatly identified the reasons of such prolonged stagnation, that the classical economics had failed to explain.

However, in 1970 USA suffered high inflation and stagnation at the same time…

This phenomenon is called STAGFLATION.Keynesian theory could not solve stagflation.Neoclassical economists came up again and attacked the

Keynesians on the ground that it could not explain stagflation and it did not have enough theoretical background.

Both the schools are still working on their weaknesses in theoretical explanations of real life problems.

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Our study of macroeconomics will cover the following

Measurement of national incomeProductivity, output and employmentConsumption, savings and investmentAsset marketCombining asset and goods market through IS-LM

framework to determine general equilibrium of the economy.

Unemployment and inflationBusiness cycle Monetary policy Fiscal policy

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