Chapter 1

DPB20033 MACROECONOMICS

CHAPTER 1: INTRODUCTION TO MACROECONOMIC

SAZALIANA BINTI HJ SHAIRALI

END OF THIS CHAPTER, STUDENT
SHOULD BE ABLE TO:

Explain the concept of • Macroeconomics
macroeconomics • Compare macroeconomics and microeconomics
• Macroeconomics goals
• Problem of macroeconomics goal

Explain Aggregate • Define AD and AS
Demand and • AD and AS curve
• Factors shift the AD and AS curve
Aggregate Supply

Discuss 4th Industrial • 4IR
• Influence of 4IR
Revolution and its

impact on the economy

INTRODUCTION

Macroeconomics :

Definition:
The branch of economics that studies decision making for the economy as a
whole or deals with economic aggregates.
Studies the aggregate behaviour of the entire economy

Focus in big scale of economics unit - country
The focus is on

i. the economy’s total production of all goods and services
ii. changes in the average level prices
iii. unemployment rate

Applies and overviews perspective to an economy by examining
economy wide variables such as:

 inflation,
 unemployment,
growth of economy,
the money supply and
the national incomes of developing countries.

DIFFERENCES BETWEEN

microeconomics macroeconomics

• Studies individual income • Studies national income

• Analyzes demand and supply • Analyzes aggregate demand
of goods and aggregate supply

• Deals with households’ and • Deals with aggregate
firms’ decisions decisions

• Studies individual prices • Studies overall price level

• Analyzes demand and supply • Analyzes total employment in
of labor the economy

MACROECONOMICS OBJECTIVES TO
ACHIEVE:

Full Employment or Reducing the Unemployment Rate
Controlling Inflation or Maintaining Price Stability
Better Quality of Life
Equitable Distribution of Income and Wealth
Achieving a Steady Rate of Economic Growth

FULL EMPLOYMENT OR REDUCING THE
UNEMPLOYMENT RATE

• An economy should use all its available resources more
efficiently to attain maximum output

• Unemployment means that an available resource is not being
used, this indicates inefficiency and a waste of resources

CONTROLLING INFLATION OR MAINTAINING
PRICE STABILITY

• Nation objective is to keep inflation rate as low as possible
• Inflation can reduce the purchasing power of consumers, the

quantity of goods and services purchased will be less if
inflation is high
• Price stability exists when price remain largely stable and
there is no rapid inflation or deflation

ACHIEVING A STEADY RATE OF ECONOMIC
GROWTH

• The economy must be operating at maximum capacity
• To an increase in the full production output level of a nation

over time
• A steady rate of economic growth is important to maintain the

present living standard and to have a better one in the future

EQUITABLE DISTRIBUTION OF INCOME AND
WEALTH

• Nation try to narrow the gap between the higher income and
the lower income groups

• To ensure that all people are equal in terms of standard of
living

• Method: tax for higher income groups

BETTER QUALITY OF LIFE

The general well-being of individuals and societies can be
evaluated by looking at their quality of life
Better quality of life is therefore an increase in the amount of
goods and services as well as a better living environment,
better health care and more leisure time

PROBLEMS OF MACROECONOMICS GOALS

Achieving Full Employment and Price Stability

Achieving a Steady Economic Growth Rate and a
Equilibrium in the Balance of Payments
Achieving a Steady Economic Growth Rate and Price
Stability

ACHIEVING FULL EMPLOYMENT AND PRICE
STABILITY

Government create more jobs

Firm produce more output and take more worker
Unemployment
Stimulate AD

AD will put pressure on the general price level to increase
Inflation rate

ACHIEVING A STEADY ECONOMIC GROWTH RATE AND A
EQUILIBRIUM IN THE BALANCE OF PAYMENTS

Economic growth rate can be achieved when more output is produced

The production capacity of the economy needs to be increased

Import capital goods from more advanced countries

More cash outflows in the economy

Problem of balance of payments deficit

ACHIEVING A STEADY ECONOMIC GROWTH RATE
AND PRICE STABILITY

G encourage investment by interest rates and government spending

Investment level will create more job

Increase the national output
When consumer spending exceeds the supply of goods and services,

price will rise
inflation

AGGREGATE DEMAND

Aggregate demand refers to the total amount of goods and services demanded in the
economy at a given overall price levels and in a given period of time.

Aggregate demand consists of the amount households plan to spend on goods (C), plus
planned spending on capital investment, (I) + government spending, (G) + exports (X)
minus imports (M) from abroad. The standard equation is:

• AD = C + I + G + (X – M)

AGGREGATE DEMAND CURVE

The AD curve shows the relationship
between the price level of economy
with the total aggregate output in a
given period, assuming that all other
remain the same.

It is assumed that the AD curve will
slope down from left to right.

This is because all the components
of AD, except imports, are inversely
related to the price level.

FACTORS SHIFT IN

AGGREGATE DEMAND CURVE

A shift to the right of the aggregate demand curve.
from AD 1 to AD 2, means that at the same price
levels the quantity demanded of real GDP has
increased.

A shift to the left of the aggregate demand curve,
from AD 1 to AD 3, means that at the same price
levels the quantity demanded of real GDP has
decreased.

They are caused by changes in the demand for any
of the components of real GDP:

• Consumption expenditures

• Investment expenditure

• Government purchases

• Net export (X – M)

AGGREGATE SUPPLY

Aggregate supply (AS) is defined as the total amount of goods and services (real
output) produced and supplied by an economy’s firms over a period of time.

It includes the supply of a number of types of goods and services including private
consumer goods, capital goods, public and merit goods and goods for overseas
markets.

Aggregate supply, also known as total output, is the total supply of goods and
services produced within an economy at a given overall price level in a given time
period.

AGGREGATE SUPPLY CURVE

Aggregate supply curve, which
describes the relationship
between price levels and the
quantity of output that firms are
willing to provide. Normally,
there is a positive relationship
between aggregate supply and
the price level.

FACTORS SHIFT IN
AGGREGATE SUPPLY CURVE

• Costs of Production
• Economic Growth
• Technology
• Incentives (Benefits)

INDUSTRIAL REVOLUTION

• 4IR refers to a new phase in the
Industrial Revolution that focuses
heavily on interconnectivity,
automation, machine learning, and
real-time data.

• Industry 4.0, which
encompasses IIoT and smart
manufacturing, marries physical
production and operations with
smart digital technology, machine
learning, and big data to create a
more holistic and better connected
ecosystem for companies that focus
on manufacturing and supply
chain management.

THE INFLUENCE OF 4IR ON

THE ECONOMY

The growth of gig economy The gig economy uses digital
and digital economy platforms to connect
freelancers with customers to
provide short-term services or
asset-sharing.

Examples include ride-hailing
apps, food delivery apps, and
holiday rental apps.

It’s a growing segment,
bringing economic benefits of
productivity and employment

THE INFLUENCE OF 4IR ON
THE ECONOMY

Technologies and the future of jobs

• It makes you more attractive to the younger
workforce.

• It makes your team stronger and more
collaborative.

• It allows you to address potential issues before
they become big problems.

• It allows you to trim costs, boost profits, and fuel
growth.

ACTIVITY 1(TRUE/FALSE Q) True/False
True/False
Policies to increase the supply of money in the economy are mainly True/False
related to macroeconomics True/False
True/False
Macroeconomics is concerned with the issue of inflation and
unemployment.

During high rates of inflation, the cost of living and the standard of living
increase

A deficit in the balance of payments is desired as it means more jobs to
the people

Two macroeconomics objectives are in conflict if efforts made to achieve
one fails to achieve the other.

ACTIVITY 2(ESSAY Q)

• Define macroeconomic.
• Distinguish between microeconomics and macroeconomics.
• Explain briefly the macroeconomic goals.
• Explain the problems of macroeconomics goals
• With the aid of a diagram, explain the aggregate demand and aggregate supply.