Saifuddin Khan, PhD, ACCA
Associate Professor
Dept. of Accounting and Information
Systems
University of Rajshahi
01777018158
saifuddink@ru.ac.bd
Fundamental Concepts
of Macro-Economics
Economics as a social
science
• Economics studies the ways in which society
decides what to produce, how to produce it, who to
produce it for and how to apportion it. We are all
economic agents, and economic activity is what we
do to make a living.
• Robins-
Economics is concerned with the best possible use
of the limited resources.
• J.M. Keynes-
Economics studies how the levels of income and
employment in a community are determined.
• Economists assume that people behave rationally
at all times and always seek to improve their
circumstances. This assumption leads to more
specific assumptions.
• Producers will seek to maximise their
profits.
• Consumers will seek to maximise the
benefits (their 'utility') from their income.
• Governments will seek to maximise the
welfare of their populations.
Type of economic system
The way in which the choices about resource allocation are made, the way
value is measured, and the forms of ownership of economic wealth will also
vary according to the type of economic system that exists in a society.
(a) In a centrally planned (or command) economy, the decisions and
choices about resource allocation are made by the government. Monetary
values are attached to resources and to goods and services, but it is the
government that decides what resources should be used, how much should
be paid for them, what goods should be made and, in turn, what their price
should be. This approach is based on the theory that only the government
can make fair and proper provision for all members of society.
(b) In a free market economy, the decisions and choices about resource
allocation are left to market forces of supply and demand, and the workings
of the price mechanism. This approach is based on the observable fact that
it generates more wealth in total than the command approach.
(c) In a mixed economy the decisions and choices are made partly by free
market forces of supply and demand, and partly by government decisions.
Economic wealth is divided between the private sector and the public
sector.
Microeconomics and
Macroeconomics
• Microeconomics
• Adam Smith is usually considered the founder of
microeconomics, the branch of economics which today
is concerned with the behavior of individual entities
such as markets, firms, and households.
• The Wealth of Nations
(1776), Smith considered how individual prices are
set, studied the determination of prices of land,
labor, and capital, and inquired into the strengths
and weaknesses of the market mechanism.
Microeconomics and
Macroeconomics
• Macroeconomics
• Macroeconomics, which is concerned with the overall
performance of the economy.
• First introduced by Ragnar Frish in 1933 ( after the great
depression)
• 1936, when J. M. Keynes published his revolutionary General
Theory of Employment, Interest and Money.
• Keynes developed an analysis of what causes business cycles,
with alternating spells of high unemployment and high
inflation.
• Today, macroeconomics examines a wide variety of areas, such
as how total investment and consumption are determined,
how central banks manage money and interest rates, what
causes international financial crises, and why some nations
grow rapidly while others stagnate.
Difference between (Two parts
of Modern Economic System)
1.Components
2. Government Involvement
3. Began
4. Variables
5. Equilibrium Method
6. Theory
Scope/ subject matters
of Macro Economics
• Analysis of Macro Variables
• Employment and Income Theory
• National Income Determination
• Price Level Stability
• Foreign Trade Policy
• Foreign Exchange Policy
The Tools of
Macroeconomic Policy
• Fiscal Policy. Fiscal policy denotes the use of taxes
and government expenditures.
• Monetary Policy. The second major instrument of
macroeconomic policy is monetary policy, which
the government conducts through managing the
nation’s money, credit, and banking system.
Aggregate Supply and Demand
• Aggregate supply refers to the total quantity of goods and
services that the nation’s businesses willingly produce and sell in
a given period. Aggregate supply (often written AS) depends
upon the price level, the productive capacity of the economy,
and the level of costs.
• We see, then, that aggregate supply depends on the price level
that businesses can charge as well as on the economy’s capacity
or potential output. Potential output in turn is determined by
the availability of productive inputs (labor and capital being the
most important) and the managerial and technical efficiency
with which those inputs are combined.
Aggregate Supply and Demand
• The second blade is aggregate demand, which refers to the total amount
that different sectors in the economy willingly spend in a given period.
Aggregate demand (often written AD) equals total spending on goods and
services. It depends on the level of prices, as well as on monetary policy,
fiscal policy, and other factors.
• The components of aggregate demand include consumption (the cars,
food, and other consumption goods bought by consumers); investment
(construction of houses and factories as well as business equipment);
government purchases (such as spending on teachers and missiles); and
net exports (the difference
between exports and imports). Aggregate demand is
affected by the prices at which the goods are offered,
by exogenous forces like wars and weather, and by
government policies
Aggregate Supply and Demand
Curves
• Aggregate supply and demand curves are often
used to help analyze macroeconomic conditions.
• The downward-sloping curve is the aggregate
demand schedule, or AD curve. It represents what
everyone in the economy —consumers, businesses,
foreigners, and governments —would buy at different aggregate
price levels (with other factors affecting aggregate demand held
constant)
• The upward-sloping curve is the aggregate supply
schedule, or AS curve. This curve represents the
quantity of goods and services that businesses are
willing to produce and sell at each price level (with
other determinants of aggregate supply held constant).
Macroeconomic Equilibrium
• We now see how aggregate output and the price level
adjust or equilibrate to bring aggregate supply and
aggregate demand into balance. That is, we use the AS
and AD concepts to see how equilibrium values of price
and quantity are determined or to find the P and Q that
satisfy the buyers and sellers all taken together.
• A macroeconomic equilibrium is a combination of
overall price and quantity at which all buyers and sellers
are satisfied with their overall purchases, sales, and
prices.
Stock and flow
variables
• Stock refers to a quantity of a commodity measured
at a point of time. In macro economics, money
supply, unemployment level, foreign exchange
reserves, capital etc. are examples of stock
variables.
• Flow variables are measured over a period of
time. National Income, imports, exports,
consumption, production, investment etc. are
examples of flow variables.
Difference between
Stock and flow
variables
• Time: point of time vs. period of time
• Time dimension: no vs. time dimension
• Stock has direct affect on flow (more the stock
more the flow or vice a versa)
• Capital vs. dividend
Statistics and dynamics
• Statics means a state in which there is a continuous,
regular, certain and constant movement without
change.
• Dynamic refers to the study of economic change.
