UNIT 1: MACROECONOMICS AND MEASUREMENT OF ECONOMIC ACTIVITY
This course book, “Applied Macroeconomics,” was written by experts in the field to update your general business knowledge and provide you with the fundamental tools you will need for your professional training as a teacher and administrator.
This 36-session, three-credit course book has been organized to reflect the weekly three-hour lecture for this course at the university. Therefore, each session is equivalent to a one-hour campus lecture.
- Session 2: Macroeconomic Policies and Economic Policies
- Session 3: Government and the Economy
- Session 4: National Income Accounting
- Session 5: Factors Influencing the Size of National
- Session 6: Circular Flow of Income
You are expected to devote a minimum of three hours and a maximum of five hours to each session as a distance learner.
To help you do this effectively, a Study Guide has been created to demonstrate how to use this book. In this study guide, your weekly schedules and dates for quizzes, assignments, and exams are clearly outlined. This book also contains a list of all symbols and their meanings.
They are intended to draw your attention to important matters of concern and required actions. Additionally, blank pages have been included for your comments on difficult topics.
Remember to bring these to your course instructor’s attention during face-to-face meetings.
We wish you success and happiness in your studies.
SESSION 1: MACROECONOMICS AND BUSINESS
To begin with this session let me pose these questions.
- Have you heard of the word macro economy before?
- What about the microeconomy? How different are they?
- What came to mind the first time you heard it?
- What was your understanding at that time?
- Do you have a different view now?
In this session, we shall define macroeconomics and attempt to look at the composition of the macroeconomy and its relation to business. Just relax and read more as we delve deeper into this dynamic yet interesting concept of macroeconomics.
Objectives By the end of this session, you should be able to:
(a) define macroeconomics and microeconomics
(b) distinguish macroeconomics from microeconomics
(c) appreciate the key factors and features concerned with the macroeconomy;
Now read on…
The Definition of Macro Economy
The term macroeconomy is a common concept that applies in our everyday conversations and business transactions. Am sure by the time we finish defining it, you will agree with me.
There are several definitions for the term macroeconomics so let’s try and derive a simple definition for the purpose of this course.
Macroeconomics is a field of economics, which deals with the economy as a whole and the determination of national output, income, and expenditure and the implications for employment and prices.
It can also be defined as the branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.
Macroeconomics studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as inflation, price levels, rate of growth, national income, gross domestic product (GDP), and changes in unemployment.
In contrast to the micro economy, this refers to the factors, which are external to the immediate environment of a firm: these involve changes in general inflation and employment, for example, rather than changes in the firm’s own product prices and workforce.
These factors affect the economy as a whole rather than its singular impact on individuals, households, and firms.
Macroeconomics, therefore, refers to the national and, increasingly, international economy of which the firm is a subunit.
The distinction between Macroeconomics and Microeconomics
A great deal of time and effort is spent by successful firms in ensuring that the right decisions are made in a competitive environment with the greatest attention being paid to the immediate environment in which the firms are operating- to the workforce, to the production line, to the marketplace for products, to direct competitors and so on.
This immediate environment is described as the microeconomic environment of a firm and involves a firm’s prices, revenues, costs, employment levels, and so on.
There are, however, other aspects of a firm’s environment of which the most notable comprise the general social and economic conditions of the larger economic system of which each firm forms a part.
Changing social values combined with changes in the international economic environment, and the political and legal institutions of a country, also have a significant impact on economic activity at the firm level and in the business sector, hence, the way in which organizations are managed and the way in which firms attempt to carry out their activities.
In this course, our attention is focused on the firm’s wider economic environment, which is the macroeconomy. By definition, since each firm is a subunit of the larger economic system, it is unable to exercise control over the macroeconomic environment in the way that it has control (though perhaps limited) over its microeconomic environment.
Thus, while the firm can relatively control its microeconomy, it has no control over the macroeconomy and for that matter, will have to take proactive measures to adapt to the ever-dynamic macroeconomy.
As microeconomics focuses on how supply and demand determine prices in a given market, macroeconomics focuses on changes in the price level across all markets.
Microeconomics deals with how a firm maximizes profit, output, consumer utility, and consumption optimization while macroeconomics is concerned with economic growth, price stability, and full employment.
Our focus in this course is on the national and global economic issues we face in our daily lives. Macroeconomic indicators include but are not limited to economic growth, the general level of prices and inflation, interest rates, availability of credit and liquidity, total investment, public expenditure plans, personal and corporate taxation, total consumer expenditure, total savings, wages, and earnings at the national economy level, national employment trends, exchange rates, imports, exports and the balance of payments.
Hope by now you agree that macroeconomic issues are those we hear of in our day-to-day activities. Just relax at this stage and try to reflect on the exact meaning of the definition.
At this point, can you outline some macroeconomic factors and their impact on the economy?
These definitions will be thoroughly explained in the subsequent sessions.
The macro economy encapsulates all factors that affect the economy as a whole. In this session, we have provided a foundation for the more detailed and structured analysis of the macro economy which will follow in the subsequent sessions.
Answer the following questions as a way of assessing what you have learned in this session.
- What do you understand by the terms macroeconomics and microeconomics? 2. What are the main subjects covered in the study of the macroeconomy?
- Outline the main sectors of the macroeconomy.
- Mention any five macroeconomic variables.
True or False Questions
- Microeconomics is concerned chiefly with the economy as a whole.
- Macroeconomics focuses on individual markets.
- Macroeconomics is the study of
- individual building blocks in the economy
- the relationship between different sectors of the economy
- household purchase decisions
- the economy as a whole
- The following are macroeconomic variables except
- demand for a product