Macroeconomics deals with aggregate economic quantities, like growth, unemployment and inflation. It analyzes data on indicators like GDP, inflation and unemployment. Governments use fiscal, monetary and supply-side policies to influence the macroeconomy and achieve goals of growth, employment and price stability. These policies target aggregate demand and supply through measures like government spending, taxation, interest rates and money supply.

1. AN INTRODUCTION TO
MACROECONOMICS
MR. WAHEED ALI
FACULTY MANAGEMENT SCIENCES

2. BASICS OF MACROECONOMICS
Definition of economics: Economics is a branch of social science that
deals with the study of efficient utilization of scare (limited) resources
to satisfy unlimited wants and needs.
Microeconomics: Microeconomics is the study of individuals,
households and firms' behavior in decision making and allocation of
resources. It generally applies to markets of goods and services and
deals with individual and economic issues.
Macroeconomics: Macroeconomics is second main branch of
economics which deals with the performance, structure, and behavior
of the entire economy, in contrast to microeconomics, which is more
focused on the choices made by individual actors in the economy (like
people, households, firms, etc.)

3. BASICS OF MACROECONOMICS
• Some of the key questions addressed by
macroeconomics include: What causes unemployment?
What causes inflation? What creates or stimulates
economic growth?
• Macroeconomics attempts to measure how well an
economy is performing, to understand what forces drive
it, and to project how performance can improve.

4. BASICS OF MACROECONOMICS
• Macroeconomics in its modern form is often defined as
starting with John Maynard Keynes and his theories
about market behavior and governmental policies in the
1930s; several schools of thought have developed since.

5. BASICS OF MACROECONOMICS
Gross Domestic Production (GDP): a measure of all
produced final goods and services within the boundaries of a
country in a specific time period. GDP is the main indicator of
economic growth.
Market value: GDP measures all goods in terms of their
market value, in the common unit of dollars. Non‐market
activities like leisure, housework, and child care don’t
contribute to GDP.
Goods and Services: Goods include cars, food, clothing, etc.
Services include haircuts, medical care, education etc.

6. BASICS OF MACROECONOMICS
Measurement of GDP: Standard Keynesian macroeconomics theory
offers two such methods to measure GDP: the income approach and
the expenditure approach. The expenditure approach begins with the
money spent on goods and services. Conversely, the income approach
starts with the income earned from the production of goods and
services (wages, rents, interest, profits).
Expenditure approach of GDP calculation= C + I+ G+ Net export (X-
M)
Consumption: Consumption is spending by households on:
‐ Durable goods (cars, appliances).
‐ Nondurable goods (food).
‐ Services (haircuts).

7. BASICS OF MACROECONOMICS
Investment: Investment is spending by firms on goods that will be
used in the future to produce more goods and services.
‐ Capital equipment (machines and tools).
‐ Structures (factories, office buildings).
‐ Inventories (goods produced but not yet sold).
By convention, the purchase of a newly built house is a form of
spending by households that is also included in investment.
Government spending includes:
‐ Purchases of goods and services by federal, state, and local
governments.
‐ Salaries of government workers.
Other forms of government disbursements, like social security
payments, are called transfer payments
and are not counted in GDP.

8. BASICS OF MACROECONOMICS
Net Exports: Net exports equal
‐ Exports: purchases of domestically (US) produced goods
by foreigners.
‐ Minus imports: purchases of foreign goods by US
households and firms.

9. BASICS OF MACROECONOMICS
Nominal GDP: It values the goods and services produced this
year at current prices that prevail this year.
Real GDP: is an inflation-adjusted measure of GDP by valuing
the goods and services produced this year at constant prices
that prevailed during a base year.
GDP Per Capita: is a measurement of the GDP per person in a
country’s population. It indicates that the amount of output or income
per person in an economy can indicate average productivity or average
living standards.

10. BASICS OF MACROECONOMICS
GDP Growth rate: The GDP growth rate compares the
year-over-year (or quarterly) change in a country’s
economic output to measure how fast an economy is
growing. Usually expressed as a percentage rate.
Formula for GDP growth rate: (GDP in current period -
GDP in the previous period) / GDP in the previous period *
100.

11. BASICS OF MACROECONOMICS
Gross National Production (GNP)= Gross national
product accounts for its citizen’s productions both within
and outside its borders minus income earned by foreign
residents within the country.
Formula for GNP= GDP + Net factor income from abroad
GNP= C + I + G + X + Z

12. GDP TRENDS OF PAKISTAN

13. BASICS OF MACROECONOMICS
Inflation:
• Inflation is a situation of rising prices in the economy.
• A more exact definition of inflation is a sustained
increase in the general price level in an economy.
• Inflation means an increase in the cost of living as the
price of goods and services rise.
• The rate of inflation measures the annual percentage
change in the general price level.

14. BASICS OF MACROECONOMICS
Unemployment:
• The term unemployment refers to a situation when a
person who is actively searching for employment is
unable to find work.
• The most frequent measure of unemployment is the
unemployment rate, which is the number of unemployed
people divided by the number of people in the labor
force.

15. BASICS OF MACROECONOMICS
Labor force:
• The labor force is the number of people who are
employed plus the unemployed who are looking for work.
The labor pool does not include the jobless who aren't
looking for work.
• For example, stay-at-home moms, retirees, and students
are not part of the labor force. Discouraged workers who
would like a job but have given up looking are not in the
labor force either.
• To be considered part of the labor force, you must be
available, willing to work, and have looked for a job
recently.

16. MACROECONOMIC GOALS,
FRAMEWORK, AND POLICIES

17. MACROECONOMIC GOALS
In thinking about the overall health of the macro economy, it
is useful to consider three primary goals: economic
growth, full employment (or low unemployment), and stable
prices (or low inflation):
• Economic growth ultimately determines the prevailing
standard of living in a country.
• Unemployment, as measured by the unemployment
rate, is the percentage of people in the labor force who
do not have a job.
• Inflation is a sustained increase in the overall level of
prices.

18. MACROECONOMIC FRAMEWORKS
Economists use theories and models to explain and
understand economic principles.
In microeconomics, we used the theories of supply and
demand; in macroeconomics, we use the theories
of aggregate demand (AD) and aggregate supply (AS).

19. MACROECONOMIC POLICIES
There are three kinds of policy that the government has
used to influence the macroeconomy:
Fiscal policy
Monetary policy
Growth or supply-side policies

20. MACROECONOMIC POLICIES
• Fiscal policy refers to changes in government
expenditure and taxation. Government expenditure, also
called public expenditure, and taxation occur at two main
levels – national and local.
• Governments spend money on a variety of items
including benefits (for the retired, unemployed and
disabled), education, health care, transport, defense and
interest on national debt.

21. MACROECONOMIC POLICIES
• Monetary policy includes changes in the money supply,
the rate of interest and the exchange rate, although
some economists treat changes in the exchange rate as
a separate policy.
• A rise in the rate of interest helps implement a
deflationary monetary policy. It will be likely to reduce
aggregate demand by lowering consumption and
investment.

22. MACROECONOMIC POLICIES
• Households will spend less due to availability of less
discretionary income, expensive borrowing and greater
incentive to save.
• Firms will invest less as they will expect consumption to
be lower. Also the opportunity cost of investment will
have risen and borrowing will have become expensive. A
higher interest rate may also reduce aggregate demand
by lowering net exports.

23. MACROECONOMIC POLICIES
• Changes in the money supply, as with changes in
interest rates, are implemented by Central Banks on
behalf of governments.
• If the money supply is increased by the Bank printing
more money, buying back government bonds or
encouraging commercial banks to lend more, the
aggregate demand increases.
• On the other hand, a decrease in the money supply
reduces aggregate demand.

24. MACROECONOMIC POLICIES
• Supply-side/Growth policies are policies designed to
increase aggregate supply and hence increase
productive potential. Such policies seek to increase the
quantity and quality of resources and raise the efficiency
of markets.
• These include improving education and training, cutting
direct taxes and benefits, reforming trade unions and
privatization. Improving education and training is
designed to raise labor productivity.

25. SUMMARY
• Concept of macroeconomics
• Macro economic indicators
• Analysis of macroeconomic variables data
• Macroeconomic policies
• Goals, frameworks and tools of macroeconomic policies