the birth of macroeconomics

8/10/2019 The Birth of Macroeconomics

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CHAPTER 1

MACROECONOMICS, WHAT IS IT?


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Macroeconomics Defined

The study of macroeconomics covers thewhole array factors that are external to thefirm but nevertheless affect the firm. And, aswe know, the factors that affect the firm affecteveryone. Hence, macroeconomics is animportant field to study by both the firm and

the household and by the government.


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Macroeconomics Defined Macroeconomics may be defined as a branch of

learning that specializes on the study ofeconomics activities on the aggregate level. Inother words, It is a study of the behavior of theeconomy as a whole. Thus, its concerns include:

1. Total Output

2. Total income 3. General Level of Employment 4. General Price Level


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Macroeconomics Defined

In order to effectively analyze and evaluate its variousconcerns, macroeconomics looks at the relevant economicfactors and studies their patterns of behavior so that theireffect on its above stated concerns may be accuratelypredicted in order to afford decision makers at the level of thefirm, the household and the government make wise decisions.

The economic factors being referred to are principally interestand inflation. These two factors are the main influences thatdetermine the performance of an economy.


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The Birth of Macroeconomics

The great depression started in the United Stateswith the fall of the New York Stock Exchange inOctober 1929. And, due to the sheer size of the U

economy and its concomitant huge participationin international trade, the economic depressionquickly spread to Europe and other parts of theworld.

At its lowest ebb (1933), total production in theUS fell 50% compared to 1929 level andunemployment went up to about 26%.


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The Birth of Macroeconomics At the beginning of the great depression, economists at that time,

sticking to their classical orientation, saw the phenomenon as anatural thing that should happen n the course of the recurringbusiness cycle, therefore, would be self-correcting. This premisedon the classical view that after prosperity, the economy has to

experience a downturn due to overproduction, but would be self-correcting.

They argued that as the economy declines, demand for labor willalso decline which would bring wage rate down. They saw theforthcoming wage cut as the signal that will induce producers tohire more workers that would eventually increased both demandand output, starting altogether a new cycle of recovery and higherlevel of prosperity. But the wait is lingered and the expectedrecovery was not forthcoming.


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The Birth of Macroeconomics At the other side of Atlantic, during these same times,

a Cambridge professor, John Maynard Keynes wasputting together a book that would later on explain thetheoretical framework of the great depression andwhat should be done about it.

The book was released in 1936 and was entitled TheGeneral Theory Employment, Interest and Money .This book explained the interrelationship of the variousfunctions of the economy, from production toconsumption including everything between them,


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The Birth of Macroeconomics The book revolutionized economic thought because it

clearly outlined how the government can intervene inthe economy to counterpart the erstwhile recurringbusiness cycle through the implementation of its FiscalPolicy (Taxation and Government Expenditure).

Through it, accumulating government surpluses duringprosperity and creating fiscal deficits during recessioncan smoothen the ups and downs in the economy out.From then on, the so-called Depression in the course ofthe business cycle had been a thing of the past.


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Problems of Macroeconomics After the publication of the General Theory of Employment, Interest

and Money , the problem of macroeconomics has been primarily agovernment concern.

These problems include:1. Unemployment2. Inflation3. Growth and Development4. Interest Policy5. Level of Taxation and Government Budget

6. International Trade Policy

The primary tools that used by the government in addressing theseproblems are monetary and fiscal policies.


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Exercise 1.2 Identify whether the given data need microeconomic analysis or

macroeconomic analysis.

1. The functioning of the household and firm.2. Deflate the 2002 deficit to 130 B.

3. The entry of china in World Trade Organization.4. Stagnant agricultural income of many farms.5. Aggressive foreign investment influx In Subic.6. Increase of general price.7. Suspension of the release of pork barrel fund does to some query.

8. Effects of prolong recession.9. 11.78% unemployment rate in our country.10. Real income of Mr. Mando Maestro after getting a promotion in his

office.


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Exercise 1.3 Choose the appropriate analysis based on the given situation: Why it is

micro, or why it its a macro in nature? If the answer is micro, transform itto micro; likewise, if the answer is macro, transfer it to micro.

1. 550 workers of KULAS Limited Inc.

2. Consumption summation of year 20013. Profit and loss of May Oban Sia Enterprises4. 3.5% economic growth brought about by companies.5. Increase in the total export of agricultural products.6. Transportation expenses of Hintoka household7. Role of unemployment every quarter of a year.8. Budget allotment of Veterans pensioner.9. Interest rates modulation.10. Imported chocolates affecting Cho-Nut supply

the birth of macroeconomics

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