What Macroeconomics is about Structure and performance of national economies Policies that governments formulate and use to affect economic performance Some notable issues that macroeconomics addresses:  Sources of growth  Reasons of fluctuation in economies  Inflation and unemployment  Government policies  Growth of economies 2

Growth of economies Between 1960 and 2002 the size of US economy as well as per capita income grew steadily. Why? 3

Fluctuation in the growth process In certain periods US economy faced fluctuations in per capita income. Why? 4

5 5 of 31 Expansion and Contraction: The Business Cycle An expansion, or boom, is the period in the business cycle from a trough up to a peak, during which output and employment rise. A contraction, recession, or slump is the period in the business cycle from a peak down to a trough, during which output and employment fall.

Inflation Inflation in Bangladesh fluctuated quite a bit during the period 1987 and When did it go up? Why? When did it go down? Why? : Flood 1990: Regime change

7 Unemployment The unemployment rate is the percentage of the labor force that is unemployed. The unemployment rate is a key indicator of the economy’s health. The existence of unemployment seems to imply that the aggregate labor market is not in equilibrium.

Relationship between Inflation and Unemployment A W Philips (1958) observed that there was an inverse relationship between unemployment rate and inflation…. WHY??? 8 Rate of change in inflation Unemployment rate

Unemployment rate in the US 9

Government Policies There are three types of policy that the government uses to influence economy.  Fiscal policy  Monetary policy  Growth policy 10

Government Policies 11 Fiscal policy refers to government policies concerning taxes and spending. Monetary policy consists of tools used by the Federal Reserve to control the quantity of money in the economy. Growth policies are government policies that focus on stimulating economic growth.

12 Exchange Rate Exchange rates are quoted as foreign currency per unit of domestic currency or domestic currency per unit of foreign currency.

Why Exchange Rate is Important Determines the value of our goods in terms of international currencies We can compare prices of same goods produced in different countries Change in the exchange rate has impact on the import-export flows 13

14 Demand and Supply in Macroeconomics Aggregate demand is the total demand for goods and services in an economy. Aggregate supply is the total supply of goods and services in an economy. Aggregate supply and demand curves are more complex than simple market supply and demand curves.

Four Sectors of Macroeconomics 1. Real sector: Encompasses activities related to the aggregate supply and aggregate demand in an economy. Data on this sector cover gross domestic and national product, consumption, savings, inflation and capital formation. 2. Fiscal sector: Encompasses government income and expenditure related activities 3. Monetary sector: Encompasses activities related to money demand, money supply, interest rate. 4. International sector: Encompasses activities related to export, import, capital flows, exchange rate. When we analyze data to estimate macroeconomic scenario, now-a-days we use data from these four sectors. However, for theoretical purpose, economists historically use three markets to analyze macroeconomic problems. These are: 1. Labor market 2. Goods market 3. Asset market 15

Schools of Macroeconomics 16 Classical school Believes in free market and advocates market reaches equilibrium through quick adjustments. Keynesian school Believes that market often does not adjust quickly and may need government intervention.

Which one do you think fit the real world better? During Great Depression, US as well as the world economy did not adjust quickly to overcome the depression. Stagnation stayed for a long time… more than a decade. At that time Keynesian theory very neatly identified the reasons of such prolonged stagnation, that the classical economics had failed to explain. However, in 1970 USA suffered high inflation and stagnation at the same time… This phenomenon is called STAGFLATION. Keynesian theory could not solve stagflation. Neoclassical economists came up again and attacked the Keynesians on the ground that it could not explain stagflation and it did not have enough theoretical background. Both the schools are still working on their weaknesses in theoretical explanations of real life problems. 17

Our study of macroeconomics will cover the following Measurement of national income Productivity, output and employment Consumption, savings and investment Asset market Combining asset and goods market through IS-LM framework to determine general equilibrium of the economy. Unemployment and inflation Business cycle Monetary policy Fiscal policy 18