INTRODUCTION TO

MACROECONOMICS
Notes and Summary of Readings
Note
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Topics Covered
References
Macroeconomics by Abel, Bernanke and
Croushore Chapter 1* (main reference)
Macroeconomics by Dornbusch and
Fischer Chapter 1* (for supplementary
reading)

* These chapters are available online for free reading.

What Macroeconomics is
about
Let us start by reading about some news
topics that generated debate and
discussion in the world of economics...
1) FDI in multi-brand retail (India, Sep 2012)

2) Debt crisis (Eurozone)

3) Fiscal cliff (USA, Dec 2012 / Jan 2013)

4) Direct cash transfer program (India, Jan

2013)
5) Record high unemployment rate
(Eurozone, Jan 2013)
While reading the above articles, you would have
come across terms like growth, unemployment,
inflation, depression, debt, deficit, interest rate,
savings, exchange rate, economic policy etc.
The branch of economics that deals with all
these issues, and much more, is called
macroeconomics.
Formally, macroeconomics is defined as the field
concerned with the structure and performance
of national economies and the policies
governments use to try to affect economic
performance.
Structure refers to the relationship between input-output accounts, levels of
consumption and investment, sectors of the economy, relationships between
different sectors, degree of independence of the economy etc.
Performance the values of macroeconomic variables, such as inflation rate,
unemployment rate, GDP etc., and how they are related to one another.
Difference between microeconomics and macroeconomics
The difference between the two fields is primarily one of
approach and emphasis.
Diff. in approach:

Microeconomics Macroeconomics
Focuses on the Concerns itself with
choices made by the choices made by the
individual decision- macro players of the
making units of the economy- such as the
society-typically the government, the
consumers and firms- central bank etc.
and the impact of and the impact of
those choices on those choices on the
individual markets economy as a whole
 Diff. in emphasis
Microeconomics
Studies the demand and
supply in individual markets,
each of which is too small to
have an impact on the
national economy
Phenomena affecting the
economy as a whole, like
inflation or unemployment,
are either not mentioned or
are taken as given, as these
are not variables that
individual buyers or sellers
can change
Macroeconomics
Emphasizes on aggregate
quantities such as aggregate
consumption, aggregate
investment and aggregate
output; fine distinctions
among different kinds of
goods, firms and markets are
usually ignored
Phenomena such as inflation
and unemployment are
among the key variables
studied
Some basic issues in
Macroeconomics
Factors important for long-term economic
growth:

** Output per unit of employed labour

2. Business cycles
As said earlier, an increase in the availability of
resources and improvements in efficiency help
a country to register an upward trend in long-
run economic growth. But it has been observed
that at any given point of time, the rate of
economic growth is greater than, smaller than,
or sometimes equal to, the general trend.
For example, the trend in the USA over the last
century has been one of rising economic
growth. However, the growth hasnt been
smooth and has numerous hills and valleys.
During the 1960s, national output nearly
doubled, but during 1973-75, 1981-82, and
1990-91, output declined from one year to the
next.
5. The international economy
Today, every major economy is an open
economy, which means that it has extensive
trading and financial relationships with other
national economies. (This is in contrast to a
closed economy, which doesnt interact
economically with the rest of the world.)
A macroeconomist studying the international
economy would be interested in knowing how
economic links among nations, such as
international trade and borrowing, affect the
performance of individual economies and the
world economy as a whole.
6) Macroeconomic policy
An extremely important factor What are federal budget
affecting economic surpluses and deficits? Do
performance is the set of governments usually run a
macroeconomic policies surplus or a deficit?
pursued by the government.
The two major types of policies
are:
Fiscal policy
concerns government
spending and taxation
determined at the national,
state and local levels
Monetary policy
determines the rate of
growth of money supply in
the country Which is the central
under the control of the
bank in India? In the
USA?
central bank
What macroeconomists do
Macroeconomic forecasting
An economist trying to forecast (predict) the
performance of the economy will be concerned with
questions such as: How will a severe drought in
agricultural regions affect food quantities and
prices? Will productivity rise as rapidly in the future
as it did during the tech boom of the early 2000s?
How will a crisis in the middle east affect fuel prices?
Owing to the complexity of the economic system,
answering such questions with a high degree of
accuracy is close to impossible. So, a
macroeconomic forecaster will usually talk in terms
of most likely forecasts, while offering optimistic
and pessimistic alternative scenarios. In this
sense, he/she is very similar to a meteorologist
both can only talk about the probability of an event
taking place.
Related news article
Macroeconomic analysis
Macroeconomic analysts monitor the economy and
think about the implications of current economic
events.
In private sector organizations (like banks and large
corporations), the job of an analyst is to try to
determine how general economic trends will affect
their employers financial investments, their
opportunities for expansion, the demand for their
products, and so on.
In public sector agencies (such as the government,
the World Bank and the International Monetary
Fund) the main function of analysts is to assist in
policymaking. The ultimate decisions regarding
economic policy are taken by politicians, who may
or may not heed the advice of macroeconomists
in the face of numerous political considerations.
Data development
Several macroeconomists are involved in
the process of collecting data on
macroeconomic variables such as the
price level, measures of output etc. This
economic data is used to assess the
current state of the economy, make
forecasts, analyze policy alternatives, and
test macroeconomic theories.
In the USA, most economic data is collected
by agencies such as the Bureau of the
Census, the Bureau of Labour Statistics,
and the Bureau of Economic Analysis.
 Why macroeconomists
disagree

Disagreements between macroeconomists may arise due to

differences in normative conclusions, and because of
differences in the positive analysis of a policy proposal.
There have always been many schools of thought in
macroeconomics, but the most important and enduring
disagreements on positive issues involve the two schools of
thought called the classical approach and the Keynesian
approach.
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