Page 10 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 1: Introduction to Macro Economics

Self Assessment Notes

State whether the following statements are true or false:
6. Macro economics studies the working of an economy as a whole.
7. Macro Economic knowledge is very useful in development of monetary and fiscal policy.

8. Macro Economics explains the effect of low productivity of labour on the market supply.
9. Macro economics explains the relationship between price, income and employment.
10. The concept of macro economics emerged as a result of World War II.

1.3 Scope of Macro Economics

Macro Economics is the study of the aggregate modes of the economy, with specific focus on
problems associated with those modes - the problems of growth, business cycles, unemployment
and inflation. The Macro Economic theory is designed to explain how supply and demand in the
aggregate interact to concern with these problems:
Economic growth takes place when both the total output and total income are increasing.
GNP is the basic measure of economic activity. Gross National Product (GNP) is the value
of all final goods and services produced in the economy in a given time period.
Nominal GNP measures the value of output at the prices prevailing in the period, during
which the output is produced, while Real GNP measures the output produced in any one
period at the prices of some base year.
Inflation rate is the percentage rate of increase of the level of prices during a given period.

Unemployment rate is the fraction of the labour force that cannot find jobs.
Business cycle is the upward or downward movement of economic activity that occurs
around the growth trend. The top of a cycle is called the peak. A very high peak, representing
a big jump in output, is called a 'boom'. When the economy starts to fall from that peak,
there is a downturn in business activity. If that downturn persists for more than two
consecutive quarters of the year, that downturn becomes a recession. A large recession is
called a depression. In general, latter is much longer and more severe than a recession. The
bottom of a recession or depression is called the trough. When the economy comes out of
the trough, economists say it is an upturn. If an upturn lasts two consecutive quarters of
the year, it is called an expansion.
The output gap measures the gap between actual output and the output the economy could
produce at full employment given the existing resources. Full employment output is also
called Potential output.
Okun's rule of thumb determines the relation between the unemployment rate and income.
It states that a 1 per cent change in the unemployment rate will cause income in the
economy to change in the opposite direction by 2.5 per cent.

The Phillips curve suggests a tradeoff between inflation and unemployment. Less
unemployment can always be obtained by incurring more inflation or inflation can be
reduced by allowing more unemployment. However, the short and long run tradeoffs
between inflation and unemployment are a major concern of policy making.
The basic tools for analysing output, price level, inflation and growth are the aggregate
supply and demand curves. Aggregate demand is the relationship between spending on

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