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Contemporary
Macroeconomic Management

What is Macroeconomics?
 Big picture
 The economy as a whole working within a
global framework
...
It focuses on aggregate
(combined or total amount) changes in the
economy such as unemployment, growth rate,
GDP and inflation
...


The context for our study is the fact that the
Australian economy (like most other countries)
operates as a ‘modified market system’
...


However, both current and historical evidence from
around the world suggests that ‘market economies’
are prone to macroeconomic instability – they
regularly exhibit unacceptable levels of inflation and
unemployment and slow rates of economic growth
...
As economies have not been able to
correct themselves solely through the market
mechanism (demand and supply forces), it then
becomes necessary for a degree of govt intervention
...
Determine nation’s economy
...


Objectives

Instruments/Tools

High output level

Monetary Policy

Low unemployment rate

Fiscal Policy

Stable price level

Exchange rate Policy

Maintenance of Balance of International Trade Policy
Payments
Steady economic growth

Price and Income Policy

Basic Concepts in Macroeconomics


Stock and Flow Concepts:
 A stock variable is measured at a specific point in time
–it signifies the level of a variable at a point in time
 Money supply, consumer price index, unemployment
level and foreign exchange reserves are examples
 A flow variable is measured over a specific period of
time- it represents the change in the level of a variable
over a period of time
 GDP, inflation, exports, imports, consumption and
investments are examples

Economic Environment
Economic stages that exists at a given time in a country
Economic system that is adopted by a country for example
...

Economic Indices such as National Income, Per Capital Income,
Disposable Income, Rate of growth of GNP, Distribution of Income,
Rate of savings, Balance of Payments etc
...
"

Features of Capitalism
Right to Private Property
Freedom of Enterprise
Freedom of Choice by Consumer
Profit Motivation
Competition

Socialism
"the important essentials of socialism are that all
the great industries and the land should be public
or collectively owned, and that they should be
conducted (in conformity with a national
economic plan) for the common good instead of
private profit
...

Economic indicators allow analysis of economic
performance and predictions of future performance
...
So if the economy is doing well, this
number is usually increasing, whereas if we're in a recession this
indicator is decreasing
...

Countercyclic: A countercyclic economic indicator is one that
moves in the opposite direction as the economy
...


Nature of Economic indicators
Timing: Economic Indicators can be leading, lagging, or coincident
which indicates the timing of their changes relative to how the economy
as a whole changes
...
Stock market returns are a leading
indicator, as the stock market usually begins to decline before the
economy declines and they improve before the economy begins to pull
out of a recession
...


Continued…
Lagged: trail behind the general economic activity
...

The Gross Domestic Product is a coincident indicator
...

Factor costs are also called factor gate costs since all the costs that
are incurred to produce a given quantity of goods and services take
place behind the factory gate ie within the walls of the firms, plants
etc in an economy
...

Includes only goods and services purchased by their final users, so
GDP measures final production
...

Excludes transfer payments since they do not represent current
production
...


GDP at factor Cost
GDP@ factor cost = GDP@ market price + Subsidies - Indirect
Taxes
GDP@ factor cost refers to the total final output of all final goods
and services produced within the national frontiers of a country by
its citizens and the foreign residents who reside within those
frontiers that are assessed at production or factor cost prior to
leaving the irrespective factory gates for various markets where
they are bought and sold
...
It also lends to countries
in difficulty, and provides technical assistance and training to help
countries improve economic management
...

Our Work
The IMF's fundamental mission is to help ensure stability in the
international system
...


Nominal GDP
Nominal GDP is the value of the total flow of goods
and services produced in an economy over a specified
period of time (usually a year) at current market price
...

Real GDP is the physical quantity of goods and
services produced in a given period
...


This covers real changes in production
...
The price for
an apple is $2 in 2000, whereas the price for a pear is $3
...
In 2005, because of
the inflation the price for an apple goes up to $3, whereas the
price for a pear is $4 at the same production levels
...
However real GDP did not change, because real GDP
only changes with the changing production level and therefore is
a better size measure for economy
...
As a result, nominal GDP will often appear higher than
real GDP
...

As a result, taking price levels (or inflation) into account is
necessary when determining if we are really better or worse
off when making comparisons between different time periods
...


Gross National Product (GNP)


Total market value of all final goods and services produced by citizens of
a country no matter where they are residing



Is total Income received by residents for their contributions as factors of
production anywhere in the world



GDP measures output within the borders of a country no matter regardless
of citizenship of the producer, GNP measures output of the country’s
citizens regardless where they live



GNP at factor cost =GDP at factor cost + Net Income
from abroad

Examples - GNP
The income of an Australian working in Bahrain is part of Bahrain's
GDP as well as Australia's GNP
Suppose Toyota owns a plant in Bahrain to produce Camry's using
Bahraini workers
...

With GNP, the capital share goes to Japan

Net National Product


NNP equals GNP less replacement investment



NNP = GNP – Depreciation



This is an estimate of how much the country has to spend
to maintain the current GNP



If the country is not able to replace the capital stock lost
through depreciation, then GNP will fall
...

 In addition, a growing gap between GNP and NNP
indicates increasing obsolescence of capital goods,
while a narrowing gap would mean that the
condition of capital stock in the country is
improving
...

Money supply in an economy determines liquidity
conditions in the market, which in turn impacts interest
rate structure and hence the cost of capital to the firms
...

Money supply is basically determined by the central bank of
a country (e
...
Reserve Bank of Australia) and the
commercial banking network
...
-Ml,
M2, M3 and M4
...
M3 includes time deposits (fixed deposits),
savings deposits with post office saving banks and all the
components of M1
...

Reasons of inflation
1
...
inflation caused by real demand expansion
3
...
” If the quantity of money grows at a
pace greater than warranted by the growth of the
economy, then the excess money supply drives up
prices
...
It involves inflation rising as the
real gross domestic product rises and unemployment falls
Cost Push inflation: This is because of large increases in the cost
of important or essential goods with no substitutes
...
This type of inflation occurs
during or soon after a war

Reductions to Inflation
 Trade policy – level external trade balance –
less exports, more imports = more aggregate
supply = lower inflation
 Wage control – lower wage growth reduces
cost-push inflation
 Contractionary policy – reduce the quantity of
money supply by decreasing bond prices and
increasing interest rates ***

Aggregate Supply
 is the total supply of goods and services that
firms in a national economy plan on selling
during a specific time period
...
Part of the solution may be to let
prices rise
...

Stimulating aggregate supply include encouraging business
investment; reducing input costs; and increasing competitive
intensity
...


Remedies – Monetary Inflation
If the cause of inflation is instead monetary
expansion, aggregate supply should still be
stimulated, but the focus of effort should be
constraining further monetary expansion
...
When inflation is caused by strong real
demand, interest rates will tend to be
high
...


Economic Output
 Economic output is the total value of all
goods and services produced in an economy
...


Measurement of Inflation
Inflation is measured by the
Wholesale Price Index (WPI)
Consumer Price Index (CPI)
A Wholesale Price Index (WPI) is the price of a
representative basket of wholesale goods
...
In this, volatile items like food prices and fuel items
are excluded
...
The third category – Manufacturing also
includes food products which tends to be volatile as well and
moves in line with prices of primary articles
...
This can also be called as core
inflation for Australia

Consumer Price Index
CPI, also retail price index is a statistical measure of
a weighted average of prices of a specified set of
goods and services purchased by wage earners in
urban areas
...


Effects of inflation
Wealth costs – inflation affects those on fixed incomes and
redirects wealth to other (physical) assets
Planning costs – businesses uncertain about future price
changes may be reluctant to invest – hits economic growth
Competitiveness – inflation at a higher rate in Australia than
elsewhere hits domestic competitiveness and affects the balance
of payments
Social stability - At very high rates, confidence in the currency
is eroded and production and exchange can be stifled – can lead
to food riots, looting and violence
...
A nominal variable is one where
the effects of inflation have not been accounted for
...




If increased borrowing leads to higher interest rates by
creating a greater demand for money and loanable funds and
hence a higher "price" (ceteris paribus), the private sector,
which is sensitive to interest rates will likely reduce investment
due to a lower rate of return
...




More importantly, a fall in fixed investment by business can
hurt long-term economic growth of the supply side, i
...
, the
growth of potential output
...




The cycle involves shifts over time between periods of relatively rapid
growth of output (recovery and prosperity), and periods of relative
stagnation or decline (contraction or recession)
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