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OBJECTIVE OF THE SERVICE COURSE INMACROEOCONIMCS:
TO BRUSH UP YOUR KNOWLEDGE IN
MACROECONOMICS.
TO IDENTIFY THE LEVEL OF THEKNOWLEDGE AQUIRED BY YOU
TO SET THE GROUND FOR THELAUNCHING THE ADVANCED COURSE INMACROEOCONOMICS
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INTRODUCTION TO MACROECONOMICS
WHAT IS MACROEOCONOMICS?
IT VIEWS ECONOMICS ISSUES USING ATELESCOPE!
PUT IT DIFFERENTLY,
MACROEOCONOMICS PROVIDES A BIRDSEYE VIEW ON ECONOMIC ISSUES.
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MACROECNOMICS concern with theeconomy as a whole
It analyses the causes of major problems:
High unemployment
Rampant inflation
Low wages
Low economic growth
It analyses the
Short term fluctuations [output, employment,price]
Long term increases [output, living standard]
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INTRODUCTION TO MACROECONOMICS
MACROECNOMICS concern with theeconomy as a whole
It analyses the causes of major problems:
High unemployment
Rampant inflation
Low wages
Low economic growth
It analyses the
Short term fluctuations [output, employment,price]
Long term increases [output, living standard]
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INTRODUCTION TO MACROECONOMICS
MACROECNOMIC objectives of aneconomy: Achieving
High level of output [GDP]Full employment
Price stability
Sustainable balance ofpayments
Raid economic growth
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Gross Domestic Product [GDP] GDP is the market value of all goods
and services produced by factorslocated within the Boundaries of acountry, during a specified period oftime usually a year
Nominal and real GDP:Nominal GDP when adjusted for pricechanges [inflation] gives the real GDP
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POTENTIAL GDP AND ACTUAL GDP
Potential GDP is the maximum outputan economy can produce when all its
resources are fully employed [alsoknown as full employment output]
At potential GDP level an economyenjoys:
Low unemployment rates
High production levels
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POTENTIAL GDP is determined by
Availability of inputs:
Land
Labor
Capital
Entrepreneurship
The countrys technological competence
Potential GDP tends to grow veryslowly but steadily
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Actual GDP is influenced by businesscycles and changes sharply fromyear to year
Macroeconomic policies affect actualGDP quickly but slowly on potentialoutput
Actual GDP diverges from potentialGDP during business cycles
The gap between potential GDP andActual GDP is the GDP gap
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The GDP gap indicates the intensityof business cycle
If actual GDP > potential GDP
inflationary output gap If actual GDP < potential GDP
deflationary [recessionary] outputgap
The objective of macroeconomicpolicies is to minimize such gaps andincrease potential output in the long
run
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Macro objectives: Full employment:
Gainful employment will reduce poverty During a recession unemployment rises
Price stability: Prices determine the purchasing power of
money During inflation PP of money will erode
Inflation is calculated by WPI, CPI Extreme form of inflation is hyper-inflation High inflation disturbs decision-making During high inflation people prefer to have
real assets
People lose confidence on currency
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Macro objectives: Sustainable Balance of PaymentsBOP is a systematic record of alltransactions of a country with the restof the world
Transactions consist of Exports imports of goods and services Lending borrowing and investment in
foreign countries An important indicator of foreign trade
is net exports [export less imports] alsoknown as the Trade Balance
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Macro objectives: Export >imports Positive trade balance Export
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Macro objectives: Economic growth usually refers to:
An increase in PPF curve A growth in real output [GDP] or real per
capita output [per capita GDP] The per capita GDP is also determined
by a third factor: the population growth If real GDP grows at g% and population
grows at p% per annum, per capita GDPmust grow at% growth Per capita GDP=([1+g]/[1+p])-1
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INSTRUMENTS OF ECONOMIC POLICY
Fiscal policy
Monetary policyExchange rate policyInternational trade policyEmployment policyPrices and income policy
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Instruments of macroeconomic policy
Objective Instrument /Tool
High output level
Low unemploymentrate
Stable price level
Maintenance of the BOP
Steady economicgrowth
Monetary policy
Fiscal policyExchange rate policy
International trade
policy
Prices and incomepolicies
Employment policy
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Fiscal policy This refers to the government policy on
its revenue and expenditure
Government expenditures:
Purchases [spending of goods andservices, investment] Transfer payments [samurdhi etc] Government spending has a +veeffect on overall spending of theeconomy which influences the GDP
Government spending is used as atool to control the level of economicactivity
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Fiscal policy This refers to the government policy on
its revenue and expenditure
Government Revenue:
Taxation is the main form ofgovernment revenue Taxation affects the economy in twoways: Changes in taxation affect the disposable
income of people. A fall in tax canincrease consumption It affects the prices of goods and
services. A fall in taxes may increaseinvestment which can spur growth
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Monetary policy The monetary system of a country
consist of institutions that createsfinancial assets with a high degree ofliquidity
This system is guided and controlled bythe central bank of a country
The central bank, commercial banks andother non banking financial institutions
constitute the financial system The monetary policy of a country is
formulated and implemented by thecentral bank.
It controls the money supply interest
rates and the quantity of credit.
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International Trade policy Trade policies relate to tariff and non
tariff regulations that limit or promotethe exports and imports of a country
East Asian countries used theirtrade policies strategically toincrease economic growth.
Sri Lanka after a 7 year period ofdirigiste regime opened itsinternational trade
Sri Lanka has a limited number ofinstruments to control trade
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Exchange Rate Policy These policies are also closely related totrade policies, since ER affects bothimports and exports
Foreign exchange rate management
play a crucial role in international trade. ER is the price of one currency in terms
of another currency The ER policy forms apart of a countrys
monetary policy Some countries use a fixed ER against
other currencies Others allow market forces to determine
the ER