CHAPTER 1:

MACROECONOMIC
OVERVIEW

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 CHAPTER OUTLINE

Microeconomics vs. Macroeconomics

Scarcity
Production Possibility Curve
Growth
Unemployment
Circular Flow of Incomes
Economic Systems: Market System, Islamic
Economic System
MICROECONOMICS VS. MACROECONOMICS

To understand the scope and sweep of

macroeconomics, lets begin by looking
more carefully at the difference between
microeconomic and macroeconomic
questions.
 Microeconomics Question
Go to accounting school or take a
job?
What determines the salary offered What determines the overall salary
by keropok company to Mariam?
What determines the cost to a
university of offering a new
course?
What government policies should
be adopted to make it easier for
low-income students to attend
college?
What determines whether CIMB
opens a new office in China?
Macroeconomics Question
How many people are employed in
the economy as a whole?
levels paid to workers in a given
year?
What determines the overall level of
prices in the economy as a whole?
What government policies should be
adopted to promote full employment
and growth in the economy as a
whole?
What determines the overall trade in
goods, services and financial assets
between Malaysia and the rest of the
world?
 Microeconomics
Microeconomics focuses on
how decisions are made by
individuals and firms and the
consequences of those
decisions.
Example:
How much it would cost
for a university to offer a
new course the cost of
the instructors salary, the
classroom facilities, the
class materials, and so on.
Having determined the
cost, the school can then
decide whether or not to
offer the course by
weighing the costs and
benefits.
Macroeconomics
Macroeconomics examines the
aggregate behavior of the
economy (i.e. how the actions of
all the individuals and firms in
the economy interact to produce
a particular level of economic
performance as a whole).
Example:
Overall level of prices in the
economy (how high or how
low they are relative to
prices last year) rather than
the price of a particular
good or service.
Four Principal Ways that Macroeconomics Differs from
Microeconomics:
1. In macroeconomics, the behavior of the whole macro economy is,
indeed, greater than the sum of individual actions and market
outcomes.

2. Macroeconomics is widely viewed as providing a rationale for

continual government intervention to manage short-term
fluctuations and adverse events in the economy.
Monetary policy
Fiscal policy

3. Macroeconomics is the study of long-run growth: What factors lead

to a higher long-run growth rate? And are there government policies
capable of increasing the long-run growth rate?

4. The theory and policy implementation focus on economic

aggregates -- economic measures that summarize data across many
different markets for goods, services, workers, and assets.
What Macroeconomics Is About?

Macroeconomics: the study of structure and performance

of national economies and government policies that affect
economic performance.

Issues addressed by macroeconomists:

Long-run economic growth
Business cycles
Unemployment
Inflation
The international economy
Macroeconomic policy (fiscal and monetary policy)
 SCARCITY

In economics,scarcityrefers to
limitationsinsufficient
resources, goods, or abilities
to achieve the desired ends.
Figuring out ways to make the
best use of scarce resources or
find alternatives is fundamental
to economics.
 PRODUCTION POSSIBLITY CURVE

A Production Possibilities curve illustrates

the tradeoffs and output that are possible
given a limited amount of input.
 Production Possibilities
Model
Economic model that shows different
combinations of two goods that an
economy can produce
Full employment
Fixed resources
Fixed technology
2-good economy
Consumer goods and capital
goods
LO 1-10
 Production Possibilities
Model
Production Alternatives
Type of Product A B C D E

Pizzas 0 1 2 3 4
(in hundred thousands)

Industrial Robots 10 9 7 4 0
(in thousands)

Plot the points to create the graph

LO 1-11
 Production Possibilities
Graph
Q
14
13
12
11
A
10 Unattainable
9 B
W
Industrial robots

8
7 C
6
5
4 D
3
2 Attainable
1 E
0 1 2 3 4 5 6 7 8 9 Q

LO
Pizzas 1-12
 Increasing Opportunity
Costs
Law of increasing opportunity
costs
As more of a particular good is
produced, its marginal opportunity
costs increase
Production possibilities curve
Concave shape
Economic rationale

LO 1-13
 GROWTH

Economic growth is the increase in the market value

of the goods and services produced by an
economy over time.

Economic growth caused the production-possibility

frontier to shift outward.

Economic growth is measured by real GDP.

Real GDP is a measure of aggregate output, the

output of the economy as a whole (corrects for price
changes). Nominal GDP uses current prices.
15
 EMPLOYMENT & UNEMPLOYMENT

Employment is the number of people

working in the economy.

Unemployment is the number of people who

are actively looking for work but arent
currently employed.

The labor force is equal to the sum of

employment and unemployment.
 CIRCULAR FLOW OF INCOMES

Trade takes the form of barter when

people directly exchange goods or
services that they have for goods or
services that they want.

The circular-flow diagram is a

model that represents the
transactions in an economy by flows
around a circle.
 Circular-Flow of Economic Activities

A household is a person or a group of people

that share their income.

A firm is an organization that produces goods

and services for sale.

Firms sell goods and services that they produce

to households in markets for goods and
services.

Firms buy the resources they need to produce

factors of productionin factor markets.
The Circular-Flow Diagram
 The Circular Flow
Wages, rents, interest,
profits

Factor services

Goods
Household Firms (production)
n t
Government ov e rnme
Taxes G nding
Spe
Savin
gs n v es t ment
Financial markets I
Imp Personal consumption
orts
rts
Expo
Other countries

McGraw-Hill/Irwin
 ECONOMIC SYSTEMS

Market System

Market system (market/free/open

economy) is an economy that operates
by voluntary exchange in free market
and is not planned or controlled by a
central authority (capitalistic economy).
The International Economy

A closed economy is an economy that does not

trade goods, services, and assets
@
an economy that does not interact economically with
the rest of the world.

Open-economy macroeconomics is the study of

those aspects of macroeconomics that are affected
by movements of goods, services, and assets across
national boundaries
@
an economy that has extensive trading and financial
relationships with other national economies.
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 One of the main concerns introduced by open-
economy macroeconomics is the exchange rate, the
price of one currency in terms of another.
Exchange rates can affect the aggregate price
level.
They can also affect aggregate output through
their effect on the trade balance, the difference
between the value of the goods and services a
country sells to other countries and the value of the
goods and services it buys in return.

Economists are also concerned about capital flows,

movements of financial assets across borders.

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Source: http://www.bnm.gov.my/index.php?
ch=statistic&pg=stats_exchangerates
 Islamic Economics is a term often referred to as a sub
branch of Islamic jurisprudence; fiqh in Arabic.

The term of Islamic Economics literally translated from

Arabic word al iktisatul Islam, or rarely al fiqhul Iktisat.

To give a more professional definition; referring Umar

Chapra; that branch of knowledge which helps to
realize human well being through an allocation and
distribution of scarce resources that is in conformity
with Islamic teachings without unduly curbing
individual freedom or creating continued
macroeconomic and ecological imbalances.
Also according to Chapra and many other Scholars,
there are 4 sources of Islamic systems. They are:
i. Al-Quran, such a divine sources
ii. Sunnah / Hadith, the sayings and practices of
the Prophet Muhammad (pbuh)
iii. Ijma, the common belief of Muslim scholars
iv. Qiyas, the other principles that are compared to
those three sources.
 In short, Islamic economic system of that
time is very close to todays free market
(capitalism or liberal economy).

However, Islam has two main and very

important differences when compared to
those other economic systems. Islamic
Economics is based on
prohibition of interest (usury or riba in
Arabic)
Presence of zakat (almsgiving)