FEDERAL UNIVERSITY LOKOJA
FACULTY OF ARTS AND SOCIAL SCIENCES
DEPARTMENT OF ECONOMICS
Course: Principles of Economics II
MACROECONOMICS; DEFINITION, SCOPE, AND STOCK AND
FLOW VARIABLES
Definition: Macroeconomics is the study of economy as a whole. In other
words it is the study of aggregates or averages covering the entire economy.
Macroeconomics is also known as the theory of income and employment, or
simply income analysis. As such it deals with issues such as economic growth,
total consumption, unemployment, inflation and government policies that might
influence overall level of economic activity. It is also the study of the causes of
unemployment, and the various determinants of employment.
In the field of business cycles, macroeconomics concerns itself with the effect
of investment on total output, total income, and aggregate employment. In the
monetary sphere, it studies the effect of the total quantity of money on the
general price level.
In international trade, the problems of balance of payments and foreign aid fall
within the purview of macroeconomic analysis. Above all, macroeconomic
theory discusses the problems of determination of the total income of a country
and causes of its fluctuations. Finally, it studies the factors that retard growth
and those which bring the economy on the path of economic development.
Macroeconomics concerns
As we earlier said, macroeconomics covers issues such as problems of
unemployment, economic fluctuations, inflation, deflation, instability etc.
Considering this therefore, there is general consensus among economists about
the macroeconomics goals we are trying to achieve. Thus: rapid economic
growth, high employment and price stability. This is because achieving these
goals makes all the citizens better off.
1. Rapid Economic Growth: By rapid economic growth we mean, a
situation whereby the rise in the output of goods and services is faster
than the population. As a result, the average person can consume much
more today – more food, clothing, housing, medical care, entertainment,
and travel – than at the beginning of the century. Economists monitor
economic growth by keeping track of real Gross Domestic Product (real
GDP) – The total quantity of goods and services produced in a country
over a year. When real GDP rises faster than the population, output per
person rises and so does the average standard of living.
, 2. High employment: It is true that economic growth is one of the most
important macroeconomics goals, but obviously not the only one; we
could have rapid economic growth without high level of employment in
an economy. We could find a situation whereby our GDP is growing at
say 4 per cent annual rate but 10 per cent of the workforce was unable to
find job. We can see that although the economy would be growing at a
healthy pace, we would not be achieving our full economic potentials,
that is, our average standard of living will not be as high as it could be.
There would be millions of people who wanted jobs, who could be
producing output we could all use, but who would not be producing
anything. This is one reason why consistent high employment is an
important macroeconomic goal. In addition to its impact on our average
standard of living, unemployment also affects the distribution of
economic well-being among our citizens. People who cannot find job
suffer. Their incomes and therefore their purchasing power decrease.
Typically the unemployed have lower living standard than the employed.
3. Price Stability: It is true that people’s lives are to a large extent affected
by rising prices and therefore inflation is costly to a society. This is why
one of the important goals of macroeconomics is to achieve stable prices
in the economy. Achieving stable prices therefore means bringing
inflation rate to a barest minimum.
Stocks and flows
Macroeconomics uses certain economic aggregates called macroeconomics
variables, to assess the performance as well as analyse the behaviour of an
economy. Many economic variables measure a quantity of something. e.g a
quantity of money, a quantity of goods, and so on. Economists distinguish
between two types of quantity variables: stocks and flows.
i) Flow variable: This is defined as quantity which is measured with
reference to particular period e.g days, weeks, years. It has time
dimension. For example, national income is flow which describes and
measures flows of goods and services which become available to a
country during a year. Things like individual personal income and
investment are all under the purview of flow variable in that the
former is earned during a month and latter also pertains to a period of
time. Other examples of flow variable are savings, profit, rent etc.
ii) Stock variable: This indicates quantity of a variable at a particular
point of time. The population of this country, the number of houses in
Nigeria, your wealth etc. are all stock variables because they are
values measured at a particular instant. E.g it makes no sense to ask
what is your wealth per month.
, CIRCULAR FLOW OF INCOME
The circular flow of income is a model of the economy showing
circulation/flows of goods and services and factors of production between firms
and households. In a simple two-sector model, the economy is closed with no
government and international trade or foreign sector, the model shows that
households provide the factors of production for firms who produce goods and
services. In return the factors of production receive factor payments, such as
wages and salaries, which in turn are spent on the output of firms.
In a simple two-sector model, we assume that;
1. There are only two sectors in the economy – households and firms.
2. The economy is spendthrift, with no element of savings. Thus, the
household sector spends the entire income received from the business
sector on buying goods and services produced by the firms, and the
business sector does not keep any undistributed money as reserve i.e the
money received by selling goods and services is spent in paying
productive resources.
3. The business firm keep their production exactly equal to their sales.
In practice, households do not spend all their income but rather are being saved.
This represents a leakage from the circular flow. Aside of consumer’s spending
on products and services, firms also carry out investment spending. This is an
injection to the circular flow of income, as it does not originate from consumers'
current income.
Factor
market
Firm Household
Product
market
FACULTY OF ARTS AND SOCIAL SCIENCES
DEPARTMENT OF ECONOMICS
Course: Principles of Economics II
MACROECONOMICS; DEFINITION, SCOPE, AND STOCK AND
FLOW VARIABLES
Definition: Macroeconomics is the study of economy as a whole. In other
words it is the study of aggregates or averages covering the entire economy.
Macroeconomics is also known as the theory of income and employment, or
simply income analysis. As such it deals with issues such as economic growth,
total consumption, unemployment, inflation and government policies that might
influence overall level of economic activity. It is also the study of the causes of
unemployment, and the various determinants of employment.
In the field of business cycles, macroeconomics concerns itself with the effect
of investment on total output, total income, and aggregate employment. In the
monetary sphere, it studies the effect of the total quantity of money on the
general price level.
In international trade, the problems of balance of payments and foreign aid fall
within the purview of macroeconomic analysis. Above all, macroeconomic
theory discusses the problems of determination of the total income of a country
and causes of its fluctuations. Finally, it studies the factors that retard growth
and those which bring the economy on the path of economic development.
Macroeconomics concerns
As we earlier said, macroeconomics covers issues such as problems of
unemployment, economic fluctuations, inflation, deflation, instability etc.
Considering this therefore, there is general consensus among economists about
the macroeconomics goals we are trying to achieve. Thus: rapid economic
growth, high employment and price stability. This is because achieving these
goals makes all the citizens better off.
1. Rapid Economic Growth: By rapid economic growth we mean, a
situation whereby the rise in the output of goods and services is faster
than the population. As a result, the average person can consume much
more today – more food, clothing, housing, medical care, entertainment,
and travel – than at the beginning of the century. Economists monitor
economic growth by keeping track of real Gross Domestic Product (real
GDP) – The total quantity of goods and services produced in a country
over a year. When real GDP rises faster than the population, output per
person rises and so does the average standard of living.
, 2. High employment: It is true that economic growth is one of the most
important macroeconomics goals, but obviously not the only one; we
could have rapid economic growth without high level of employment in
an economy. We could find a situation whereby our GDP is growing at
say 4 per cent annual rate but 10 per cent of the workforce was unable to
find job. We can see that although the economy would be growing at a
healthy pace, we would not be achieving our full economic potentials,
that is, our average standard of living will not be as high as it could be.
There would be millions of people who wanted jobs, who could be
producing output we could all use, but who would not be producing
anything. This is one reason why consistent high employment is an
important macroeconomic goal. In addition to its impact on our average
standard of living, unemployment also affects the distribution of
economic well-being among our citizens. People who cannot find job
suffer. Their incomes and therefore their purchasing power decrease.
Typically the unemployed have lower living standard than the employed.
3. Price Stability: It is true that people’s lives are to a large extent affected
by rising prices and therefore inflation is costly to a society. This is why
one of the important goals of macroeconomics is to achieve stable prices
in the economy. Achieving stable prices therefore means bringing
inflation rate to a barest minimum.
Stocks and flows
Macroeconomics uses certain economic aggregates called macroeconomics
variables, to assess the performance as well as analyse the behaviour of an
economy. Many economic variables measure a quantity of something. e.g a
quantity of money, a quantity of goods, and so on. Economists distinguish
between two types of quantity variables: stocks and flows.
i) Flow variable: This is defined as quantity which is measured with
reference to particular period e.g days, weeks, years. It has time
dimension. For example, national income is flow which describes and
measures flows of goods and services which become available to a
country during a year. Things like individual personal income and
investment are all under the purview of flow variable in that the
former is earned during a month and latter also pertains to a period of
time. Other examples of flow variable are savings, profit, rent etc.
ii) Stock variable: This indicates quantity of a variable at a particular
point of time. The population of this country, the number of houses in
Nigeria, your wealth etc. are all stock variables because they are
values measured at a particular instant. E.g it makes no sense to ask
what is your wealth per month.
, CIRCULAR FLOW OF INCOME
The circular flow of income is a model of the economy showing
circulation/flows of goods and services and factors of production between firms
and households. In a simple two-sector model, the economy is closed with no
government and international trade or foreign sector, the model shows that
households provide the factors of production for firms who produce goods and
services. In return the factors of production receive factor payments, such as
wages and salaries, which in turn are spent on the output of firms.
In a simple two-sector model, we assume that;
1. There are only two sectors in the economy – households and firms.
2. The economy is spendthrift, with no element of savings. Thus, the
household sector spends the entire income received from the business
sector on buying goods and services produced by the firms, and the
business sector does not keep any undistributed money as reserve i.e the
money received by selling goods and services is spent in paying
productive resources.
3. The business firm keep their production exactly equal to their sales.
In practice, households do not spend all their income but rather are being saved.
This represents a leakage from the circular flow. Aside of consumer’s spending
on products and services, firms also carry out investment spending. This is an
injection to the circular flow of income, as it does not originate from consumers'
current income.
Factor
market
Firm Household
Product
market
