Short introduction to Macroeconomics

1. Introduction to
Macroeconomics
Lecturer: Anna Martirosyan
Russian-Armenian(Slavonic) University
April, 2019

2. Reminder: There are two branches of
Economics
• Microeconomics is a branch of economics that examines economic
behavior of individuals and firms.
• Macroeconomics is about the economy in general and looks at the
economic problems at country’s perspective.

3. Ex ante and ex post analysis
• There are two types of analysis in Macroeconomics:
• Ex ante, which means "before the event". When you’re making a
prediction, you’re doing so ex ante. Example: prediction of the
inflation
• Ex post, which means after the event. Example, measuring
unemployment

4. Methods in Macroeconomics
• Abstraction – using models to explain economic processes.
• Deduction and induction (see the past lectures)
• Normative and positive analysis(see the past lectures)
• “Other things equal” (google it)
• Assumption that individuals are rational (google it)

5. Methods in Macroeconomics
• Aggregation, which refers to the connection between economic
interactions at the micro and the macro levels. The micro level refers
to the behaviour of individual economic agents. The macro level
refers to the relationships that exist between country level indicators,
averages, etc.

6. Economic agents
• In Economics, we define players of the Economy as Economic agents.
Economic agents are decision makers in some aspect of the economy.
• Economic agents are
• Households
• Firms
• Government
• Foreign sector

7. Households
All those people living under one roof are considered a household.
Households do two fundamental things vital to the economy.
1. Demand goods and services from product markets
2. Supply labor, capital, land, and entrepreneurial ability to resource markets
Economists think of each household acting as a single decision-maker.

8. Firms, Government, Foreign sector
• Firms are economics agents whose role is to transform factors of
production into goods and services to sell.
• The purpose of firms is to maximize their profit.
• Government is an economic agent which provides rules for how firms
and consumers should interact.
• Foreign sector is the rest of the world.

9. Markets in Macroeconomics
• Aggregate markets in Macroeconomics are:
• Goods and services market
• Financial market
• Market of Economic resources
• Currency exchange market
• Search in Google for details about the above mentioned markets!!!

10. Circular flow of income with Government
• Look at the attached graph. Circular flow of income is the same as we
did in the past seminars. We only add Government and its
interactions with other economic agents and markets.
• In order to understand the graph, we need some definitions:
• Transfers (Subsidy, Subvention)

11. Subsidy, Subvention
• Subsidy is the money paid by a government to help an organization or
industry reduce its costs, so that it can provide products or services at
lower prices.
• Subvention is a grant by the Government to the enterprise for a
specific purpose (equipment purchase, renovation, etc.)

12. Market failure and the role of Govenment
• Market regulates demand and supply, however there are cases that it
is not operating efficiently. This cases are known as market failures.
• The followings are the types of market failures:
• Monopoly
• Assymetric information
• Externalities
• Commons
Search in google for more details.

13. Government intervention
• In case when the market fails, Government intervene with the
following tools:
• Creating legal framework
• Protecting competition (anti-monopoly regulations, setting maximum
price, etc.)
• Regulating demand for money
• Social policy of the Government (benefits, grants, etc.)
• Income distribution (taxes, subsidies, etc.)

14. How Government regulates
• Government regulates the economy with the following tools:
• Direct regulation
1. Subsidies and subventions
2. Government spending
• Indirect Regulation
1. Monetary policy
2. Fiscal policy
More on this in the seminar.