BUSINESS ECONOMICS

PRESENTATION HEADING

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 Macroeconomics vs Microeconomics

The methodology of economics distinguishes between Micro and

Macro economic perspectives:

• Microeconomic analysis is concerned with the study of economic

decision taking by both firms and individuals
∙ Macroeconomic analysis is concerned with interactions in the economy
as a whole i.e. Economic Aggregates
∙ Formally, Macroeconomics is the study of economic activity and prices
in the overall economy of nation or a region
1.0 Macroeconomic Objectives

Four Key Macroeconomic Variables that Governments seek to Influence

1.1 Economic Growth

• Governments want to achieve high but stable rates of economic

growth as measured by GDP (Gross Domestic Product)
• Distinguish between actual and potential growth
• Actual growth is the annual % increase in national output (GDP)
(current activities in the country)
• Potential growth is the % annual increase in the trend - the rate of
growth in potential output (resources that we have that are not fully
used)
• Actual growth can be explained by the variation of growth in
'Aggregate Demand' (Total spending on goods and services made in
the economy) against a backdrop of market imperfections.
• Potential output is concerned with the productive capacity of the
economy. This is determined by the amount of resources (K & L) and
their productivity (F), therefore:
National output (GDP) 1.1 Stylised Business Cycle

Potential
Output

Actual
Output

O
Time
1.2 Unemployment

• Maintaining low rates of unemployment as it

represents a waste of human capital and drain on
welfare systems
• Number of Unemployed: those of working age who
are without work, but who are available for work at
current wage rates
• Usually expressed as a percentage thus -

• There are different type of unemployment

Types of Disequilibrium
Unemployment
– Real-Wage Unemployment
– Cyclical Unemployment
Types of Equilibrium
– Frictional Unemployment Unemployment
– Structural Unemployment
– Seasonal Unemployment
1.3 Inflation

• Inflation refers to a general rise in the price level; annual % increase

in prices
• Typically inflation is measured by observing consumer prices hence
the Botswana Government publishes the CPI (Consumer Price Index)
each month
• Botswana Monetary authorities (Bank of Botswana) are tasked with
maintaining price stability hence have to influence economic policy
to meet its 2% inflation target
• Inflation is determined by the level of activity in the economy
(Aggregate Demand) and the supply capacity of the economy
(Aggregate Supply)
1.4 Balance of Payments

• The Balance of Payments measures exports versus imports hence

the flow of money in and out of the economy
• It is generally regarded undesirable to have persistent balance of
payments deficits
• Therefore it is desirable to maintain a balance or balance of
payments surplus
• This is usually achieved by a mix of structural change
(competitiveness) and changes in persistent exchange rate parities
(via economic policy)
1.5 Macroeconomic Policy

• Government macroeconomic policy aims primarily to achieve two

goals
• Ensure the key macroeconomic variables (growth, inflation, unemployment,
BoP) are at acceptable levels
• Create a stable economic environment in which the economy can flourish
• Government Macroeconomic Policies:
Demand-Sided Policies and Supply-Sided Policies

Two Types -
1. Monetary Policy - Altering interest rates (r) via money supply
2. Fiscal Policy - Altering Government Spending (G) &/or Taxation (T)
3. Wage policy, minimum wage, price ceilings, price floors
Why is Macroeconomics important for my business?

As a manager you may have to think hard about:

• When and where to invest,

• Exchange rates if you’re trading abroad,
• Which markets abroad are most suitable for your
products.,
• Will the economy go into recession (Covid-19)?
• Will interest rates go up?
2.1 Circular Flow of Income

Expenditure
Incomes
2.1 Circular Flow of Income with J & W

J=I+G+X

Consumption of
domestically
Incomes produced goods
(Y) and services
(Cd)

W=S+T+M
3.0 Equilibrium Output Calculations

Understanding how to calculate the Level of Economic Output (GDP)

 3.1 Composition of Aggregate Demand (AD)

• Consumption (C) refers to the goods and services purchased by

consumers.

• Investment (I), sometimes called fixed investment, is the purchase

of capital goods. It is the sum of non-residential and residential
investment.

• Government spending (G) refers to the purchases of goods and

services by the central and local governments. It does not include
government transfers, nor interest payments on the government
debt.
 3.1 Composition of Aggregate Demand (AD)

• Imports (M) are the purchases of foreign goods and

services by consumers, business firms and the UK
government.

• Exports (X) are the purchases of UK goods and services

by foreigners.
 3.1 Composition of Aggregate Demand (AD)

Therefore the total sum of spending in the economy (AD) can be

written as –

GDP Expenditure method/

…but its also important to understand as macroeconomists what

determines the components of AD (section 3.2) so we can try and
achieve our macroeconomic objectives (section 1.0)
3.1 Composition of GDP in U.S. (2010)
 3.2 Calculating GDP

As Economists, given we are concerned with a 'theory of output', we

need to be able to calculate GDP (output): Three ways:

• The Product Method

• The Income Method
• The Expenditure Method

In reality GDP is very hard to calculate, but they all give the same figure
of GDP
The circular flow of national income and expenditure
(1) Production

(2) Incomes (3) Expenditure

3.3 Calculating GDP: Product Method

Product (or production) method of measuring GDP:

• Involves adding up the value added of each stage of
production during a given period

• For example: a TV manufacturer sells a TV to a retailer for

P2000 and the retailer sells the TV to a consumer for P3000.

• Count the value added at each stage: (P2000 by the

manufacturer plus P1000 by the retailer = P3000)
 3.3 Calculating GDP: Income Method

Income method of measuring GDP:

• Focuses on income generated from the production of goods
and services
• This includes wages and profits generated at each stage of
production
3.4 Calculating GDP: Expenditure Method

Expenditure method of measuring GDP:

• The sum of all (aggregate) spending (expenditure) on final
output (which will be at market prices).

GDP=
 3.4 Measuring National Output

National output statistics: suitable measure of living standards?

– items that are excluded
• non-marketed items
• the underground economy
– production: poor indicator of welfare?
• production does not equal consumption
• human costs of production
• externalities
• the production of 'regrettables'
• distribution of income
 4.0 Conclusion

• Macroeconomists are concerned with numerous objectives

• As such, it is imperative to understand how economic output is
determined
• The circular flow of incomes represents the various consumption
and output flows coupled with the various modes of injections and
withdrawals
• Three methods for calculating GDP: Production, income and
expenditure method
• Where authorities see fit, the macroeconomy can be influenced via
changes to AD, therefore reducing the tradeoff between
macroeconomic objectives (growth, inflation, employment)
• This is highlighted through macroeconomics short run equilibrium
theory
Short-term growth & the business cycle

• Economic growth and the business cycle

• fluctuations in actual growth
 the phases of the business cycle
 upturn
 expansion
 peaking out
 slowdown or recession
 The business cycle

Full-capacity
output
National output (GDP)

3
4
3 2 Actual
output
4
2 1

O
Time