Introduction to Macroeconomic Section: 202 Instructor’s name: Mr. Mahmod Assignment 1: Due Date: November 25, 2012 Group members: Haifa AlQahtani / 201000203 Bshayr Bazaid / 201000643 Razan Abduljabbar / 201001157 Rawia Bakhashwain / 201002438 Dana AlRabiah / 201000364 Lulu Alyousef / 201001400 Introduction: The world’s population has increase greatly. Statistics of 2009 estimated the world population to be 8.6 billion people. But even, long ago when the population of our planet was not so big, there were still some challenges. One of the major challenges human beings face as individuals or groups was how to make use of the earth’s resources. Another challenge is concerned with the distribution of these resources through trade. One of the advances which mankind came up with to meet this challenge of resources/ people equation was the study of economics. My experience of try and error, then a little by little to the basic economic concepts like using currency, using mathematics and until a set of economic theories were developed. Through this gradual addressing of this issue is allocating the available resources to the most effective use. This is what the economics discipline is about. Generally, the smaller version of economics, which is about individuals and business organizations’ activities, was developed first. Then it comes the big picture of this individual and organization’s economy. It was the macroeconomic, which theorized, formulated and applied principles that today are governing the economy of every country in this world. Macroeconomic was found to tackle the complicated economies of countries. It is about governing the national resources, economic interest of country and also governing the countries individuals and organizations’ economic activities. Not only that, but macroeconomic also governs and tackles the inter-state or the economic activities between countries. This research will focus on shed light on the difference between Macroeconomics and Microeconomics. Secondly, a brief scope into macroeconomics will be explained and the importance of macroeconomics will be illustrated. It also reveals the fundamental principles of macroeconomics and illustrates the basic structure of macro model. It will discuss the main problems that face macroeconomics in generally. It also tells us how the government behaves as far as the economy is concerned. Lastly, the report will explain the GDP and its types followed by the macroeconomic growth. The Difference between Macroeconomics and Microeconomics Economy itself is a term with a wide meaning. The basic definition of economy is: “The large set of inter-related economic production and consumption activities which help in determining how scarce resources are allocated” (businessdictionary.com, 2012) has yet a narrower detail and divided in smaller two types from the point of studying economy. However these two parts of economics have little difference but at the end they are closely inter-related and complete each other. Macroeconomics is defined as “The field of economics that studies the behavior of the economy as a whole”. We can notice here the emphasis on the word das a whole because macroeconomic is the specialty of the highest authority which is the government. This definition means macroeconomics takes care of large picture of the economy of the country and the government economic decisions. Up on the top there are decisions that people and businesses should make to govern the different activities. The first feature, which lies under macroeconomic, is the country’s Domestic Gross Product (GDP) like unemployment, national income and rate of growth. Such authority decision may include the allocation of the country’s resources, the prices of goods and services, and other major economic rules like the taxes, currency value and other major decisions about economic events like inflation. Microeconomics is defined as “The study of individuals and business decisions”. The word of focus here is “individual” which means persons or business partners because microeconomics takes the citizens’ business and commercial activities. Of course for such people microeconomics is their look on how their company can increase its production and expansion. These individuals or organization seek their own interest but the government governs them. They take decisions to change their prices and improved their competitiveness in the industry. Such microeconomic activities are ruled by several economic principles, mainly the supply and demand principle. From this definition, the difference can be expressed in the fact that; microeconomic takes the picture of the economy from the bottom going up, while the macroeconomic is the opposite and takes the top picture going down. Scope of Macroeconomics Studying microeconomics is important for several reasons: The performance of an economy is judges by the gross national product GNP of the economy. Macroeconomic theory defines the material wellbeing of the country to raise that material. Macroeconomic theory is useful to the government for formulating appropriate policies such as: fiscal policy, monetary policy and income policy etc. The main objective of a country is to promote economic development. That’s why it is important to know the factors influencing the process of economic development. Thus, theses factors can be manipulated. It’s required for any business firm to acknowledge the macroeconomic theory. Principles of Macroeconomics Macroeconomics study how the economy in a given country moves, also decide, and propose the possible effective choices to improve the economy. the main issues of macroeconomics are concerned with issues namely, growth, inflation, unemployment, interest rates, exchange rates, technological progress, and budget deficits. In order to understand macroeconomics it is compulsory to recognize the fundamental principles of it. The first principle of macroeconomics revolves around the fact that interaction of households, firms, and governments interventions and policies determine the general income and output of the nation. The influence occurs as they produce goods and services, exchange, consume, save and invest in different fields. Of course, these interactions happen through different markets. The markets in turn are a good way to organize economic activity. The next principle introduces the various means that work together with the objective of improving the standard of living in modern economies. The standard of living depends on the country's production. These means are summarized in capital accumulation and the advancement in technology. If the country produces more goods and services, the standard of living increases. When people consume greater quantities of goods and services, their standard of living goes up. A third fundamental principle reveals that the determination of production and income relies on the aggregate demand. The market prices balance supply and demand, and the availability of resources. This can happen in the long run. Moreover, the scarcity of labor and labor's value in producing goods determine the real wages and employment. In addition, the act of lending and borrowing in the market of finance, the impact of saving, consumption and distribution of resources determine the real interest rate. Money is also an element that reduces transactions costs. However, in the end its quantity is neutral. Another principle in macroeconomics states that recession and unemployment caused by market severity, in the short run by the fluctuations in aggregate demand and the quantity of money. Sometimes the economy of the country faces a short-run Tradeoff between Inflation and Unemployment. When prices increase, suppliers tend to increase the production of goods and services. To achieve the objective companies have to hire more workers to produce more .So, the more organizations need workers the less unemployment rate we have. This happens while there is still inflation. The last fundamental principle introduces how policy makers can use the government's monetary and fiscal policies. Their objective is always focusing on keeping the economy stable to face internal and external challenges. It is according to their expectations of policy that macro policies' work can be influenced. Economic Model To explain the theoretical principles of economics we use the economic model. This model contains functional relations and equations, which explain economy or economic units. The economic model consists of diagrams, mathematical equations and computer programs, which make the forecasting regarding the behavior of economic variables. The economic models are classified into two types: Microeconomics. Macroeconomics. Microeconomic Model: Microeconomic model studies the individual units of economy like firms, consumer and factors of production and also studies firms’ work, behavior of customer and determine the prices of goods. This model observes the consumer’s demand model, consumer behavior model, demand and supply model, and the equilibrium model. Macroeconomic Model: Macroeconomic model studies the aggregate consumption, aggregate investment, national income and the general price level etc. This model studies the economy as a whole. The economic model is divided into two types: Partial Equilibrium This model has two or few variables selected while the rest are fixed. Then the efficient relationship is anticipated between the selected variables of the model. General Equilibrium model The general equilibrium model consists of all the variables of the economy. The general equilibrium model establishes the relationship between the variables of the economy. In the market model we will see that the price of goods, supply of goods and demand of goods will affect the demand and supply of goods. This is what is called general equilibrium model. Derivation of Economic Model There are two methods to derive the economic model Deduction method The specific result is derived from ordinary reality of life. A deductive method to derive an economic model results from a routine fact of life. (E.g.) consumption depends upon income and when income increase consumption also increases, but not in the same proportion. Induction method A simple law is derived in this method on based on specific fact of life. Regarding the chosen facts, the statistical data are collected. After analyzing the data comes finding the conclusion. Therefore, based on the conclusion an ordinary law is formed. Macroeconomic Problems There are two major issues that face macroeconomics: Unemployment Unemployment refers to the fact of being unemployed, or to the average of people in the working society who are unemployed. In this modern world unemployment is considered as a huge problem. The working population can measure this problem, with putting in consideration that not every person is able to work. It is a waste of time to include children and youngsters as labor resources. Therefore, the first step of controlling unemployment is to measure the scale size we are working with. Also, we must observe the current unemployment problems. For example, would 100% employment affect the economy positively? Overall, the consequences unemployment fetch and how it may be controlled. Unemployment rate The unemployment rate is basically a ratio, which is measured by dividing the number of unemployed people in the working society by the number of employees or persons in the labor force. Unemployment as a problem The problem of unemployment can be contributed by several circumstances. The first main reason of unemployment is the lack of education or age. That makes them unable to adapt new technology techniques and sectors. This obviously impacts the working lifestyle, which expects income and production. Above what has been mentioned it is important to reinforce individuals making sure that they own the idea of continuing education, empowering their talents. The importance of education will be a widespread and overall wiling to learn independently throughout your life. Inflation Inflation is considered as a rise in the average level of price in the economy. Thus, If the price of each good or service in the economy rose by 5% from one year to the year after, we could approve that the average level of price has rose by 5% and there has been 5% inflation throughout the year. But, in general prices do not all raise the same rate. Some raise slowly, some rise rapidly and some prices even decrease. Therefore, we express the overall level of price by a price index that is an average of theses different rising and falling prices. Government behavior The government intervenes by issuing economic policies in order to keep inflation at low levels with the objective of preserving the stability of growth and to provide high level of employment opportunities to its citizens. It also strives to draw policies aiming at keeping stable position on the balance of payment and build strong finances. it also aims at rising the average living standards in the country. The government's economic policy intends to achieve a strong sustainable and balanced growth. In fact, the government behaves in a way to provide the convenient conditions to achieve a dynamic economy by removing barriers on taxes, regulations and spending. The reason is that it is necessary for the government to keep a sustainable and balanced growth. Such policy can enable it to pay its debts and give its citizens new opportunities. The success of its policy can make the country in a good position for competing and expending the economy. The government sometimes reacts with the objective of ensuring stable prices. The economy can be subject to different unexpected instabilities. The fluctuations in economic activity, which can be caused by economic conditions, international events, political decisions, wars, natural disasters and technological changes, urge the government to issue policies to reduce the effect of these fluctuations. Accordingly, the government strives to find solutions by acting before unemployment or inflation jeopardize the national economy. The government also acts as a collector of information to know about unemployment situation. So, statistics are conducted and then interpreted to have a clear view of the situation. This information and other economic data are used to make decisions and set plans to reduce the average of unemployment in the country by focusing on the underlying causes. Sometimes governments resort to lowering taxes, which in turn can promote companies to grow. Thus, they create jobs instead of downsizing and aggravate the problem of unemployment. The government can also draw policies to maintain a stable and sustainable balance of payment. To concretize the government must. Implement monetary, fiscal and commercial policies in order to stabilize their economies to face external impact. Thus, the receipt from exports can equal the imports. Fiscal policy aims at using the government spending, taxation and borrowing to influence the economic activity. However, monetary policy involves the use of interest’s rate to control the rate of growth of aggregate demand in the economy. In short, government policy has strong effect on economic situation. A good policy can promote the economy and thus create positive social repercussions. On the other hand, miscalculated behavior or decisions from the government can lead to recession or depression. Definition of Gross Domestic Product - GDP: Gross Domestic Product. The total market value of all final goods and services produced in a country in a given year, equal to total consumer About GDP: GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living. GDP is composed of goods and services produced for sale in the market and also include some nonmarket production, such as defense or education services provided by the government. An alternative concept, gross national product but, there is something’s that are not counted in GDP such as the value of leisure, clean environment and its excludes items sold illicitly, such as illegal drugs. GDP is measured by components of expenditure: Consumptions, investment, government purchases and net export Real GDP: It’s the value of the goods and services that is produces I a given year at contrast prices and account for changes in the price level, and provide a more accurate figure unlike, nominal GDP its values production of goods and services at current prices Why GDP is important: GDP is important because it gives information about the size of the economy and how an economy is performing. The growth rate of real GDP is often used as an indicator of the general health of the economy in addition, it is important to differentiate Gross Domestic Product from G National Product (GNP). GDP includes only goods and services produced within the geographic boundaries of the U.S regardless of the producer's nationality. GNP doesn't include the good and services produced by U.S What the GDP does not reveal: It’s also important to understand what GDP cannot tell us. The commonly used GDP indicator in real terms does not catch a country trading gain or loss. The real gross domestic income rates of Growth, which include the influence of terms of trade changes, were approximately 1 percentage point higher in annual average than the GDP rates in the Czech economy and belonged to the fastest in Central Europe moreover, it does not reveal the economy health moreover, GDP is not a measure of the overall standard of living or well-being of a country for instance, increased output may come at the cost of environmental damage or other external cost such as noise. Economic growth What is Economic Growth? It is the measuring of the productivity for goods and services of a country, and comparing it in period of time from another. Economic growth is divided into two terms of measuring: nominal terms, which include inflation, or in real terms, which are adjusted for inflation. As we mentioned we measure the growth of a country from one period of time to another, for example: comparing economic growth of Saudi in year 2002 and economic growth of Saudi in year 2003, we also can be compare between a country’s economic growth and another using GDP witch includes the population difference between each country. Factors can lead to Economic Growth: There is no countries have the same economy and each has different factors of growth that can effect on other country or region, it shows us how the economy growth of countries is connected to one another. Further more, here are some of the factors that considers economic growth: Growth in physical capital stock leading to rise in capital per employee. Growth in the size of the active labor force. Growth n the quality of labor (human capital). Technological progress and innovation driving productivity improvement Higher GDP per hour worked). Advantages and Disadvantages of Economic Growth: There are many advantages of economic growth such as: High living standard, increasing in the income of an individual. Reduce unemployment as its stimulate more job opportunities. Financial profits as the GDP growth enhance tax revenues witch benefits the government to gain more money in order to improve and provide services for the public such as education and healthcare. Economic growth supports social responsibilities, with a stronger economy Decision makers in business and firms are encourage to spend money and invest Researches production processes to reduce costs in order to protect the environment, such as low-carbon investment. On the other hand, there are also some disadvantages of economic growth, for Example: Due to the fast economy expanding there are some costs such as rising prices Increasing in working hours, which can upset work life balance and it, may lead employees to quit. Environmental damages as it creates negative impact on the environment, for Example pollution. Conclusion: In conclusion, I think when you get into Macroeconomics with its interesting theories about things like the relationship of interest rates to unemployment, exchange rates..etc you will believe that Economics knowledge is useful at a personal level because you learn a lot of skills and knowledge that you can apply to other jobs or to your personal life also, Economics provides an understanding of how the world works it will make us learn more About the impact decisions have on the firm, industry, and national level and learn more About the impact of international trade, both good and bad and it will defiantly teach us how we allocate our scarce resources because macroeconomics examines the structure and performance of the economy. And the Economic theory states that we live in a world of scarcity; we do not have enough natural resources or time to fulfill our unlimited desires.