Unit 2: Macroeconomic
Data
Learning Outcomes
By the end of this Unit, you should be able to:
• State the nature of macroeconomic data.
• Describe the circular flow model
• Analyze the business cycle
Introduction
• Like scientists, economists want to figure out what is going on
in the world around them.
• To do this, they rely on both theory and observation. They build
theories in an attempt to make sense of what they see
happening.
• They then turn to more systematic observation to evaluate the
theories’ validity. Only when theory and evidence come into line
do they feel they understand the situation.
• Macroeconomists use data to make informed policy decisions.
Nature of Macroeconomic Data
• In terms of time horizon data can be classified as either cross
section or longitudinal (time series).
• Cross section data is collected on variables at one point in time
from several respondents.
• On the other hand, time series data is data that is collected at
regular time intervals for example, daily, weekly, monthly,
quarterly or annually from the same participant.
• macroeconomists mainly use time series data to understand
behavior of an economy and its response to policy intervention
• The three statistics that economists and policymakers use most
often are ;
• gross domestic product,
• unemployment rate and
• consumer price index.
Gross domestic product (GDP)
• GDP tells the nation’s total income and the total expenditure on
its output of goods and services. It is the sum of the money
values of all final goods and services produced in the domestic
economy during a specified period of time, usually a year.
• For example, income that is earned by Chinese in Malawi is
included in the GDP for Malawi but the income earned by
Malawians in South Africa cannot be part of GDP for Malawi.
The Consumer Price Index (CPI)
• CPI is a single value that is commonly used to measure the level
of prices is the consumer price.
• To compute the CPI economists determine goods and services
that are commonly used by an average household in the
economy.
• These goods and services make up a consumer basket.
• The value of the basket is calculated at regular time intervals
using prices that prevail at each time period.
• The CPI is the price of this basket of goods and services relative
to the price of the same basket in some base year.
The unemployment rate.
• One aspect of economic performance is how well an economy
uses its resources.
• Because an economy’s workers are its chief resource, keeping
workers employed is a paramount concern of economic
policymakers.
• The unemployment rate is the statistic that measures the
percentage of those people wanting to work who do not have
jobs.
• High rates of unemployment can have social and political
implications in a country.
• Socially, unemployment may increase crime rate, suicide,
divorce etc.
The Circular Flow Model(two sectors)
• You will notice that money changes hands between members of
different sectors in the economy.
• Let us assume that we have an economy that has closed two
sectors, household sector and the business sector.
• In this case, the government and foreign sector have no role.
• We take households as consumers who sell factors of
production to the firms and spend all the income earned on
purchases of finished goods and services from the firms.
• The businesses are seen as producers who use the inputs
purchased from households to produce goods and services that
are then sold to the households.
The Circular flow model(closed three
sector model)
The Business Cycle
• The term business cycle refers to alternating rises and declines
in the level of economic activity, which sometimes extends over
several years.
• Economic fluctuations are irregular and unpredictable.
Fluctuations in the economy are often called the business cycle.
These fluctuations do not follow regular or easily predictable patterns.
The Business Cycle
• Sometimes growth gives way to recession and depression –
that is, to declines in real GDP and significant increases in
unemployment. At other times rapid inflation impairs rapid
economic growth.
• Both unemployment and inflation often are associated with
business cycles .
• The four phases of the business cycle are;
1. peak,
2. recession,
3. trough
4. recovery.
1. Peak
• At a peak, business activity has reached a temporary maximum.
• The economy is at full employment and the level of real output
is at or very close to the economy’s production capacity.
• The price level is likely to rise quickly (inflation) during peak
because full employment of resources, including labour means
that a large number of households will have money leading to
an increase in effective demand for goods and services.
• Therefore, if demand exceeds the economy’s capacity to
produce, inflation will be likely outcome
2. Recession
• A peak is followed by recession – a period of decline in real
output, income, employment, and trade.
• This downturn, which lasts 6 months or more, is marked by the
widespread contraction (reduction) of business activity in many
sectors of the economy.
• But because many prices are downwardly inflexible, the price
level is likely to fall only if the recession is severe and prolonged
– that is, only if a depression occurs.
• A recession is characterised by high unemployment rate and low
inflation rate. However, inflation may occur during recession
because households tend to use their assets including savings
for financing their daily needs. This creates a situation in which
effective aggregate demand is relatively larger than the
available aggregate supply produced from the declining
economic activities.
3. Trough
• In the trough of the recession or depression, output and employment
“bottom out” at their lowest levels.
• In other words, at the trough, the economy’s output reaches its lowest
level while unemployment registers its highest level indicating greatest
loss of employment opportunities by the labour force.
• The trough phase may be either short-lived or quite long.
• If the economy stays in the trough over a long period of time, prices
may go down as households tend to spend all their assets which can be
liquidated into cash for survival leading to a decline in the effective
aggregate demand even for the little aggregate supply of goods and
services on the market. Producers are forced to reduce the selling prices
just to clear the inventory in an effort to reduce storage cost.
4. Recovery
• In the expansion or recovery phase, output and employment rise
toward full employment.
• As recovery intensifies, the price level may begin to rise before
full employment and full-capacity production returns.
• This happens because effective aggregate demand may
increase faster than aggregate supply, as previously retrenched
workers are re-called to get back to their jobs.
• So, in the recovery phase of the business cycle, unemployment
declines (or employment increases) while inflation rises.