This study unit emphasizes the important of basic tools of macroeconomics analysis, the students are, however introduced to these tools of analysis in order to hCont full grasp of the entire course work because most of the latter discussion would be based on the understanding of these basic tools of analysis.
The basic macroeconomics tools imply the instrument through which the study is
analysed explicitly to the understanding of the learners. These include verbal statements, graphs and equations or mathematical models.
Objectives
At the end of this unit, you should be able to
Know the various tools of macroeconomic analysis.
Distinguish among these tools of macroeconomic analysis
Understand the rudiments of macroeconomic tools
Understand and have the ability to employ these tools for economic
analysis
Verbal Statement or Prose
The use of words is often the easiest way of presentation. It has the advantage of
making discussion in economics available to a wide audience. Verbal statement
consists of words in tape or class room teaching delivery. Verbal statement could
involve different methods; it could be one to one, one to many or many to one, in
teacher - student arrays. Fundamentally, verbal learning also includes virtual
learning, lecturer (teacher) given lectures (teachings) online, which could also be
real time or offline. The former implies receiving online lectures as at when the lectures are being delivered by the lecturer, in which real time participation is
expected, teacher asks questions from students answering the question at the
same time and vice versa. On the other hand, the offline imply that the teacher
leaving lecturing material for student to learn and ask question that are not
replied immediately.
Self Assessment Exercise
i. Explain verbal statement as a tool of macroeconomic analysis.
Graphs
Graphs are used as a further aid to understanding economic discussion.
Moreover, it provides a clear picture of the relationship between two economic
variables because of their visual appeal. The easiest graphical analyses in
economics include that of demand and supply curves. The two curve shows
relationship between quantity and price of the commodity, this is illustrated
below;
The figures show the relationships that exist between quantity of a commodity
demanded and supplied and the price adjustment. Figure 1.2.1a show that more
is demanded at a lower price and less at a higher price while figure 1.2.1b
implies that supplier would be willing to sell more at a high price than at lower
price.
The illustration above confirms the fact that a clearer picture of concept is view
from a graph or curves. There is a negative relationship between demand and
price while positive relationship exists between supply and price.
Self Assessment Exercise
i. How could graph be used for illustration?
Equations / Models
Complex relationships of a multi-dimensional nature are expressed in
mathematical language; algebraic statement of functional relationship. However, for ease of presentation variables are often reduced to two so that they could be shown on graphs.
An algebraic statement could be made from illustration of demand and supply
curves in figure 1.2.1a and 1.2.1b.
For instance figure 1.2.1a could be algebraically represented as; Qd = f (P)
meaning quantity of a commodity demanded depends on the price of that
commodity, implicitly. However, it could be explicitly written as Qd = a –bP ,
meaning that a negative relationship exists between quantity of a commodity
demanded and its price. i.e. people tend to demand more at a low price than at a
high price, ceteris paribus. On the other hand figure 1.2.1b could be also
implicitly written as Qs = f (P), still meaning that quantity supply of a
commodity is a function of its price, and could be explicitly written as Qs = -a +
bP, meaning that seller would be willing to sell more at a high price than at a low
price.
Some Mathematical Concepts
Variable
A variable refers to a quantity that may assume any value in the context of a
particular problem. Symbols are often used to denote variables. In economics,
the two types of variables often considered are the continuous variable and discrete variable. The continuous variables are one that assumes any value within a specified interval of real numbers. Examples include all non-countable
numbers between 3 and 6. Some of these may differ by very small (infinitesimal)
amounts, e.g. 3.00036. The discrete variable, on the other hand assumes values within a countable range. An example is the number of integers between 10 and 20 ( are 11) which are countable.
Dependent and independent variables: The variables to which we assign value
are called independent variables, and the variables whose values are determined
by the independent variables are called dependent variables. Thus, if the
functional relationship is Y = f(X), i.e. Y depends on X, then X is the
independent variable and Y is a dependent variable.
Exogenous and Endogenous Variables: The endogenous variable in an
economic model is the one that is explained within the model. The exogenous variable is the one that affects the endogenous variable but is determined from outside the model.
Using the population case again, if we hypothesize that the population of Nigeria
is determined by the food supply, the endogenous variable is population and the exogenous variable is the availability of food. Food supply, although determined from outside the model, has impact on the population. Notice that population
itself is assumed to have no impact on food supply, since population is being
explained in the model. Another name for an exogenous variable is the autonomous variable. Note also that in the relationship Y = f(X), Y is endogenous while X is exogenous variable.
Functions
If two variables-say X and Y- are related in such a way that when the value of X
is given, the value of Y is determined, we say that Y is a function of X. that
means that Y depends on X. This is written as Y= f(X), where f is the notation of
function and means ‗depends on‘. Suppose P stands for the population of Nigeria and Q stands for food supply produced. We can say that P = f (Q), i.e. the population of Nigeria depends on food supply, or population is a function of food
supply.
Increasing Function: If Y is a function of X and Y increases as X increases, or
Y decreases as X decreases, we say that Y is an increasing or direct function of
X. In our population example above, if P increases with Q, then we can say that
population is an increasing or direct function of food supply.
Decreasing Function: If Y increases as X decreases or Y decreases as X
increases, Y is said to be a decreasing function of X. Alternatively, we can say
that Y is an indirect or inverse function of X. If, for instance, population (P)
increases when food supply (Q) decreases, we can say that population is a decreasing or indirect function of food supply.
A Rectangular Coordinate System
Graphs of functional relationships between two variables can be drawn or
demonstrated using the rectangular coordinate system (see Fig. 2.1). If two
straight lines are drawn in a given plane, one vertically and the other
horizontally, they will intersect at a point called origin (0).
The vertical line, called they y-axis, and the horizontal line, called the x –axis,
have divided the space into four quadrants numbers in an anti-clockwise direction as I, II, III and IV. The value of x is generally written before that of y.
The first quadrant has positive values for both x and y (+, +). The second quadrant has negative values for x and positive values for y (-, +). The third quadrant has negative values for both x and y (-, -) while the fourth quadrant has positive x and negative y (+, -).
Since most values in economics at this level of analysis are often positive, we
use the first (positive) quadrant in showing economic relationships.
Any point in each of the quadrants has coordinates, i.e. numbers representing
that point. Thus, the coordinates of point A are 2 units from the x-axis and 2 units
from the y-axis. This is written as A(2, 2). The coordinates of point B are 2 units
from the x-axis and 4 from the y-axis, written as B (2,4). As earlier stated, notice
that the horizontal (x-axis) coordinate is often written before the vertical (y-axis)
coordinates. Can you read off the coordinates associated with points C and D in Fig. 1.2.2? We shall now see how simple graphs can be drawn on quadrant I.
Self Assessment Exercise
i. Explain mathematically, what is meant by inverse relationship
CONCLUSION
We conclude here that microeconomics and macroeconomics concepts are two
ways of looking at the same thing, that is both micro and macroeconomics study
the economic activities of every economy, but while one looks at aggregate
(macroeconomics), the other(microeconomics) looks at the individual economic unit (i.e. household, businesses (firms), and government).
SUMMARY
This module discussed the macroeconomics concept in its entirety and relates it to microeconomics to bring a clearer picture between the two. It further gives relevant examples of both macroeconomic and microeconomics concepts and finally discusses the basic tools of macroeconomic analysis with definitions and examples.
MARKED ASSIGNMENT
i. Clearly distinguish between microeconomic and macroeconomic
concepts.
ii. Enumerate and explain various tools of macroeconomic analysis.
iii. Can internet be a source of interaction between learner and teacher.
Discuss with examples
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