Fundamentals of economics chapter 9 INTRODUCTION TO MACROECONOMICS

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INTRODUCTION TO MACROECONOMICS

CHAPTER

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Fundamentals of Economics

At the end of this chapter, you should be able to:

 Interpret the meaning of macroeconomics.

 Distinguish the differences between macroeconomics

and microeconomics.

 State and explain the objectives of macroeconomics

from the conventional and Islamic perspectives

LEARNING OUTCOMES

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INTRODUCTION TO MACROECONOMICS

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INTRODUCTION TO MACROECONOMICS (cont.)

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OBJECTIVES OF MACROECONOMICS

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(cont.)

Macroeconomic Objectives from the Conventional

Perspective

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(cont.)

(1) To Achieve Full Employment

Full employment does not mean there is no unemployed or jobless people in the economy

It is difficult to assume that full employment refers to 100%

of the labour force is being employed

The potential benefits of full employment in an economy are that it can optimize the available resources efficiently

The crucial consequences of unemployment to the

economy are wastage of available resources and social

problems

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(cont.)

(2) To Achieve Price Stability

A high degree of inflation rate that is associated with a

sustained increase in the general price level can be

disastrous to an economy

To the consumers, inflation directly influences their

purchasing power The quantity of goods and services

purchased will be less if inflation is high

Maintaining price stability is beneficial because it means

uncertainty and disruptions in the economy are avoided It

means consumers and businesses can safely pursue

long-term consumption and production plans

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(cont.)

(3) To Achieve Economic Growth

Economic growth can be described as expansion in

national output over a given period of time

As long as a nation achieves economic growth it tells us

that the economic performance is positive

However, an economy will not always encounter an upward trend over time as economies tend to experience short-term ups and downs in their performance This is called a

business cycle

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(cont.)

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(cont.)

(4) To Achieve an Equitable Distribution of Income

It is necessary to ensure that the economic growth of a

nation is shared equally among the population

Generally, policymakers try to ensure that there is no wide gap between the rich and the poor

This is to ensure that all people are equal in terms of

standard of living

Disparities of income will create social friction and bring out many problems

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(cont.)

(5) To Achieve Equilibrium in the Foreign Sector

Foreign sector means economic transactions or activities

that take place beyond the political boundaries

If a country faces balance of payment (BOP) deficit, it

means that the country will have to borrow from overseas

and leads to high debt problems whereas a prolonged BOP surplus will lead to inflation

Thus it is important for a country to understand and

determine the favourable scale of their BOP

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(cont.)

Macroeconomic Objectives from an Islamic Perspective

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(cont.)

(1) Social Justice

Social justice aims to achieve spiritual salvation to human

happiness

It is based on the principle that all existence in the universe

belongs to Allah

There is no difference between the rich and the poor, between the high and the low, or between the white and the black

There is to be no discrimination due to race or colour or

position

The only criterion of a man's worth is character, ability and

service to humanity

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(cont.)

(2) Equitable Distribution of Income

Islam insists on a powerful built-in income-redistribution

mechanism; nevertheless some income inequality is allowed

since it promotes individual initiative

Social justice in Islam is rooted in man's faith

Income redistribution, voluntary or compulsory, is not only an economic necessity, but also a means to spiritual salvation

In Islam, happiness is not derived from the possession of

material goods, but from contentment and gratitude

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(cont.)

(3) Universal Education

Acquisition of knowledge is obligatory in Islam

Thus, every child, irrespective of his birth, must receive an

equal opportunity to education

Man’s claim to superiority over all creations is based on this

superior knowledge

In an Islamic economy, the government must subsidize or

provide free education so that education is available to equalize man who are endowed differently in terms of wealth and

property

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(cont.)

(4) Optimal Rate of Economic Growth

Growth in an Islamic economy is comprehensive and

includes moral, spiritual and material aspects of man's life

In terms of capital formation, it includes human capital and material capital

Man is the central to all economic activities This

consideration should influence the composition of investment because the expenditure on education is considered an

investment

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(cont.)

(5) Maximization of Employment Generation

An Islamic economy must ensure that economic growth

results in a maximum contribution to the creation of new

employment opportunities

Additional employment in the long run must be generated

in a technically efficient manner with suitable technology in

line with resource endowment

Ensuring sufficient employment also includes the need to

provide educational and training opportunities in specific

fields

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