HAWASSA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

Department of Economics
Master of Science in
Development economics/Financial economics
Course Title:
Advanced Macroeconomics
SEMESTER I :Year: I

Course Code: Econ 5021 ; Credit Hours: 4

Pre requite : Pre-requisite: Undergraduate Macroeconomics
Course Instructor : Berhanu Getinet(Ass. Professor ); Degela E.(PhD) and
Seyoum H.(Phd)
E-mail: [email protected]

A/C Year: 2020-2021

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 COURSE DESCRIPTION
• The course provides basic understanding of the theoretical foundations of
macroeconomics at advanced level.
• The course uses a consistent approach based on microeconomic foundations
and the rationality of economic agents to address several issues in monetary
policy, exchange-rate policy and fiscal policy.
• It discusses the details of aggregate demand and supply in both closed and
open economy cases. It also discusses about dynamic aggregate demand and
supply , dynamic aggregate demand and supply, Rational expectation and
macroeconomic policy making, aggregate consumption and savings,
investment, money and financial market, Financial Markets and
Macroeconomic policy, credit and banking, budget deficits and fiscal policy,
and inflation and monetary policy, long run & short-run macroeconomic issues.
• Growth theories and Models: Solow growth models, overlapping (Ramsey and
Diamond models) new growth theory (Romer model), kaldor model, Real
business cycle theory and models, , Macro economic Modelling, policy, and
Growth in Ethiopia.

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 COURSE OBJECTIVE
• The main objectives of this course are:
o Equipping the students with detailed theoretical and applied
knowledge of short run macroeconomic models
o Familiarizing the students with dynamic macroeconomic and
growth models
o Building an underlying aggregate economy-wide knowledge
that enables students to analyze theoretical and applied
macroeconomic models and policy issues.

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 Course Contents

Chapter 1: Introduction
o The Fundamentals of Economics
o Basic Macroeconomic Concepts, Models & Policy
o The Concept Of macro variables measurement
Chapter 2: Who is who in Macroeconomics?
Chapter 3: Traditional Keynesian Theories of fluctuations: The
analysis of the Of Aggregate Demand And Supply Model

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Chapter 4: Dynamics in the Aggregate Supply and Demand Model
Chapter 5: Rational Expectation and macro policy
Chapter 6: Open Economy Macroeconomics
Chapter 7: The theories of consumption and investment (Dr
Degela.)
7.1 Theories of consumption
7.2 Theories of investment
Chapter 8: Labour market and unemployment issues (Dr Degela.)
o Labor market and how it works
o Unemployment issues
Chapter 9: Government Budget Deficits and Fiscal Policy (Dr
Degela.)

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 Cont…
Chapter 10: Models of economic growth (Dr Seyoum H.)
o Stylized facts of economic growth and development
o The Solow-Swan Model
o Infinite-Horizon and Overlapping Generation Models
o New Growth Theory
Chapter 11: Real Business Cycle Theory (Dr Seyoum H.)
Chapter 12: Money and financial market, Inflation, interest rate,
Monetary Policy and Dynamic Inconsistency Issues (Dr
Seyoum H.)

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 Main Text Books
• Romer, David (2001) Advanced Macroeconomics, 2nd
edition. London: McGraw-Hill.
• Heijdra, Ben J. and Frederick van der Ploeg (2002).
Foundation of Modern Macroeconomics. Oxford: Oxford
University Press.
• Snowdon, Brain & Howard R. Vane (2005). Modern
Macroeconomics: Its Origins, Development and Current
State. London: Edward Elgar.
• Agenor, Prre-Richard (2000). The Economic of Adjustment
and Growth.. San Diego: Academic Press. OR Agenor and
Montiel (2008). Development Macroeconomics. New York:
• Valdes, Benigono (1999). Economic Growth: Theory,
Empirics and Policy. London: Edward Elgar

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 Other supplementary references
• AlemayehuGeda (2002). Finance and Trade in Africa:
Macroeconomic Response in the World Economy Context.
Basingstoke/New York: Pallgrave-Macmillan.
• Mankiw, N. G. (2007). Macroeconomics. (6th Ed.). New York
• Blanchard, O. (2006). Macroeconomics (4th Ed.) Upper Saddle River,
NJ, Prentice Hall.
• Sørensen, P.B., Whitta Jacobsen, H.J., (2005). Introducing Advanced
Macroeconomics: Growth and Business Cycles. McGraw Hill
Education
• Maurice, O., and Kenneth S. Rogoff (1996). Foundations of
International Macroeconomics.The MIT Press
• Gärtner, M. (2006). Macroeconomics. (2nd Ed.). Harlow, England,
Prentice Hall.
• De Long, J. B. & Olney, M. (2006). Macroeconomics (2nd Ed.) Boston,
McGraw-Hill Irwin.

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 EVALUATION AND ASSESSMENT:

• Assignment/term paper
• Case Study/article review
• Presentation
• Final Exam
NOTE: You need to know that the assessment
methods are tentative

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 Chapter 1: Introduction

1. The Fundamentals of Economics

2. Basic Macroeconomic Concepts, Models &
Policy

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 The Fundamentals of Economics
Why WE study ECONOMICS?

The globally acceptable reasons:

•To understand The Role of Government in an

economy;
• To understand macro policy issues
•The Challenges of The Global Marketplace

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 Fundamental………
What are the TWIN THEMES of ECONOMICS?

• Scarcity:-means that society has limited

resources and therefore cannot produce all
the goods and services people wish to have.

• Efficiency:- means society GETES the MOST

from that SCARCE resources.
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 Fundamental………

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 Fundamental……………
Exhibit : per capita income : CIA world facts Nov, 2020:
Qatar : $124,100 (2017 est.)
USA: $59,800 (2017 est.)
DRC : $800 (2017 est.)
Ethiopia: $2,200 (2017 est.)
………

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 Class Discussion
Take Scarcity
Assume
If all Human Desires were Fully Satisfied
( No Scarcity at all- in such an Eden of
Affluence),
What would Happen?

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 Suggested Points
 People do not worry to stretching out their
limited Income b/c they would have everything
they wanted
 Business organization would not worry about the
cost of Labor or Health Care , etc
 Governments would not need to struggle over
taxes or spending b/c no body would care
 Moreover, all of us could have as much as we
pleased, no one would be concerned about the
distribution of incomes among d/t people or class
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 Suggested……
• In such case there would be no ECONOMIC
GOODS that are SCARCE or LIMITED in SUPPLY
• And therefore, PRICE & MARKET would be
IRRELEVANT
• AND Indeed ECONOMICS would no longer be a
useful SUBJECT.

• BUT surprisingly NO SOCIETY has reached a

UTOPIA of Limitless Possibilities – GOODS are
Limited & WANTS are LIMITLESS

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 What is Economics then?
• It is the study of how we can best increase a
country’s wealth with the resources that we have
available to us.

• It is the study of how society manages its Scarce

Resources to produce valuable commodities &
distribute them among d/t people.

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 Fundamental Questions of Economic
Organizations
Three Questions:-
1.What Commodity are Produced and in What
Quantities?
• How much of goods & service the society demanded

2. How are goods Produced?:

• Who will do Production, With what Resources, with
what Production Techniques?
3. For whom are Goods Produced?
• Who gets to eat the fruit of economic activities
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 Fundamental Ways of Organizing an Economy

We do have four ways:

1. A Market Economy:- Individuals & Private Firms make the
major decisions about Production & Consumption ( E.g. US),
But it is not absolutely free there are some government role
in it.
That is, the role of the government is limited to the most
essential functions.

For example
• Most decisions in the US are made in the Market Place(DD
and SS) . But Gov’t plays an important role in overseeing THE
FUNCTION OF THE MARKET;
• Gov’t pass Laws that regulate Economic Life, produce
Educational & Policy services & control Pollution.
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2. Command Economy

 Government makes all decisions regarding

production, prices, wages, interest rates, and
income distribution.
3. Mixed Economy
 Most economic decisions are made by the
private sector, but the role of the government
is significant. Government spending and taxes
are relatively high.

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4. Laissez-fair Economy
 Extreme cases of Market economy- Gov’t
keeps its hands off economic decisions.
(Practically- No contemporary Nation in the
World)

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 Opportunity Cost
 The Cost of Something Is What You Give Up to
Get It.
 That is, The opportunity cost of an item is
what you give up to obtain that item.

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 The Production Possibilities Frontier/PPF

 A production possibilities Frontier represents

outcome or production combinations that can be
produced with a given amount of resources.

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 It shows the maximum amount of production
that can be obtained by an economy, given
its technological knowledge & quantity of
imputs available
 Countries are always being forced to decide
HOW MUCH of their limited resources goes
to their military & how much goes to other
activates: like new factories or education)

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 If an economy is operating at a point on the
production possibilities curve,
curve all resources are used,
and they are utilized as efficiently as possible.

Y
600 E
C F
500
B
400
G A
300

D X
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 Economic Growth
• Economic Growth Is Caused by:

oIncreases in Resources
oInvestment and capital stock
oHuman capital accumulation
oAnd Advances in Technology

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 Microeconomics Vs Macroeconomics
• Microeconomics examines how individual units,
whether they be consumers or firms, decide how to
allocate resources and whether those decisions are
desirable
• Macroeconomics studies the economy as a whole; it
looks at the aggregate outcomes of all the decisions
that consumers, firms, and the government make in
an economy
• Macroeconomics is about aggregate variables such
as the overall levels of output, consumption,
employment and prices- and how they move
overtime and between countries

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Why should people be interested in studying
macroeconomics?
• Understanding economic policy issues
• The relative significant of aggregate and firm-
specific uncertainty
• To understand Long run factors impacting the
functionings of an economy

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 What do macroeconomists measure?
• At the foundation of macroeconomics is a
concern of human welfare
• Macroeconomists focus on the amount of
goods and services- the “output” produced
within the economy
• They multiply the quantity of each good by its
price an then add them all together
• Outputs can be nominal or real output
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 Nominal Vs Real Variable Values
• In the nominal output, the output of each good is
multiplied by its current price
• In the real output, the same constant price is
used as weight for each year
• Real output changes only because the quantity of
goods being produced has increased and not
because prices have changed
• Nominal output changes every year because
output changes and because the weights (prices)
attached to each output have altered
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• Because economists are ultimately interested in
welfare, they want to measure the production of
output and thus prefer to focus on real output or
real GDP
• Real GDP focuses on how production in the
economy changes by using constant prices
• Nominal GDP changes because of change in
production and changes in prices
• GDP measures the value added produced in an
economy- the difference between the value of
the output sold and the cost of intermediate
inputs and raw materials

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 The goods and services produced within an economy
have four basic uses
1. Consumption by individuals (C )
2. Consumption and investment by government
(G)
3. Investment by the private sector (I)
4. Exports

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 Aggregate Demand
 Aggregate Demand= Consumption+Investment+Government
Expenditure+Exports
Or
AD=C+I+G+X
 This demand must either be made from domestically produced
output (Y) or from the imports (M). Because expenditure on
goods must equal sales of goods (demand must equal supply)
Output+Imports=Consumption+Investment+Government
Expenditure+Exports

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 Aggregate Demand
• Y+M=C+I+G+X
Implies
Output=consumption+Investment+Government
expenditure+net Exports
Or
Y=C+I+G+(X-M)
GDP can be measured either as value of output
produced, or the income earned in the economy
by capital and labour, or the expenditure on the
final products

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 GDP or GNI
• Is it best to use GDP or GNI as a measure of
the standard of living?
• The answer is- it depends
• By focusing on income, GNI tells us which
countries are currently rich.
• Instead GDP tells us which countries produce
the most
• In the long run, it is the countries with high
GDP that are wealthiest
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 GDP or GNI
• If a country has high GNI and low GDP and
experiences a shock that wipes out its foreign
assets, the GNI will fall to the level of GDP and
the country will become poor
• However, if a country that has high GDP but
higher GNI experiences a similar shock, it will be
still rich and because of its high productivity will
be able to continue to attract inward investment,
produce high output and income, and so be able
to rebuild its foreign assets
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 GDP or GNI
• GDP measures the value of output produced
in an economy but GNI shows the income
earned, taking into account net worker,
investor, corporate, and government
remittances

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The Central Macroeconomics Questions

Three Questions
1. Why do output and unemployment
sometimes fall, and how can unemployment
be reduced?
2. What are the sources of price inflation ,and
how can it be kept under control?
3. How can a nation increase its rate of
economic growth?
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 Goals of Macroeconomic Policy
1. High and Growing level of national output (
I.e. Real GDP)

2. High employment with low Unemployment

3. A stable or gently rising price level ( Rapid

price changes leads to economic inefficiency)

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 Basic Macroeconomic Policy
(Tools / Instruments of Macroeconomics Policy)
1. Monetary Policy:-
•Denotes managements of Nations Money, credit & Bank
systems
•Central banks implement monetary policy by controlling
the money supply through several mechanisms
2. Fiscal Policy:-
• Denotes the use of taxes & Government Expenditure
•Fiscal policy is the use of government's revenue and
expenditure as instruments to influence the economy

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3. Growth or supply-side policies
 Government policies that focus on stimulating
aggregate supply instead of aggregate
demand.

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 Comparison b/n Monetary & Fiscal Policy
 Economists usually favor monetary over fiscal
policy because it has two major advantages.
 First, monetary policy is generally implemented
by independent central banks instead of the
political institutions that control fiscal policy.
Independent central banks are less likely to make
decisions based on political motives.
 Second, monetary policy suffers fewer lags than
fiscal. Central banks can quickly make and
implement decisions while discretionary fiscal
policy may take time even longer to carry out to
pass decisions.
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 End of the chapter

Thank you for your attention!

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