Bridge Course Economics

8/6/2019 Bridge Course Economics

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Macro Economics


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Macro perspective to analyse an economy.

Why is macroeconomics important for business?

What does macroeconomics deal with?

Circular flow of income in a closed and open economy

Concepts of national income, output, growth, employment andinflation.

Introducing growth-inflation trade-off and growth-equity trade-offidea.

Introducing balance of payments, current and capital account.

Some Key concepts of Macroeconomics


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Introduction of Economics

Economics is the study of the choicesmade by people who are faced with

scarcity. Scarcity is a situation in which resources

are limited and can be used in differentways.


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Economics


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What Macroeconomics Is About

Macroeconomics:

Deals with the overall, or aggregate performance of an economy

studies the structure and performance of national economies aswell as

government policies that affect economic performance In doing this,

Studies the determination of the economys aggregates, sumsindividual economic variables to get economy-wide totals

Investigates the prices that correspond to these quantities

The performance of the overall economy matters


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Why learn Macroeconomics?

The macro economy affects societys well-being


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What Macroeconomics Is About

Issues addressed by macroeconomists: Long-run economic growth Business cycles Unemployment Inflation The international economy Macroeconomic policy


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National Income


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National Income

National Income is the total income earned by anations residents in the production of goods andservices.


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Gross Domestic Product

GDP is the market value of all final goods andservices produced within a country in a given periodof time.


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The Measurement of GDP

Output is valued at market prices.

It records only the value offinal goods, notintermediate goods (the value is counted onlyonce).

It includes both tangible goods (food, clothing,

cars) and intangible services (haircuts,housecleaning, doctor visits).


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Gross National Product (GNP)

Gross national product (GNP) is the total income

earned by a nations permanent residents (callednationals).

It differs from GDP by including income that our

citizens earn abroad and excluding income thatforeigners earn here.


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The Circular-Flow of Income


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The Circular-Flow Diagram

The equality of income and expenditurecan be illustrated with the circular-flow

diagram.


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Figure 1 The Circular-FlowDiagram

Spending

Goods and

services

bought

Revenue

Goods

and services

sold

Labor, land,

and capital

Income

= Flow of inputs

and outputs

= Flow of dollars

Factors of

production

Wages, rent,

and profit

FIRMS

Produce and sell

goods and services

Hire and use factors

of production

Buy and consume

goods and services

Own and sell factors

of production

HOUSEHOLDS

Households sell

Firms buy

MARKETS

FOR

FACTORS OF PRODUCTION

Firms sell

Households buy

MARKETS

FOR

GOODS AND SERVICES

Copyright 2004 South-Western


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FactorpaymentsFactor

payments

Consumption ofdomestically

produced goodsand services (Cd)

Consumption ofdomestically

produced goodsand services (Cd)

Investment (I)Investment (I)

Governmentexpenditure (G)

Governmentexpenditure (G)

Exportexpenditure (X)

Exportexpenditure (X)

BANKS, etc

Netsaving (S)

Netsaving (S)

GOV.

Nettaxes (T)

Nettaxes (T)

ABROAD

Importexpenditure (M)

Importexpenditure (M)

The circular flow of incomeThe circular flow of income

WITHDRAWALS

INJECTIONS


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Inflation


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Inflation is a period of sustained price rise of allgoods.

If price of only some good rises, that is relative pricechange, not inflation in the true sense.

An opposite term is deflation. Deflation means sustained price fall.

Inflation


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Inflation

One may think inflation is good for business, as it

raises prices and revenue.

But inflation creates problems as well.

Input prices may rise faster.

Inflation may increase labour management dispute.

Inflation may invite govt. control.


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Measurement of inflation

Inflation is measured by price index.

A price index is a number that measures

price changes over two differentsituations. It is an weighted average of theprice changes of all the commoditiescollectively.


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Balance of Payments


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Definition

The Balance Of Payments of a country is a systematic record

of all economic transactions between the residents of a country

and the rest of the world. It presents a classified record of all

receipts on account of goods exported, services rendered and

capital received by residents and payments made by them on

account of goods imported and services received from the capital

transferred to non-residents or foreigners. Reserve Bank of

India (RBI)


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Importance of BOP

The BOP is an important indicator of pressure on a countrysforeign exchange rate .

T

he BOP

helps to forecast a countrys market potential,especially in the short run.

Changes in a countrys BOPmay signal the imposition orremoval of controls over payment of dividends and interest,

license fees, royalty fees, or other cash disbursements toforeign firms or investors.


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Contents of BoP

Current account

Capital account

Financial account

Net errors and omissions account

Reserves and related items: official reserve account


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Current account

Net export/import of goods (trade balance)

Net export/import of services

Net income (investment income from direct and

portfolio investment plus employee compensation)

Net transfers (sums sent home by migrants and

permanent workers aboard, gifts, grants and pensions)


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Capital account

Capital transfers related to the purchaseand sale of fixed assets such as real estate


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Financial account

Net foreign direct investment

Net portfolio investment

Other financial items


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Components of the trade

Imports

-bulk imports: petroleum, crude & products, bulkconsumption goods, other bulk items.

-non bulk imports: capital goods, mainly export relateditems

Exports

-agriculture and allied products, ores and minerals,

manufactured goods, mineral fuels.


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The End

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Bridge Course Economics