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Amity School of Business
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Amity School of BusinessBBA, 2nd Semester
Macroeconomics for Business
Rajneesh Mishra (Lecturer)
Amity School of Business
Module- I
Introduction to Macroeconomics
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Amity School of Business
INTRODUCTION TO MACROECONOMICS• What Economics is all about?• Scarcity• Choice• Economic Activity• Economic systemsCapitalismSocialismMixed Economic System
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Amity School of Business
MACROECONOMICS
• “Macroeconomics is concerned with the economy as a whole or large segments of it. In macroeconomics, attention is focused on such problems as the level of unemployment, the rate of inflation, the nation’s total output and other matters of economy- wide significance.”
M.H.Spencer
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MACROECONOMICS
• Study of Aggregates.• Studied at the level of economy as a whole.• Scope of Macroeconomics:- Theory of national Income Theory of Employment Theory of Money Theory of general Price LevelTheory of Economic GrowthTheory of International Trade
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TWO SCHOOLS OF THOUGHTS• Macroeconomics is dominated by two school of
thoughts:- CLASSICAL SCHOOL
Mill, Malthus, Pigou, Ricardo etc. KEYNESIAN SCHOOL
Keynesian solution to the ‘GREAT DEPRESSION’
• Emergence of Macroeconomics.
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MICROECONOMICS vs. MACROECONOMICS
• Basis of Study
• Degree of Aggregation
• Different set of Assumptions
• Central Issue
• Method of Study
• Micro- Macro Paradox7
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MICROECONOMICS AND MACROECONOMICS- THE
INTERDEPENDENCE
• Micro variables depend on the level and behavior of macro variables.
Investment in one industry depend upon overall level of income and investment
• Macro variables depend upon the level and behavior of micro variables.
Aggregate demand is sum total of individual demands
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ECONOMICS AND BUSINESS POLICY DECISIONS
• Managerial economics is the use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources.
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Amity School of Business
ECONOMICS AND BUSINESS POLICY DECISIONS
• Relationship to other business disciplines– Marketing: Demand, Price Elasticity– Finance: Capital Budgeting, Break-Even Analysis,
Opportunity Cost, Economic Value Added– Management Science: Linear Programming,
Regression Analysis, Forecasting– Strategy: Types of Competition, Structure-
Conduct-Performance Analysis– Managerial Accounting: Break-Even Analysis,
Incremental Cost Analysis, Opportunity Cost10
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NATIONAL INCOME ACCOUNTING
• Estimation of National Income and related Macroeconomic variables.
• Significance of NY Accounting:- estimation of national income structure of the economy relative significance of different sectors factoral distribution of income inter-regional and international comparisons
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Circular Flow of Income
Government
Consumption IndustryBuy
Products
PaySalary
PayTAXGovernm
ent
ExpenseProv
ide
Serv
ice
Pay
TAX
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The Circular Flow
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Amity School of Business
Gross Domestic Product, GDP: A Definition
– A nation’s gross domestic product (GDP)
• Total value of all final goods and services produced for the market during a given period within the nation’s borders.
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Amity School of Business
Gross Domestic Product, GDP: A Definition
…of all final…When measuring production, we only count goods
and services that are sold to their final users.Avoids over-counting intermediate products when
measuring GDP.Value of all intermediate products is automatically
included in value of final products they are used to create.
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Amity School of Business
Gross Domestic Product, GDP: A Definition
• …goods and services…– Goods: cars, furniture, computers, beer, etc.– Services: medical, financial, educational, etc.
• …produced…– In order to contribute to GDP, something must be
produced.
Q: should stocks or bonds be included in the calculation
of GDP? 16
Amity School of Business
Gross Domestic Product, GDP: A Definition
• …for the market…
• GDP does not include all final goods and services produced in the economy
• Includes only the ones produced for the market—that is, with the intention of being sold.
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Amity School of Business
Gross Domestic Product, GDP: A Definition
…during a given period…GDP measures production during some
specific period of timeOnly goods produced during that period are
counted.GDP is actually measured for each quarter,
and reported as an annual rate.
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Amity School of Business
Gross Domestic Product, GDP: A Definition
• …within the nation’s borders– Indian GDP measures output produced within
Indian borders.– Regardless of whether it was produced by Indians– Incomes Indians earned abroad are not counted.– However, foreigners producing goods or services
within the country are included:
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Amity School of Business
GDP and NDP
• Net domestic product (NDP) – the sum of consumption expenditures, government expenditures, net foreign expenditures, and investment less depreciation.
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Amity School of Business
GDP,NDP and GNP• Net domestic product is GDP adjusted for
depreciation:
GDP = C + I + G + (X-M)
NDP = C + I + G+ (X-M) – depreciation
GNP = GDP+ Net factor income from abroad
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NDP & NNP
• NDP= GDP- DEPRECIATION
• NNP( National Income at Market Prices)= GNP- DEPRECIATION
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Amity School of Business
N.I. or National Income at Factor Cost
• N.I. or National Income at Factor Cost=
• N.N.P or National Income at Market Prices – Indiret Taxes + Subsidies.
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Other National Income Terms
• PERSONAL INCOME=
National Income – Social Security Contributions – Corporate Income Taxes – Undistributed Corporate Profits + Transfer Payments.
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Other National Income Terms
• Disposable personal income is personal income minus personal income taxes and payroll taxes.
Disposable personal income is what people have readily available to spend.
DPI = PI - Personal taxes
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Real and Nominal GDP
• Real GDP is arrived at by dividing nominal GDP by the GDP deflator.
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Real and Nominal GDP2001 Nominal GDP
2006 Nominal GDP
2006 Real GDP
Bread (ton) 1 at Rs.1 thousand
… Rs. 1thousand
2 at Rs.2 thousand
.. Rs. 4 thousand
2 at Rs. 1 thousand…………Rs.2 thousand
Milk (thousand Litres)
1 at Rs 0.5 thousand………....Rs. 0.5 thousand
3 at Rs.0.75 thousand…………..Rs. 2.25 thousand
3 at Rs.0.50 thousand…………..Rs.1.50 thousand
Total GDP Rs. 1.5
thousand
Rs. 6.25 thousand Rs. 3.50 thousand
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Amity School of Business
Nominal and Real GDP
•Nominal GDP is the sum of the quantities of final goods produced times their current price.
•Real GDP is constructed as the sum of the quantities of final goods times constant (rather than current) prices.
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Amity School of Business
Measuring GDP: A Summary
• Different ways to calculate GDP– Expenditure Approach
• GDP = C + I + G + NX– Value-Added Approach
• GDP = Sum of value added by all firms– Factor Payments Approach
• GDP = Wages and Salaries + interest + rent + profit
Therefore, Total output = Total income29
Amity School of Business
The Expenditure Approach to GDP• Expenditure approach divides output into four
categories according to which group in the economy purchases it as final users– Consumption goods and services (C)—purchased
by households– Private investment goods and services (I)—
purchased by businesses– Government goods and services (G)—purchased
by government agencies– Net exports (NX)—purchased by foreigners
Amity School of Business
The Expenditure Approach to GDP
• When we add up the purchases of all four groups we get GDP
GDP = C + I + G + NX
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Amity School of Business
Solve It• From the following data, calculate GDP at both factor
cost and market price
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ITEMS Rs. crore
Gross investment 90
Net exports 10
Net indirect taxes 05
Depreciation 15
Net factor income from abroad -05
Private consumption expenditure 350
Govt. purchases of goods and services 100
Amity School of Business
Find NDP at factor cost
Items Rs. crore
Gross domestic fixed investment 10,000
Inventory investment 5,000
Depreciation 2,000
Indirect taxes 1,000
Subsidies 2,000
Consumption expenditure 20,000
Residential construction investment 6,000
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Amity School of Business
The Value-Added Approach
• Value added – Firm’s contribution to a product or– Revenue it receives for its output
• Minus cost of all the intermediate goods that it buys
• GDP is sum of values added by all firms in economy.
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Amity School of Business
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Amity School of BusinessNumerical• In an economy consisting of two firms find
a) Value added by firm A & B
b) GDP at factor cost
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ITEMS RS. LAC
Sales by firm A 100
Purchases from firm B by firm A 40
Purchases from firm A by firm B 60
Closing stock of firm A 20
Closing stock of firm B 35
Opening stock of firm A 25
Opening stock of firm B 45
Sales by firm B 200
Indirect taxes paid by both firms 30
Amity School of Business
• Calculate GDP at market price and National income
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ITEMS $ Billion
Output of primary sector 800
Output of secondary sector 200
Output of tertiary sector 300
Value of inputs used by primary sector 400
Value of inputs used by secondary sector 100
Value of inputs used by tertiary sector 50
Indirect taxes paid by all sectors 50
Consumption of fixed capital of all sectors 80
Factor income received from ROW 10
Factor income paid to non- residents 20
Subsidies received by all sectors 20
Amity School of Business
• Calculate NDP at factor cost from the following data
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ITEMS PRIMERY SECTOR
SECONDARY SECTOR
TERTIARY SECTOR
Sales 100 150 130
Closing stock 15 20 25
Intermediate consumption 15 25 15
Opening stock 10 10 15
Indirect Tax 12 13 17
Subsidies 7 8 7
Consumption of fixed Capital 10 12 15
Expenses of electricity and fuel 3 4 3
Amity School of Business
The Factor Payments Approach
• In any year, value added by a firm is equal to total factor payments made by that firm.
• Thus, GDP = total factor payments made by all firms in the economy
• Gives us an important insight into the macroeconomy
Total output of economy (GDP) = total income earned in the economy
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Amity School of Business
Income/Factor Payment Method
• Compensation of employees+ Operating surplus+ Mixed income of the self employed = NDPFC
• + Net factor income from abroad = NNPFC
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Amity School of Business
A question for you:Suppose a firm
X produces $10 million worth of final goods
but only sells $9 million worth.
Does this violate the expenditure = output identity?
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Amity School of Business
Why output = expenditure
Unsold output goes into inventory and is counted as “inventory investment”… . ….whether the inventory buildup was intentional or not.
In effect, we are assuming that firms purchase their unsold output.
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Amity School of Business
Using Income method calculatea) Net Domestic Income b) Gross Domestic Incomec) Net National Income d) NNP at mkt. price
ITEMS Rs. Crore
Indirect Taxes 9000
Subsidies 1800
Depreciation 1700
Mixed income of self employed 28000
Operating surplus 10000
Net factor income from abroad (-) 300
Compensation of employees 24000
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Amity School of Business
Calculate a) Domestic Income b) National Income
ITEMS RS. CRORE
Wages 10,000
Rent 5,000
Interest 400
Dividend 3,000
Mixed Income 400
Undistributed Profits 200
Social Security Contribution 400
Net Factor income from abroad 1,000
Corporate Profit Tax 400 44
Amity School of BusinessSummaryVALUE ADDAD METHOD INCOME METHOD EXPENDITURE METHOD
Gross value added in primary sector + GVA in secondary sec. + GVA in tertiary sector
Compensation of employees + Operating surplus + Mixed income of self employed
Final consumption expenditure + Investment expenditure + Govt. expenditure + Net Exports
= GDP at mkt. price = Net domestic income = GDP at mkt. price
- Depreciation + Net factor income from abroad
- Depreciation
= NDP at mkt. price = National Income (NNP at FC)
= NDP at mkt. price
- Net Indirect Taxes - Net Indirect Taxes
= NDP at factor cost = NDP at factor cost
+ Net factor income from abroad
+ Net factor income from abroad
= National Income (NNP at FC)
= National Income (NNP at FC) 45
Amity School of Business
Problems With GDP Measurement
• Changes in Quality
• Underground Economy
• Non-market Production
• Not a perfect measure of economic well-being
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