Overview of Macroeconomics-I

8/6/2019 Overview of Macroeconomics-I

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acroeconom cacroeconom c

ss

Dr. ShylajanDr. ShylajanAssociate Professor, IBS HyderabadAssociate Professor, IBS Hyderabad

[email protected]@gmail.com

Cell:9440070524Cell:9440070524
mailto:[email protected]:[email protected]:[email protected]


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Topics ofTopics of

DiscussionDiscussion Microeconomics and MacroeconomicsMicroeconomics and Macroeconomics Major Macroeconomic IssuesMajor Macroeconomic Issues

Macroeconomic Policy ObjectivesMacroeconomic Policy Objectives

Macroeconomic Policy ToolsMacroeconomic Policy Tools

Measuring National IncomeMeasuring National Income Macroeconomic Policies in IndiaMacroeconomic Policies in India

Macroeconomics and Indian Business EnvironmentMacroeconomics and Indian Business Environment

Macroeconomic Management-Recent Developments inMacroeconomic Management-Recent Developments inIndiaIndia


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ReferencesReferences

EconomicsEconomics by Samuelson andby Samuelson and

NordhauseNordhause


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Other UsefulOther Useful

ReferencesReferences RBI publicationsRBI publications(rbi.org.in)(rbi.org.in) Ministry of Finance (Ministry of Finance (

http://finmin.nic.inhttp://finmin.nic.in)) Centre for Monitoring IndianCentre for Monitoring Indian

Economy (CMIE,Economy (CMIE, www.cmie.comwww.cmie.com)) Economic and Political WeeklyEconomic and Political Weekly

Macroscan.comMacroscan.com Business LineBusiness Line
http://finmin.nic.in/http://finmin.nic.in/http://www.cmie.com/http://www.cmie.com/http://www.cmie.com/http://finmin.nic.in/


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M croeconom cscroeconom csandand

MacroeconomicsMacroeconomicsThe behavior of individual producers andThe behavior of individual producers and

consumers in marketsconsumers in markets

The business environment at the firmThe business environment at the firmlevel : the structure of the marketlevel : the structure of the market

What is Macroeconomics?What is Macroeconomics?


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MacroeconomicsMacroeconomics

The study of working of the economy asThe study of working of the economy asa wholea whole

Great Depression of 1930sGreat Depression of 1930s

Stagnant production throughout worldStagnant production throughout worldeconomy- (N.America & Europe)economy- (N.America & Europe)


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MacroeconomicsMacroeconomics

In America, the Depression began inIn America, the Depression began in1930 and lasted till 19411930 and lasted till 1941

UnemploymentUnemployment 25 %25 %

Output produced fell 20 % below trendOutput produced fell 20 % below trend What causes economic booms andWhat causes economic booms and

recessions?recessions?


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MacroeconomicsMacroeconomics Is the study of the aggregate states of theIs the study of the aggregate states of the

economy.economy.

Aggregate Demand (AD)Aggregate Demand (AD)

Aggregate Supply (AS)Aggregate Supply (AS)

General Price LevelGeneral Price Level


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Aggregate Demand and AggregateAggregate Demand and Aggregate

SupplySupply

AD

Priceleve

l

National output


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SupplySupply

The aggregate demand curveThe aggregate demand curve

Why aggregate demand curvesWhy aggregate demand curves

slope downwards?slope downwards?


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SupplySupplyAS

AD

Pricele

vel


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Aggregate Demand and SupplyAggregate Demand and Supply

The aggregate supply curveThe aggregate supply curve

Why aggregate supply curvesWhy aggregate supply curves

generally slope upwards?generally slope upwards?


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Four majorFour major

macroeconomicmacroeconomic

questionsquestions

What causes economic growth?What causes economic growth?

What causes business cycles?What causes business cycles?What causes inflation?What causes inflation?

What causes unemployment?What causes unemployment?


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Major MacroeconomicMajor Macroeconomic

Policy ObjectivesPolicy Objectives

Economic GrowthEconomic GrowthPrice StabilityPrice Stability

Full EmploymentFull Employment


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Macroeconomic PolicyMacroeconomic Policy

ObjectivesObjectives

Macroeconomic PolicyMacroeconomic Policy

ObjectivesObjectives

Sustained Economic Growth Price Stability


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Economic growthEconomic growth

The actual annual growth of goods andThe actual annual growth of goods and

services in an economyservices in an economy

It is captured by the growth of GDP.It is captured by the growth of GDP.

It is an estimate of growth of aggregateIt is an estimate of growth of aggregatedemand for goods and servicesdemand for goods and services


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If AD > AS , then economy has a phase of boom.If AD > AS , then economy has a phase of boom.

Then prices rises and inflation goes upThen prices rises and inflation goes up

If AD < AS, then economy has aIf AD < AS, then economy has a

slowdown/recession. Then prices falls and inflationslowdown/recession. Then prices falls and inflation

comes down.comes down.

The primary measurement of growth is changesThe primary measurement of growth is changes

inin real gross domestic product.real gross domestic product.


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Real Gross Domestic Product (real GDP)Real Gross Domestic Product (real GDP)

The market value of final goods andThe market value of final goods andservices produced in the economy statedservices produced in the economy statedin the prices of a given yearin the prices of a given year..


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Per capita real outputPer capita real output is real GDPis real GDPdivided by the total population.divided by the total population.

Issues of growth are considered in a long-Issues of growth are considered in a long-run framework.run framework.

l b l i i h


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Global Experience withGlobal Experience with

GrowthGrowth

Per capita economic growth allows everyone in society,Per capita economic growth allows everyone in society,

on average, to have more.on average, to have more.


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Indian Experience withIndian Experience with

GrowthGrowth

What do you infer from theWhat do you infer from the

following Figure?following Figure?


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Business CyclesBusiness Cycles

Fluctuations in economic growth areFluctuations in economic growth are

calledcalled

business cyclesbusiness cycles

A business cycle hasA business cycle has two phasestwo phases


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Business CycleBusiness Cycle

1. Expansion or Boom1. Expansion or Boom

Production (GDP) grow rapidlyProduction (GDP) grow rapidlyEmployment grow rapidly andEmployment grow rapidly and

Prices grow rapidlyPrices grow rapidly

If AD > AS , then economy has a phase of boom.If AD > AS , then economy has a phase of boom.


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2. Recession or Depression2. Recession or Depression

Production (GDP) falls,Production (GDP) falls,Unemployment rises, andUnemployment rises, and Rate of Inflation fallsRate of Inflation falls

If AD < AS, then economy has a slowdown/recession. Slow-down has toIf AD < AS, then economy has a slowdown/recession. Slow-down has tocontinue for at least six months to be considered a recession.continue for at least six months to be considered a recession.


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Expansion ExpansionRecession

The Phases of theThe Phases of the


Boom

Seculargrowthtrend

Downturn

Upturn

Trough

Peak

0

TotalOutput

. .

TimePeriod


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Do we have growthDo we have growth

cycles in India?cycles in India?There have beenThere have been 4 episodes4 episodes betweenbetween

1950-51 and 1992-931950-51 and 1992-93 when growth inwhen growth inGDP fell sharply.GDP fell sharply.

These have been inThese have been in

1957-581957-58

1965-661965-661979-801979-80

1991-921991-92


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Rea DP growt rate nea grow ra e n


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Rea DP growt rate nea grow ra e nIndiaIndia

1956-571956-57 5.7 %5.7 % 1957-581957-58 -1.2 %-1.2 %

1964-651964-65 7.6 %7.6 %

1965-661965-66 -3.7 %-3.7 %

1978-791978-79 5.5 %5.5 %

1979-801979-80 -5.2 %-5.2 %

1990-911990-91 5.6 %5.6 %

1991-921991-92 1.3 %1.3 %


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Business CyclesBusiness Cycles

There are a number of policies regardingThere are a number of policies regarding businessbusinesscyclescycles..

Classical economistsClassical economists generally favorgenerally favornoninterventionist policies.noninterventionist policies.

KeynesiansKeynesians generally favor interventionist policies.generally favor interventionist policies.

We will discuss it laterWe will discuss it later


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Price StabilityPrice Stability

Stability in the general price level isStability in the general price level iscaptured by the rate of inflation in thecaptured by the rate of inflation in theeconomyeconomy

Movements in Wholesale Price IndicesMovements in Wholesale Price Indicesor Consumer Price Indicesor Consumer Price Indices

In India, inflation is measured fromIn India, inflation is measured from

movements in WPImovements in WPI


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Price StabilityPrice Stability

What causes inflation?What causes inflation?

DD pull vs Cost-pushDD pull vs Cost-push

inflationinflation


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Inflation in IndiaInflation in India

MagnitudeMagnitude

CausesCauses

CorrectionCorrection

MacroeconomicMacroeconomic


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Policy ToolsPolicy Tools

Fiscal PolicyFiscal Policy

Monetary policyMonetary policy

Both try to ensure that actual growth ofBoth try to ensure that actual growth ofGDP (AD) does not deviate too much fromGDP (AD) does not deviate too much fromthe potential GDP (Capacity of thethe potential GDP (Capacity of theeconomy)economy)

U d di h M iU d t di th M i


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Understanding the MacroeconomicUnderstanding the Macroeconomic

Policy EnvironmentPolicy Environment

Macroeconomic Policy ToolsMacroeconomic Policy Tools

Fiscal Monetary

Govt Expenditure, Taxes Money Supply

Aggregate DD, Prices, Interest Rate, Exchange Rate, Tax Rates

Business Environment



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Policy ToolsPolicy Tools

Fiscal Policy responsibility of Ministry ofFiscal Policy responsibility of Ministry ofFinanceFinance

Refer Ministrys websiteRefer Ministrys website

Monetary Policy responsibility of CentralMonetary Policy responsibility of CentralBank (RBI in India)Bank (RBI in India)

Refer RBI websiteRefer RBI website

How does macroeconomicHow does macroeconomic


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How does macroeconomicHow does macroeconomicpolicies influence aggregatepolicies influence aggregate

demand for goods anddemand for goods and

services?services?

Fiscal policy influences GDP and pricesFiscal policy influences GDP and prices

throughthrough changes in governmentchanges in governmentexpenditure and taxesexpenditure and taxes

Monetary policy impacts GDP andMonetary policy impacts GDP andprices throughprices through change in moneychange in money

supplysupply

How does macroeconomicHow does macroeconomic


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How does macroeconomicHow does macroeconomicpolicies influence aggregatepolicies influence aggregate

demand for goods anddemand for goods and

services?services?

The behavior of interest rates,The behavior of interest rates,

exchange rates, prices and taxexchange rates, prices and tax

rates affects the businessrates affects the businessenvironmentenvironment


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Why an understandingWhy an understanding

of macroeconomics andof macroeconomics andmacroeconomic policiesmacroeconomic policies

is of utmost importanceis of utmost importanceto the manager?to the manager?


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To UnderstandTo Understand

How an economyHow an economyfunctions?functions?

What causesWhat causesfluctuations influctuations inaggregate demand?aggregate demand?

What leads toWhat leads toinstability in prices?instability in prices?

To arrive at aTo arrive at a

decision ondecision on

timing of freshtiming of freshinvestments,investments,

penetration topenetration to

new markets andnew markets and

To get the bestTo get the bestreturn onreturn on

investmentinvestment


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Thank YouThank You

Documents

Overview of Macroeconomics-I