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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