Macroeconomic s

Dr. Shylajan
Associate Professor, IBS Hyderabad shylajan@gmail.com Cell:9440070524

Topics of Discussion

Microeconomics and Macroeconomics Major Macroeconomic Issues Macroeconomic Policy Objectives Macroeconomic Policy Tools Measuring National Income Macroeconomic Policies in India Macroeconomics and Indian Business Environment Macroeconomic Management-Recent Developments in India

References

Economics Nordhause

by Samuelson and

Other Useful References

RBI publications (rbi.org.in) Ministry of Finance ( http://finmin.nic.in) Centre for Monitoring Indian Economy (CMIE, www.cmie.com) Economic and Political Weekly Macroscan.com Business Line

Microeconomics and Macroeconomics

What did you learn in micro economics?

Microeconomics and Macroeconomics and The behavior of individual producers

consumers in markets

The business environment at the firm level : the structure of the market What is Macroeconomics?

Macroeconomics

The study of working of the economy as a whole

Great Depression of 1930s Stagnant production throughout world economy- (N.America & Europe)

Macroeconomics

In America, the Depression began in 1930 and lasted till 1941 Unemployment 25 %

Output produced fell 20 % below trend What causes economic booms and recessions?

Macroeconomics
Is

the study of the aggregate states of the economy. Aggregate Demand (AD)
Aggregate Supply (AS) General Price Level

Aggregate Demand and Aggregate Supply

Price level

AD
National output

Aggregate Demand and Aggregate Supply

The aggregate demand curve

Why aggregate demand curves slope downwards?

Aggregate Demand and Aggregate Supply

AS

Price level

AD

Aggregate Demand and Supply

The aggregate supply curve

Why aggregate supply curves generally slope upwards?

Four major macroeconomic questions

What

causes economic growth? What causes business cycles? What causes inflation? What causes unemployment?

Major Macroeconomic Policy Objectives

Economic

Growth Price Stability Full Employment

Macroeconomic Policy Objectives

Macroeconomic Policy Objectives

Sustained Economic Growth

Price Stability

Economic growth

The actual annual growth of goods and services in an economy It is captured by the growth of GDP. It is an estimate of growth of aggregate demand for goods and services

Economic growth
If AD > AS , then economy has a phase of boom. Then prices rises and inflation goes up If AD < AS, then economy has a slowdown/recession. Then prices falls and inflation comes down.

The primary measurement of growth is changes in real gross domestic product.

Economic growth

Real Gross Domestic Product (real GDP)

The market value of final goods and services produced in the economy stated in the prices of a given year.

Economic growth

Per capita real output is real GDP

divided by the total population.

Issues of growth are considered in a longrun framework.

Global Experience with Growth

Per capita economic growth allows everyone in society, on average, to have more.

Indian Experience with Growth

What do you infer from the following Figure?

Business Cycles
Fluctuations

in economic growth are called business cycles

business cycle has two phases

Business Cycle
1. Expansion or Boom
Production

(GDP) grow rapidly Employment grow rapidly and Prices grow rapidly
If AD > AS , then economy has a phase of boom.

Business Cycle
2. Recession or Depression
Production

(GDP) falls, Unemployment rises, and Rate of Inflation falls

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

The Phases of the Business Cycle

Expansion
m

Recession
Peak Do

Expansion
rn tu Up Secular growth trend

Total Output

Bo o

wn

tu rn

Trough

0 Time Period

Do we have growth cycles in India?

There have been 4 episodes between 1950-51 and 1992-93 when growth in GDP fell sharply. These have been in 1957-58 1965-66 1979-80 1991-92

Real GDP growth rate in India

1956-57 1957-58 1964-65 1965-66 1978-79 1979-80 1990-91 1991-92

5.7 % -1.2 % 7.6 % -3.7 % 5.5 % -5.2 % 5.6 % 1.3 %

Business Cycles

There are a number of policies regarding business cycles. Classical economists generally favor noninterventionist policies. Keynesians generally favor interventionist policies. We will discuss it later

Price Stability

Stability in the general price level is captured by the rate of inflation in the economy Movements in Wholesale Price Indices or Consumer Price Indices In India, inflation is measured from movements in WPI

Price Stability
What

causes inflation?

DD

pull vs Cost-push inflation

Inflation in India
Magnitude Causes Correction

Macroeconomic Policy Tools

Fiscal

Policy policy

Monetary

Both try to ensure that actual growth of GDP (AD) does not deviate too much from the potential GDP (Capacity of the economy)

Understanding the Macroeconomic Policy Environment

Macroeconomic Policy Tools

Fiscal

Monetary

Govt Expenditure, Taxes

Money Supply

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

Macroeconomic Policy Tools

Fiscal Policy responsibility of Ministry of Finance Refer Ministrys website Monetary Policy responsibility of Central Bank (RBI in India) Refer RBI website

How does macroeconomic policies influence aggregate demand for goods and services?

Fiscal policy influences GDP and prices through changes in government expenditure and taxes Monetary policy impacts GDP and prices through change in money supply

How does macroeconomic policies influence aggregate demand for goods and services?

The behavior of interest rates, exchange rates, prices and tax rates affects the business environment

Why an understanding of macroeconomics and macroeconomic policies is of utmost importance to the manager?

To Understand

How an economy functions? What causes fluctuations in aggregate demand? What leads to instability in prices?

To arrive at a decision on timing of fresh investments, penetration to new markets and To get the best return on investment

Thank You