Amity School of Business

Amity School of Business

BBA, 2nd Semester Macroeconomics for Business Rajneesh Mishra (Lecturer)

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Module- I

Introduction to Macroeconomics

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INTRODUCTION TO MACROECONOMICS
What Economics is all about? Scarcity Choice Economic Activity Economic systems  Capitalism  Socialism  Mixed Economic System
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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 nations 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 Level  Theory of Economic Growth  Theory 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 Paradox
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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 organizations scarce resources.

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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, StructureConduct-Performance Analysis Managerial Accounting: Break-Even Analysis, Incremental Cost Analysis, Opportunity Cost
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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

Pay Salary Buy Products

Industry
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The Circular Flow

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Gross Domestic Product, GDP: A Definition

A nations gross domestic product (GDP) Total value of all final goods and services produced for the market during a given period within the nations borders.

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Gross Domestic Product, GDP: A Definition

y of all final y When measuring production, we only count goods and services that are sold to their final users. y Avoids over-counting intermediate products when measuring GDP. y Value of all intermediate products is automatically included in value of final products they are used to create.
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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?
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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 marketthat is, with the intention of being sold.
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Gross Domestic Product, GDP: A Definition

y during a given period yGDP measures production during some specific period of time yOnly goods produced during that period are counted. yGDP is actually measured for each quarter, and reported as an annual rate.
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Gross Domestic Product, GDP: A Definition

within the nations 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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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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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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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.

Nominal GDP Real GDP = GDP deflator

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Real and Nominal GDP

2001 Nominal GDP Bread (ton) Milk (thousand Litres)
Total GDP 1 at Rs.1 thousand Rs. 1thousand

2006 Nominal GDP

2 at Rs.2 thousand .. Rs. 4 thousand

2006 Real GDP

2 at Rs. 1 thousand Rs.2 thousand

3 at Rs.0.50 1 at Rs 0.5 3 at Rs.0.75 thousand.... thousand thousand Rs. 0.5 thousand ..Rs. 2.25 thousand ..Rs.1.50 thousand Rs. 1.5 thousand Rs. 6.25 thousand Rs. 3.50 thousand
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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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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 income
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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

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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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Solve It
From the following data, calculate GDP at both factor cost and market price
ITEMS Gross investment Net exports Net indirect taxes Depreciation Net factor income from abroad Private consumption expenditure Govt. purchases of goods and services Rs. crore 90 10 05 15 -05 350 100
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Find NDP at factor cost

Items Gross domestic fixed investment Inventory investment Depreciation Indirect taxes Subsidies Consumption expenditure Residential construction investment Rs. crore 10,000 5,000 2,000 1,000 2,000 20,000 6,000

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The Value-Added Approach

Value added Firms 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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Numerical
In an economy consisting of two firms find a) Value added by firm A & B b) GDP at factor cost
ITEMS Sales by firm A Purchases from firm B by firm A Purchases from firm A by firm B Closing stock of firm A Closing stock of firm B Opening stock of firm A Opening stock of firm B Sales by firm B Indirect taxes paid by both firms

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RS. LAC 100 40 60 20 35 25 45 200 30

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Calculate GDP at market price and National income

ITEMS Output of primary sector Output of secondary sector Output of tertiary sector Value of inputs used by primary sector Value of inputs used by secondary sector Value of inputs used by tertiary sector Indirect taxes paid by all sectors Consumption of fixed capital of all sectors Factor income received from ROW Factor income paid to non- residents Subsidies received by all sectors $ Billion 800 200 300 400 100 50 50 80 10 20 20
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Calculate NDP at factor cost from the following data

ITEMS PRIMERY SECTOR 100 15 15 10 12 7 10 3 SECONDARY TERTIARY SECTOR SECTOR 150 20 25 10 13 8 12 4 130 25 15 15 17 7 15 3

Sales Closing stock Intermediate consumption Opening stock Indirect Tax Subsidies Consumption of fixed Capital Expenses of electricity and fuel

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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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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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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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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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Using Income method calculate a) Net Domestic Income b) Gross Domestic Income c) Net National Income d) NNP at mkt. price
ITEMS Indirect Taxes Subsidies Depreciation Mixed income of self employed Operating surplus Net factor income from abroad Compensation of employees Rs. Crore 9000 1800 1700 28000 10000 (-) 300 24000
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Calculate a) Domestic Income b) National Income

ITEMS Wages Rent Interest Dividend Mixed Income Undistributed Profits Social Security Contribution Net Factor income from abroad Corporate Profit Tax RS. CRORE 10,000 5,000 400 3,000 400 200 400 1,000 400

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Summary
VALUE ADDAD METHOD Gross value added in primary sector + GVA in secondary sec. + GVA in tertiary sector = GDP at mkt. price - Depreciation = NDP at mkt. price INCOME METHOD Compensation of employees + Operating surplus + Mixed income of self employed = Net domestic income + Net factor income from abroad = National Income (NNP at FC)

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EXPENDITURE METHOD Final consumption expenditure + Investment expenditure + Govt. expenditure + Net Exports = GDP at mkt. price - Depreciation = NDP at mkt. price

- Net Indirect Taxes = NDP at factor cost + Net factor income from abroad = National Income (NNP at FC)

- Net Indirect Taxes = NDP at factor cost + Net factor income from abroad = National Income (NNP at FC) 45

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Problems With GDP Measurement

Changes in Quality Underground Economy Non-market Production Not a perfect measure of economic well-being

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