Introduction to Macroeconomics 1

8/3/2019 Introduction to Macroeconomics 1

1/41

Economic Environment of

BusinessUnderstanding the coursecontent


2/41

Scope of Study

An Overview of macroeconomics and its impact onbusiness

An overview of growth and developmental economics

National income accounting

Various financial markets Indian economy : an overview

The world economy : International monetory system

Balance of payment

India and the world


3/41

Internal Assessment Pattern

Attendance/ Class Participation 5

Test 5

Project/ Presentation- 10


4/41

Click to edit Master subtitle style

Chapter-1

Macroeconomics:

An overview


5/41

The Essence of Macroeconomics


6/41

Macroeconomics vs.

Microeconomics

66

MICROECONOMIC QUESTION

Go to business school or take a job?

What determines what salary to be given to a new

MBA

What determines the cost to a university or college o

offering a new course?

What determines whether a bank opens a new office

in Shanghai?


7/41

Macroeconomics

77

MACROECONOMIC QUESTION

How many people are employed in the economy as awhole

What government policies should be adopted to

promote full employment and growth in the economyas a whole?

What determines the overall trade in goods, services

and financial assets between the our country. and the

rest of the world?


8/41

Click to edit the outline

text format

Second Outline Level

Third Outline

Level

Fourth Outline

Level Fifth Outline

Level

Sixth Outline88

Microeconomics focuses on how decisions ar

made by individuals and firms and theconsequences of those decisions.

Ex.: How much it would cost for a universitor college to offer a new course the cost the instructors salary, the classroomfacilities, the class materials, and so on.

Having determined the cost, the school can then decidewhether or not to offer the course by weighing the costs

and benefits.

Macroeconomics vs. Microeconomics

M


9/41

Macroeconomicsexamines the aggregate behavioof the economyhow the actions of all the

individuals and firms in the economy interact to

produce a particular level of economic performanceas a whole.

Ex.: Overall level of prices in the economyhow hi

or how low they are relative to prices last yearrath

than the price of a particular good or service.

Macroeconomics vs.

Microeconomics

M i Diff f


10/41


text format


Third Outline

Level

Fourth Outline

Level Fifth Outline

Level

Sixth Outline1010

Macroeconomics Differs from

Microeconomics:

In macroeconomics, the behavior of the whole macroeconomy is, indeed,greater than the sum of individualactions and market outcomes.Macroeconomics is widely viewed as providing a rationa

for continualgovernment intervention to manage short-term fluctuations and adverse events in the economy. fiscal policy, control of government spending and

taxation, and monetary policy, control over interest rates and the

quantity of money in circulation

M i Diff f


11/41


text format


Third Outline

Level

Fourth Outline

Level Fifth Outline

Level

Sixth Outline1111

Macroeconomics Differs from

Microeconomics

Macroeconomics is the study of long-run growth:What factors lead to a higher long-run growth rate? Anare there government policies capable of increasing thlong-run growth rate?

A distinctive feature of modern macroeconomics is that both theory and policy implementation focus on economicaggregates -- economic measures that summarize data acromany different markets for goods, services, workers and asse


12/41

1212

Macroeconomic Goals

Economistsand society at largeagree on threeimportant macroeconomic goals

Economic growth

Full employment

Stable pricesWhy is there such universal agreement on these three

goals?

Because achieving them gives us opportunity to make all of

our citizens better off

E i G th


13/41

1313

Economic Growth

Economists monitor economic growth by keeping trackof real gross domestic product (real GDP)

Total quantity of goods and services produced in a country over ayear

Real GDP has actually increased faster than thepopulation

During this period (1929 to 2002), while U.S. population didnot quite triple

Quantity of goods and services produced each year has increasedmore than tenfold

Indias GDP grew from 200 M in 1950 to 3912991 M US Dollarsat market prices


14/41

Economic Growth

Although output has grown, rate of growth has varied ovthe decades

Over long periods of time small differences in growthrates can cause huge differences in living standards

Economists and government officials are very concernedwhen economic growth slows down

Macroeconomics helps us understand a number of issuesurrounding economic growth

1414

Hi h E l t ( L


15/41

Lieberman & Hall;Introduction to

Economics, 20051515

High Employment (or Low

Unemployment)Unemployment affects distribution of economic well

being among our citizens

People who cannot find jobs suffer a loss of income

Joblessness affects all of useven those who have jobs

A high unemployment rate means economy is not achieving itsfull economic potential



16/41

1616


Unemployment)

Unemployment ratePercentage of the workforce that would like to work, but

cannot find jobs

Used to keep track of employment

All nations commitment to high employment has beenbeen written into law

With memory of Great Depression still fresh, the USCongress passed Employment Act of 1946

Indian Govt has also passed the employment act many times


17/41

Click to edit the outlinetext format

Second Outline

Level

Third Outline

Level

Fourth Outline

Level

Fifth Outline

Level1717

Employment and Unemployment

Discouraged workers are non-working people who are capable o

working but are not actively looking for a job.

Underemployment is the number of people who work during a

recession but receive lower wages than they would during an

expansion due to smaller number of hours worked, lower-paying job

or both.

The unemployment rate is the ratio of the number of people

unemployed to the total number of people in the labor force, either

currently working or looking for jobs.


18/41

1818

Employment and the Business Cycle

When firms produce more output, they hire more workers

when they produce less output, they tend to lay off workersWe would thus expect real GDP and employment to be closelyrelated, and indeed they are

Business cyclesFluctuations in real GDP around its long-term growth trend

ExpansionA period of increasing real GDP

ContractionA period of declining real GDP


19/41

1919

Employment and the Business

Cycle

Recession

A contraction of significant depth and duration

Depression

An unusually severe recessionIn the twentieth century, United States experienced one

decline in output serious enough to be considered a

depressionthe worldwide Great Depression of the 1930s

From 1929 to 1933, the first four years of Great Depression, U.S.output dropped by more than 25%


20/41


Economics, 20052020

Figure 3: The Business Cycle

Ti

me

Re

alGD

P

Expansion

Recession

Expansion

Long-runupward trendof real GDP

The businesscycle fluctuationof actual outputaround its long-

run trend.


21/41


Economics, 20052121

Stable Prices

With very few exceptions, inflation rate has been positive

During 1990s, inflation rate of US averaged less than 3% per

year

An extreme case was the new nation of Serbiaprices rose by 1,880% inAugust 1999

The inflation rate in India was last reported at 9.7 percent in October of 2010. It was5.58 % in Jan 2008.

The highest inflation rate is of Zimbabwe, As om Jan 1, 2009 the inflation is 533%.


22/41

Some interesting facts about

InflationThe term inflation is from the Latin term inflare,

meaning to blow up or inflate

The inflation rate is the percentage increase in the price

of goods per year. For example, if the inflation rate is2%, then a $1 candy will cost $1.02 this year.

The movie Cleopatra cost $44 million to make in 1963. With inflation taken

into account, the same movie would cost $300 million to make today


Economics, 20052222


23/41

Stable Prices

Why are stable pricesa low inflation rateanimportant macroeconomic goal?

Because inflation is costly to society

With annual inflation rates in the thousands of percent, the costsare easy to see

Purchasing power of currency declines so rapidly that people are no

longer willing to hold it

Economists regard some inflation as good

Price stabilization requires not only preventing inflationrate from rising too high

But also preventing it from falling too low, where it would be

dan erousl close to turnin ne ativeLieberman & Hall;Introduction to

Economics, 20052323


24/41


Economics, 20052424

The Macroeconomic Approach

In macroeconomics, we want to understand how

the entire economy behaves

Thus, we apply the steps to all markets simultaneously

How can we possibly hope to deal with all thesemarkets at the same time?

The answer is aggregationprocess of combiningdifferent things into a single category and treating

them as a whole


25/41


Economics, 20052525

Aggregation in

Macroeconomics

Aggregation plays a key role in both micro- and macro-

economics

In macroeconomics, we take aggregation to the extreme

Because we want to consider the entire economy at once, andyet keep our model as simple as possible

Must aggregate all markets into broadest possible categories

By aggregating in this way, can create workable and

reasonably accurate models that teach us a great deal

about how overall economy operates


26/41


Economics, 20052626

Macroeconomic Controversies

Macroeconomics is full of disputes and disagreements Modern macroeconomics began with publication ofThe

General Theory of Employment, Interest, and Money by Britisheconomist John Maynard Keynes in 1936

Keynes was taking on conventional wisdom of his time Which held that the macroeconomy worked very well on its

own Best policy for the government to follow was laissez faire

This new school of thought held that the economy does

not do well on its own and needed guidance


27/41


Economics, 20052727

Macroeconomic Controversies

While some of the early disagreements have beenresolved, others have arisen to take their place

For examplethe controversy over the Bushadministrations $330-billion ten-year tax cut

Because of such political battles, people who follow thenews often think that there is little agreement amongeconomists about how the macroeconomy works

In fact, the profession has come to a consensus on many basic

principles, and we will stress these as we go


28/41

2828

The Great Depression precipitated a thorough rethinking of macroeconomics

which gave rise to modern macroeconomics.


29/41


text format


Third Outline

Level

Fourth Outline

Level

Fifth Outline

Level

Sixth Outline2929

The Business Cycle

The business cycle is the short-run alternation between

economic downturns, recessions, and economic upturns,

expansions.

A depression is a very deep and prolonged downturn.

Recessions are periods of economic downturns when outpand employment are falling.

Expansions, or recoveries, are periods of economic

upturns when output and employment are rising.

FOR INQUIRING MINDS: Defining


30/41

3030

FOR INQUIRING MINDS: Defining

Recessions and Expansions

In many countries, economists adopt the rule that arecession is a period of at least 6 months, or two quarters,

during which aggregate output falls.

n the United States, the task of determining when a recession begins and ends

assigned to an independent panel of experts at the National Bureau of Economi

Research (NBER). This panel looks at a number of economic indicators, with th

main focus on employment and production, but ultimately the panel makes a

judgment call.

e e ec s o recess ons an


31/41

3131

e e ec s o recess ons anexpansions on unemployment and

aggregate output:In general, the unemployment raterises during recessions

and falls during expansions. It moves in the direction

opposite toaggregate output, which falls during recessions

and rises during expansions.

Taming the Business Cycle


32/41


text format


Third Outline

Level

Fourth Outline

Level

Fifth Outline

Level

Sixth Outline3232


Although recessions are temporary phenomena, they produc

a considerable amount of economic pain for an economysmembers. So one of the key missions of macroeconomics i

to understand why recessions happen, and what, if anything

can be done about them.


33/41


Policy efforts undertaken to reduce the severity of

recessions are called stabilization policy.

One type of stabilization policy ismonetary

policy, changes in the quantity of money or theinterest rate.

The second type of stabilization policy isfiscal

policy, changes in tax policy or governmentspending, or both.


Economics, 20053333

ECONOMICS IN ACTION: Has the Business Cycle


34/41

3434

Been Tamed?

Has progress in macroeconomics made the economy morestable? Answer: Sort of

Clearly, nothing like the Great

Depressionthe huge surge in

unemployment that dominates the figu

has happened since. But economists

who argued during the 1960s that the

business cycle had been completely

tamed were proved wrong by severe

recessions in the 1970s and early 1980


35/41


text format


Third OutlineLevel

Fourth Outline

Level

Fifth Outline

Level

Sixth Outline3535

Long-Run Economic Growth

Secular long-run growth, or long-run growth, is thesustained upward trend in aggregate output per person over

several decades.

A country can achieve a permanent increase in the standard

living of its citizens only through long-run growth. So acentral concern of macroeconomics is what determines long

run growth.

Aggregate Price Level


36/41


text format


Third OutlineLevel

Fourth Outline

Level

Fifth Outline

Level

Sixth Outline3636

Aggregate Price Level

A nominal measure is a measure that has not been adjust

for changes in prices over time.

A real measure is a measure that has been adjusted for

changes in prices over time.The change in real wages is a better measure of changes i

workers purchasing power than the change in nominal

wages.

The aggregate price level is the overall level of prices inthe economy.

Inflation and Deflation


37/41

3737

Inflation and Deflation

A rising aggregate price level is inflation.

A falling aggregate price level is deflation.

The inflation rate is the annual percent change in the

aggregate price level.

The economy has price stability when the aggregate pricelevel is changing only slowly.

Because inflation and deflation can cause problems, price

stability is generally desirable. In reality, the inflation rate hmainly been positive for decades, though we are not too far

from price stability today.

ECONOMICS IN ACTION: A Fast (Food) Measure o


38/41

3838

ECONOMICS IN ACTION: A Fast (Food) Measure o

Inflation

McDonalds opened in 1954: Hamburgers cost only 15 cent25 cents with fries.

Today a hamburger at a typical McDonalds costs five time

as muchbetween 70 and 80 cents.Too expensive?

Noin fact, a burger is, compared with other consumer goods, a better bargain than it was in 1

Burger prices have risen about 400 percent, from 15 cents to about 75 cents, over the last half

century. But the overall consumer price index has increased more than 600 percent.

If McDonalds had matched the overall price level increase, a hamburger would now cost betw

90 cents and a dollar.

O


39/41


text format


Third OutlineLevel

Fourth Outline

Level

Fifth Outline

Level

Sixth Outline3939

The Open Economy

A closed economy is an economy that does not trade good

services or assets with other countries; an open economy

trades goods, services and assets.

The U.S. has become increasingly open, so that open-

economy macroeconomics has become increasinglyimportant.

Open-economy macroeconomics is the study of those

aspects of macroeconomics that are affected by movements

of goods, services and assets across national boundaries.

The Open Economy


40/41


text format


Third OutlineLevel

Fourth Outline

Level

Fifth Outline

Level

Sixth Outline4040

The Open Economy

One of the main concerns introduced by open-economy macroeconomics is the

exchange rate, the price of one currency in terms of another. Exchange rates can affect the aggregate price level.

They can also affect aggregate output through their effect on the trade

balance, the difference between the value of the goods and services it se

to other countries and the value of the goods and services it buys in retu

Economists are also concerned about capital flows, movements of financialassets across borders.

GDP Growth in India a


41/41

GDP Growth in India a

comparison


Economics, 20054141

Documents

Introduction to Macroeconomics 1