Concepts of Macro Economics

Ms. Dilpreet KaurUnit I

Concepts of Macro Economics

2

IntroductionPut subtitle here

01 02 03 04

Compare the US in the

years 1933 and 2000?

What do you notice?

Why is it that jobs are plentiful in one time

period in one country and there is

completely a different situation in another

country?

Did you know that the inflation rate in Zimbabwe

in 2007 was 50% per month??? In 2008 it

surged to 231000000% per annum!!!

What drives up prices

over time?

OVERVIEW

4

Jagan Institute of Management Studies (JIMS) www.JimsIndia.org

“Macroeconomics is the study of the behavior of the economy as a whole.

It examines the overall level of a nation’s output, employment, prices and foreign trade.”

What is Macroeconomics?According to Paul Samuelson,

To understand macroeconomics better, look at the questions macroeconomics seeks to answer,

• What determines the level of the economic activity, total output and employment in a country?

• How is the equilibrium level of national income determined?

• What determines the general level of prices in a country?

• What determines the level of foreign trade and trade balance?

• How do the monetary and fiscal policies of the government affect the economy?

5


1. Importance of Macroeconomic Issues:

2. Growing Complexity of Economic System:

Macroeconomic issues of a country need to be resolved effectively as they pertain to theeconomic fate of a country and its people. The internal security, law and order situation,social harmony also depend to a great extent on the economic condition of the common manof a country.

• The modern economic system has grown extremely complex due to

Why to study Macroeconomic Theory?

• Expanding horizons of human wants to consume more and better goods and services,

• Increasing economic interaction between nations (globalization)

• Increasing international flows of capital, manpower, and technology,

• Growing interdependence of economies

6


3- Need for Government Intervention with the Market System:

While the government intervention with the market system has proved helpful in preventingbusiness cycles and controlling inflation, it has created new kinds of problems like inefficiency,corruption, reducing growth rate, etc.

The need for management of the economy by the government has arisen out of the failures of the market mechanism to ensure efficient allocation of resources, to achieve socially optimum production and distribution patterns of goods and services, and to bring stability in growth, employment, price levels and exchange rates.

Why to study Macroeconomic Theory?

7


Transaction motive

GROWTH OF MACROECONOMICS

The Classical Macroeconomics

Post Classical: The Keynesian Revolution

Post Keynesian Developments

8


The classical economists had not developed any macroeconomic theory or model.According to the classical economists, if market forces of demand and supply are allowed towork freely, then

1- There will always be full employment in the long run and unemployment, if any, will be a short run phenomenon;

l- The Classical Macroeconomics

3- The economy will always be in equilibrium in the long run

2- There will be neither over-production nor under production; and

9


• There was large scale unemployment in most industrialized economies

• In the US, unemployment rates increased from 3% in 1929 to 25% in 1933,

• GNP declined disastrously,

BUT, what happened in the 1930s?

The Great Depression

• Production of goods and services declined by 30%,

• Price level fell by 23%,

• Business investments dropped to almost nil.

10


The classical economists could offer neither an explanation nor a solution to the economic problems created by the great depression.

This marked the collapse of the classical macroeconomics.

11


Keynesian macroeconomics was born out of John Maynard Keynes’ attempt to find solution toeconomic problems associated with the Great Depression

The Keynesian macroeconomic theories are associated mainly witha) Employment,b) Growth, andc) Stability.

II. Post Classical: The Keynesian Revolution

12


• The level of output and employment in an economy is determined by the aggregatedemand given the resources

• The unemployment in any country is caused by lack of aggregate demand and economicfluctuations are caused by demand deficiency

The central theme of the Keynesian macroeconomics may be

summarized as follows:

• The demand deficiency can be removed through compensatory government spending

• Keynesian economics stresses on the role of demand management by the government forthe stable growth of the economy

• Keynesian economics stresses the favorable macroeconomic effects of the governmentspending on national income and employment through its multiplier effect

13


The post Keynesian developments in macroeconomics include the following schools ofthoughts

• Monetarist school, • Neo-classical macroeconomics,• Supply side economics, and• Neo-Keynesianism.

III. The Post Keynesian Developments

14


A group of economists called “monetarists” led by Milton Friedman claimed that Keynesiantheory had failed to predict national output, price level, rate of employment andunemployment, and interest rates.

Monetarism

The monetarists came out with a new revolutionary thought, that is, the role of money is central to the growth and stability of national output. In their opinion, money supply is the main determinant of output and employment in the short run and price level in the short run

15


The neo classical school emphasizes the role of individual’s rational expectations about futureeconomic events, especially those on the supply side of the economy and future governmentpolicies

Neo Classical Macroeconomics: Robert E. Lucas

The anticipated changes in monetary and fiscal policies cause a shift in aggregate demand curve, which causes an immediate and equal shift in the aggregate supply curve

16


• The supply side economists, emphasized on the role of the factors operating on the supplyside of the market

Supply-Side Economics: Arthur Laffer

• The supply side economists, emphasized on the role of the factors operating on the supplyside of the market

17


• Contrary to the neo classical group, the new Keynesians argue that market does not clearalways, in spite of individuals working for their own interest

Neo Keynesianism

• They give reason that ‘information problem and cost of changing prices lead to some pricerigidities’ which cause fluctuations in output and employment

18


• It ignores the structural changes in the constituent elements of the aggregate. Therefore,the conclusions drawn from the analysis of the behavior of the aggregate variables may bemisleading

Limitations of Macroeconomics

• Macroeconomics deals with national aggregates and “aggregates are not a reality but apicture or approximation of reality.”

• Some economists consider macroeconomics only as an “intellectual attraction” withoutmuch practical use.

19


Stock and Flow Variables

Stock Variables Flow Variables•Refer to the quantity of a variable given at a point in time

•For example, water stored in a tank at a point in time is a stock variable, number of books in a library on a particular date

•In economics, the stock of capital in country, number of people employed, total money supply etc are measured at a point in time and are thus stock variables

•Are the variables that are expressed per unit of time, e.g., per hour, per week, per month

•For example, in economics, GDP, consumption, savings, investments, exports, imports etc, are all flow variables, since they all are measured over a period of time

20


• A fixed deposit with a bank is a stock variable and interest earned on the deposit (say,monthly) is a flow variable

• Investment in plant, building, machinery, stock, etc, is a stock variable and the annual return from such investments is a flow variable

Some other examples:

Jagan Institute of Management Studies

22


About JIMS

JIMS Rohini is one of the leading MBA institutes of Delhi. We impart professional education both at post graduate and undergraduate levels in the fields of management and information technology.

Our PGDM program is approved by the AICTE and is

accredited from NBA for excellence in quality education.

PGDM program has also been granted equivalence to

MBA degree by the AIU. We offer specialized PGDM

programs in International Business and Retail as well.

JIMS, Rohini, Sector 5 also offers technical programs viz BBA,

BCA & MCA affiliated from GGSIPU.

Established in 1993, JIMS completed its 20 years of

Excellence in 2013. We offer excellent academic

structure, industry interaction and job opportunities.

Address3, Institutional Area, Sector-5, Rohini(Near Rajiv Gandhi Cancer Research Institute), Delhi-110085.

Contact DetailsPhone : 011-45184000/1/2Mobile : +91-9871097501Email : [email protected]

GET IN

TOUCH

Web Addresswww.jimsindia.org

Facebook: https://www.facebook.com/JimsDelhi?sk=wall

Twitter: https://twitter.com/JIMSsec5Rohini

G+: https://plus.google.com/+jimsrohini/posts?hl=en

YouTube: https://www.youtube.com/user/jimsquery/

LinkedIn:https://www.linkedin.com/company/jagan-institute-of-management-studies-jims-

Slideshare: http://www.slideshare.net/JimsIndia

Pinterest: https://www.pinterest.com/jimsrohini/

https://www.facebook.com/JimsDelhi?sk=wall

https://twitter.com/JIMSsec5Rohini

https://plus.google.com/+jimsrohini/posts?hl=en

https://www.linkedin.com/company/jagan-institute-of-management-studies-jims-

http://www.slideshare.net/JimsIndia

Economy & Finance

Concepts of Macro Economics