Introduction
An Overview
1. Economics
Social / Behavioural science
Material well-being
Adam Smith, 1776
Alfred Marshall, 1890
Dismal science
Scarcity, uncertainty, and choice
Lionel Robbins, 1932
Production possibility curve
- Law of increasing cost
- No free lunch
ab c
d e
f g
h
A
BO Civilian goods
Def
ence
go
ods
Figure 1 : Production Possibility Curve
Decision issues- Production: Who, what, how, where - Exchange: Whom to sell at what price- Consumption: Basket - Growth: Non-renewable resources use, strategies - Decision units: Households, firms, workers, govt.
Science of numbers
- Positive and normative - Ceteris paribus
Economics methodology
- Rational Behaviour (self interest)- Inductive- Fallacy of causation
Consensus and dis-agreements
Inexact science
- No controlled experiments
2. EconomistsClassical
Adam Smith, 1723-90 (1776): Father of modern economics: specialisation, foreign trade, laissez-faire, self-interestRobert Malthus 1766-1834 (1798): Population growth to outstrip food productionDavid Ricardo, 1772-1823 (1817): Foreign trade: principle of comparative advantage, theory of rentKarl Marx, 1818-83 (1867): Capitalist system as unfair, unstable and unsustainable
Neo – classicalLeon Walras, 1834-1910 (1874): General equilibrium Alfred Marshall, 1842-1924 (1890): Partial equil., demand–supply tools, elasticity concept, eco. as a separate discipline for study
Irving Fisher 1869-1947 (1930): Father of monetary economics, quantity theory of money, theory of interest rate Lionel Robbins (1932): Resource scarcity and choice J. B. Say: Supply creates its own demand
Vilfredo Pareto 1848-1923 (1906): Pareto optimal: None could gain without someone else’s loss A C Pigou, 1877-1959 (1920): Real balance effect
Others
John Maynard Keynes, 1883-1946 (1936): Father of Macro economics, saviour of capitalism, greatest economist of the 20th century (Time magazine)Simon Kuznets 1901-85: Measurement of income, Kuznets’ curve
Edward Chamberlin, 1899-1967 (1930s): Monopolist competition theory
Joan Robinson, 1903-83 (1930s): Golden Rule, imperfect competition
John R. Hicks, 1904-89 (1940s): IS-LM apparatus, yield curve elasticity of substitution, indifference curves
Harbert A. Simons, 1916- (1952): Satisficing - theory of firmRagner Frisch 1895-1973: Micro-macro dichotomy
Modern economists
• Milton Friedman, 1912- (1968): Natural rate of output/ unemployment, adaptive expectations theory, permanent income hypothesis, policy lags, fooling of workers, monetarist
• Paul Samuelson, 1915- (1949): Non-monetarists leader, revealed preference theory
• James Tobin, 1918- (1956): Tobin tax, transaction demand for money, portfolio theory, separation theorem
• Robert Solow, (1956): Growth model, saving as a temporary source of growth only
• Amartya Sen 1933- (1960): Freedom as development, human capabilities: Health and education, questioned rational behavior assumption.
• Arthur Laffer, (1968): Laffer curve • Robert Lucas, 1937- (1973): Rational expectation theory,
theory of policy irrelevance
3. Two branches and the bridge
Micro and macroRagnar FrischResource allocation --- resource utilisation and augmentationGiven national income and general price, determinerelative price and output --- reverse
* Interdependence* Micro foundation of macroTheory/fallacy of aggregation
Year Household - 1 Household - 2 Household - 3
Income Consumption Expenditure
Income Consumption Expenditure
Income Consumption Expenditure
1990 50,000 40,000 90,000 80,000 140,000 120,000
1999 100,000 70,000 50,000 45,000 150,000 115,000
(Rupees)
Cjt = aj + bj Yjt (1.1)
Ct = A + B Yt (1.2)
j
Cjt = Ct
j
aj = A
j bj Yjt B Yt
-Paradox of thrift
-Bumper crop
-Relative grading
4. Subject matter of Macro-economics
Measurement/monitor the economy
Economic fluctuations / stability (short-run)
-Unemployment
-Inflation
Growth(long-run)
5. Major macro-economic variables
National income Wage rate
Unemployment/employment Interest rate
Inflation Money supply
Fiscal deficit Foreign trade
/investment Saving - investment gap Forex rate
Current account deficit Forex reserves External debt
6. Tinbergen’s classification of variables
Target Indicators Intermediate Policy
7. Macro economic policy goals and relationships High and growing income
Price stability Social justice Globalization and sovereignty
- Phillips’ Curve - Kuznets’ Curve- Okun’s law
8. Economic systems and decisions
Free enterprise (capitalist) economies
Demand/supply
Command (socialist) economies Central planning authority
Mixed economies
Dual system
Guiding principle
Efficiency: Production and distribution
Pareto optimality : Sardar Sarovar Dam Project
Market/Govt. dichotomy !! / Market-Govt. failures
Decisions: rational Vs. emotions / traditions / customs
9. Role of government: Mixed economy
• Defense (public goods)
• Justice (law and order)
• Provision and maintenance of certain public works (roads, bridges, canals, rivers, harbors etc) and institutions (central bank, public work depts, etc) for improving welfare (infrastructure and regulation)
10. Study of economics
To understand environment, including policiesTo take economic decisions: Levels of national income, inflation, unemployment matters for firms
11. Economic Policies
Stabilization : Fiscal, monetary and forex rate
Regulating : Agriculture, industry, trade, labour, etc
New initiatives
-Liberalization
-Privatization
-Globalization
Policy alternatives vis-à-vis performance
12. India’s economic position vis-à-vis world
Levels Fluctuations/Growth Economic ills/policy
13. Macro- economic problems/issues
Recession / unsustainable growth Inflation / deflation Unemployment / poverty Three gaps
Saving-investment Fiscal deficit Trade deficit
Table 1.1 International Data on National Goal Variables
Country Population
Land area
GDP growth rate
Inflation rate (CPI) (average)
Unemployment rate
Total external debt
Gross int’l reserves
2002 2002 1990-2001
1990-2001 2002 2001 2002 2002
India 1048 3287 480 2570 5.9 8.7 - 28.6 34.7 8.1 46.1 97.1 71
USA 288 9629 35060 35060 3.4 2.7 5.8 - 14.1 5.2 46.4 NA 79
UK 59 243 25250 25870 2.7 2.8 3.2 - 13.1 6.1 43.2 NA 42.8
Japan 127 378 33550 26070 1.3 0.6 5.4 - 3.7 10.6 35.7 NA 462.4
Singapore 4.2 0.62 20690 23090 7.4 1.6 4.3 - - 5 49 NA 82
Indonesia 212 1905 710 2990 3.8 13.9 - 15.7 7.2 8.4 43.3 135.7 32.1
Malaysia 24 330 3540 8280 6.5 3.4 3.5 15.5 <2 4.5 53.8 43.4 34.3
Republic of Korea
48 99 9930 16480 5.7 4.9 3.1 <2 <2 7.9 37.5 110.1 121.4
China 1281 9598 940 4390 10 7.6 3.1 6 16.1 5.9 46.6 170.1 295.2
Pakistan 145 796 410 1940 3.7 9.1 7.8 28.6 13.4 9.5 41.1 32 8.8
Sri Lanka 19 66 840 3390 5 9.9 8.8 20 6.6 8 42.8 8.5 1.7
Australia 20 7741 19740 26960 3.9 2.2 6.3 — 7.8 5.9 41.3 - 21.6
Nigeria 133 924 290 780 2.5 30 — 43 70.2 4.4 56.7 31.1 7.3
Russian Federation
144 17075 2140 7820 –3.7 85.9 9 30.9 6.1 4.9 51.3 152.6 47.8
World 6201 1E+05 5080 7570 2.7 — — — — — — — —
GNP per capita Below poverty line (% of Population)
Share in GDP (%)
BOP current account balance
(%) National
(Million)
(‘000 Sq. kms)
Measured PPP
(US $)
(US $ billions)
2002 1987 – 2002** 1994 – 2002**
Int’l (US $ 1/day)*
Poorest 20%
Richest 20%
(US $ Billions)(%) (%)
4.67
-480.9
-14.41
112.5
-17.26
18.7
7.82
7.19
6.09
* For OECD countries, the benchmark figure is US$ 14.40 at 1985 instead of US$1.00** Data refer to the latest available year.
0.51
29.52
—
Sources: World Development Indicators 2003, UNDP: Human Development Report 2003, and IMF: International Financial Statistics,
35.42
3.87
-0.29
Growth Rate:Real GDP
-10
0
10
20
30
1950
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
Year
% G
row
th R
ate
USA
China
India
World
Unemployment Rate
0
2
4
6
8
10
12
14
1950
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
Year
% U
nem
plo
ymen
t
USA
Japan
UK
Malaysia
Inflation Rate:
CPI
-10
-5
0
5
10
15
20
25
30
35
1950 19
6419
6719
7019
7319
7619
7919
8219
8519
8819
9119
9419
9720
00
USA China India World