Download - S1M Macro Issues
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1Macroeconomics: Problems and Issues
Macro is sum of micro:
Agg. Output = Sum of all output i.e. Qi Agg. Price = Sum of all prices ( generally price indices) i.e. Pi Agg Employment= Sum of all employment in all sector i.e. Ei
But since apple and orange can not be added we add themonetary value of this to obtain total output.
Output MacroYear Apple Orange Car TV Total Output2008 50 40 10 12 1122009 80 70 20 15 185
MacroeconomicAggregates:TheoryofAggregation
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2Macroeconomic fallacy:
However due to fallacy of composition, whatever relationship istrue for an individual may not be true at aggregate level.Ex. ( Rs. 000)
- Whatever is true for household in not true for economy.- Aggregates are not a reality but a picture or approximation of
reality.- Conclusion drawn from aggregates are misleading.
Household I Household II MacroYear income Consumption income Consumption income Consumption2009 50 40 90 80 140 1202010 100 70 50 45 150 115
MacroeconomicAggregates:TheoryofAggregation
MacroeconomicAggregates:ASADa. Aggregate Supply AS refers to the total quantity of goods and
services that the nations business willingly produce and sell ina given time. AS depends upon price level, the productivecapacity of the economy, and the level of costs
AS=f(L,N,K,O)
b. Aggregate Demand: AD refers to the total amount thatdifferent sectors in the economy willingly spends in a givenperiod. AD equals total spending on goods and services. Itdepends on the level of prices, as well as monetary, fiscal policyand other factors.
AD=C+I+G+NX
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3Equilibrium: The interaction between AD and AS determinesthe general price level ( called as price indices)
MacroeconomicEqulibrium:ASAD
MacroeconomicEquilibrium:Outcome
P
Q
P
P
Q
Q
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4MainObjectives:1.Output:HighandrapidEconomicGrowth (ofoutput).
>Sustainableeconomicgrowth>Inclusivegrowth
2.Employment: HighlevelofEmploymentwithlowinvoluntary3.PriceLevelStability: Lowinflationratewithstablepricelevel
MajorMacroeconomicGoals/Objectives
SubsidiaryObjectives:1.SocialWelfareandEquitableJustice2.ComplementaryandConflictingGoals
1.MacroeconomicGoals:EconomicGrowth Actual Output ( GDP):
The output actually produced in a country mostlyGDP at time period t.
GDP at FC at Constant Price:To measure the Growth Rate of output for a country.
Growth Rate= (GDPtGDPt1/GDPt1)*100
>Sustainableeconomicgrowth>Inclusivegrowth
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5RealGDPLevelvsGrowthRatei.e.GDPatFC(constantprice)baseyear(200405)
0.00
10000.00
20000.00
30000.00
40000.00
50000.00
60000.00
70000.0019
50-51
1953
-5419
56-57
1959
-6019
62-63
1965
-6619
68-69
1971
-7219
74-75
1977
-7819
80-81
1983
-8419
86-87
1989
-9019
92-93
1995
-9619
98-99
2001
-0220
04-05
2007
-0820
10-11
2013
-14
GDP at Factor Cost
TrendLine
-6.000
-4.000
-2.000
0.000
2.000
4.000
6.000
8.000
10.000
12.000
1950
-5119
53-54
1956
-5719
59-60
1962
-6319
65-66
1968
-6919
71-72
1974
-7519
77-78
1980
-8119
83-84
1986
-8719
89-90
1992
-9319
95-96
1998
-9920
01-02
2004
-0520
07-08
2010
-1120
13-14
GDPatFCgrowthrate
(RupeesBillion)
1.MacroeconomicGoals:EconomicGrowth
1.MacroeconomicGoals:EconomicGrowtha. Actual Output ( GDP). Actually produced
GDP at time t period.Also Known as Demand for Output (AD)
b. Potential Output (GDP)Maximum sustainable output the economycan produce with full utilisation ofresources.Also Known as Supply for Output(AS)
Calculation of Potential Outputa. Usually when unemployment rate is 4 tor
6%, OR,b. Trend line growth, ORc. Hodrick Prescott Filtering Techniques
Output Gap = Actual Output Potential Output= ADAS
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6OutputGapandInflationRate
NaturalRealGDP isthelevelofGDPatwhichtheinflationrateisconstant,withnotendencytoaccelerateordecelerate.ThetermPotentialRealGDPandnaturalRealGDPareinterchangeablyused
Lowoutputhighunemploymentlowincomelowdemandlowprices.
If Output Gap > 0 Economy is heading towards Inflation as AD>ASIf Output Gap < 0 Economy is heading towards deflation as ADu* Inflation rises Ifu 0 =>low unemployment as AD>ASIf Output Gap < 0 => high unemployment as AD
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72.MacroeconomicGoals:PriceStability
Jan1969 Jan2011AnnualchangesinCPI From1969until.2010,theaverageinflationrateinIndia was7.99percent
4to5%inflationrateisgoodforeconomicgrowth
3. Macroeconomic Goals: Low Unemployment
U.S.
1973 1975recession
1981 1982recession
1990 1991recession
GreatDepression(1929 1933)
WorldWarII(1941 1945)
Source:BureauofLaborStatistics(www.bls.gov)
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83.MacroeconomicGoals:LowUnemployment
UnemploymentRatein%oflaborforce
4.SubsidiaryMacroeconomicGoalsa. ComplementaryGoals
Lowunemploymentandhigheconomicgrowth
b. ConflictingGoals Lowunemploymentandlowinflation
c. SocialWelfare Health,education,sanitationetc.
d. EquitableJustice Lawandordercondition Equaljusticetoeverybody
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9CentralMacroeconomicIssues1. Why do NATIONAL OUTPUT some time fluctuates?
How can a nation increase its rate of Economic Growth withstability over long run.
2. Why does EMPLOYMENT sometimes fall?How can unemployment be reduced?
3. What are the sources of PRICE FLUCTUATION ( INFLATIONS)and its consequences?
CentralMacroeconomicIssues Short Run
1. Business Cycle2. Unemployment3. Inflation
Long Run1. EconomicGrowth2. PovertyandOverall
LivingStandards3. Interest Rates4. HighRatesofSavings
andInvestment5. Governmentbudget
deficits6. ExchangeRate7. BOPDeficits
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1.BusinessCycles
Business Cycle implies a swing in total national output, income, andemployment, usually lasting for a period of 2 to 10 years, markedby a widespread expansion or contraction in most sectors of theeconomy Samuelson. (e.g.) 1930: Great Depression; GlobalRecession of 200709.
During the period of prosperity there is high growth rate of nationaloutput above the potential growth rate.
NBER determines and declares the dates of business cycle but wellafter the recession has begun and recovery has started.
MacroeconomicIssues
BusinessCyclePotentialorNaturalRealGDPgrowthrate
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Trough: High unemployment, low demand, unused productive capacity,low profits, low investments and lack of confidence about economicprospects
Peak: top of cycle high capacity utilisation shortage of skill labour andraw material excess demand, etc
Recovery or Expansion: employment, income, consumer spending,demand, etc. increases Business opinions changes from pessimism tooptimism
Recession or contraction: is downturn in economic activity. Recession is fallin real GDP for two quarters.
Depression Recession that is deep and long lasting is Depression. Demand,production and employment falls
Boom and Slump: Non technical but descriptive terms. Falling half of cycle isslump. Rising half of cycle is often called boom.
PhasesofBusinessCycles
2.HighGrowthRatesoftheEconomyAchievingandmaintainingahighsustainablegrowthrateinlongrun.
DCsgrowthrate46%,LDCsstillstrivingforit
India: designed5yearplan:1951753.5%growthrate(average):Mid1980sgrowthrateisslightlyhigherthan3.5%:Strivingfor9%growthrateperannum
FactorsAffectingLongrunGrowth:1. IncreasesinCapitalperHourWorked2. TechnologicalChangeGrowthModels:
Harrod DomarModelKaldorModelSolowModelSamuelsonModelRobertLucasModeletc.
MacroeconomicIssues
GrowthModelsInIndiaNehru- Mahalnobis ModelEconomic Planning5 Year PlansNitii Ayog
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3.InflationPersistentriseinthegeneralpricelevelsoveraperiodoftime.DC:23%inflationisgoodLDCs :45%inflationisgoodPolicyproblem: Howtostimulateeconomicactivitywithout
causinginflation.Inflation tighteningmonetarypolicythatraisesinterest
ratesbutbringsslowdownintheeconomy
4.UnemploymentandPovertyUnemploymentiscentralconcernofeconomics.(e.g.)In1930s,IncreaseinGovernmentspendingandreducingtaxes.UnemploymentleadtoPoverty.1/3ofIndianpopulationBPLIncomeInequality:
Kuznets'sCurve,LorenzCurve
MacroeconomicIssues
5.OverallLivingStandards QualityofLife Environment Health EducationLongtermincreaseintotaland/orpercapitaoutputisthepredominantdeterminantoflivingstandards.
6.HighRatesofSavingsandInvestment Requiredforexpandingproductionsandeconomicactivities Avoidparadoxicalsituation:Highsaving,lowconsumption,
lowdemand,leadtorecession7.InterestRates
Highinterestrateissymptomoftightmonetarypolicy.>Borrowingbecomescostlier.Businessexpansionstops.Consumersreduceexpensesandsalesfall.
Lowinterestratestendtostimulatedemand
MacroeconomicIssues
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8.GovernmentbudgetdeficitsDeficits=Expenditure>RevenueGovernmentspendingcreatesjobs.ButburdenofdebtandinterestpaymentburdenwillincreasetaxburdenFirmsworryaboutdeficitsinthreeways: Increaseininterestrates Increaseintaxes(forinterestanddebtburden) Governmentpreemptingfundsthatcouldflowtofirms
9.ExchangeRateExchangeratechangescanaffectrelativepricesandtherebycompetitivenessofdomesticandforeignproducers.
Ex.USsubprimecrisisanditsspilloveracrossglobe10.BOPDeficits
Highbalanceofpaymentsdeficitleadstohighborrowingandfurtherdetoriationinnationaleconomicactivities
MacroeconomicIssues
Inadequatesupplyofinfrastructure
Corruption Inefficientgovernmentbureaucracy
Policyinstability Inflation Accesstofinancing TaxregulationsandTaxrates
MacroeconomicProblemsFacingIndia Restrictivelabour
regulations
Insufficientcapacitytoinnovate
Governmentinstability/coups
Poorworkethicinnationallabourforce
Security:Crimeandtheft Foreigncurrencyregulations Poorpublichealthand
education
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MainPolicy:1. MonetaryPolicy:RBI2. FiscalPolicy:CentralGovt.
SubsidiaryPolicy1. ExchangerateorTradePolicy: FERA(orFEMA).2. EmploymentPolicy :
MGNREGA,JawaharRozgarYojna,PMGSYetc.3.PriceandIncomePolicy:
MSP,minimumagestotheworkers.4.InternationalTradePolicy: EXIMpolicyin1997
SEZ, etc.
MacroeconomicPolicies
DemandManagementPolicies: GivenSupplyfixedhowtomanagedemandi.e.C,I,G,Nx (XM) ObjectiveinShortrun:controlinflationandunemployment Instrument:MonetaryPolicyandFiscalPolicy
SupplyManagementPolices Howtoboosteconomicgrowth(Percapita income):L,La,K,E Obj:Longrun increaseinoutput Instruments:Innovations,Technology,R&D,Percapitaproductivityetc.
MacroeconomicPolicies
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MacroeconomicTheory
Theory of Income and Employment
Theory of Price and Inflation
Theory of Economic Growth
Theory of Distribution
MacroeconomicTheory
Economists use economic models to understand the world. Model is a formalstatement of a theory which describes relationship between two or morevariables. In other words model means abstraction of reality.1. Economic Theory
Relation bt. MS and Inflation, Relation bt. unemployment and inflation etc. Relation bt. Consumption and disposable income
2. Variables: something which can be measured Endogeneous Exogeneous
3. Assumptions: always present in a model Taken for given or granted. Ex. Ceteris paribus
4. Model: C=C0+cYd Estimation Validation Policy Decision
MacroeconomicModels
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MajorWorksinMacroEconomics Mercantilists(from15th18thcentury)Europe:Wealth=f(Trade)ThomasMun,JeanBodin,DavidHume
Physiocrats (Late17th andearly18th Century)France,Wealth=f(Productivity)FrancoisQuesnay
Classical (18th and19th Century 1770sto1930s),UK,USA,Wealth=f(ProductivityandDivisionofLabour)AdamSmith,JBSay,Ricardo,JSMill.
London School of Economics(1895) by Sidney Webb, Beatrice Webb, George Bernard Shaw and R.G.D. Allen
Keynesian (20th Century,1030s)UK: EconomicFluctuations(Y)GD,FP,Shortrun ,JMKeynes(1936),ISLMModelbyHicksandHansen(1937),mathtoKeynesianmacromodels
Monetarist(late1940sand1960s)USA: PriceFluctuations(P),MP,ShortrunandLongrun MiltonFriedman,AnnaSchwartz(1956s)
PhillipsCurve(1958) NewZealand:Inflation(P)andUnemployment(U)tradeoffinshortrunA.W.BillPhillips
MajorWorksinMacroEconomics Fiscalists:(late1950s early1970s)USA,FP,RoleofGovt.Inflation(P)andUnemployment(U)notradeoffinlongrunJamesTobinandPASamuelson
RationalExpectations(NewClassicalEconomic)(during1970s(1972))USA:Rationalbehavior,failureofMP,JohnMuth andRobertLucas,ThomasSargent,EdwardPrescott
SupplySideEconomics(1975)USA,LafferCurve,RobertMundell,RonaldRaganandArthurLaffer
RealBusinessCycles(1982):USA Businesscycleduetorealvariablesfluctuations Kydland andPrescott,
DSGEmode(1982) microeconomicequationscombinedintomodelsofthegeneraleconomyKydland andPrescott:
InstitutionalEconomics(during1980sand1990s)USA, Informationasymmetry,RonaldCoase,GAkerlof
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MajorWorksinMacroEconomics Neoclassical(19thandearly20thCentury)foundedin1870s:micro(foundationsof)economicsD&S>P
Cambridge school (1871):Stanley Jevons, Alfred Marshall, and Arthur Pigou: partial equilibrium and market failuer
Austrian School(1871):Carl Menger, Eugen von Bhm-Bawerk, and Friedrich von Wieserdeveloped capital theory and explin economic cisis
Lausanne School (1874):Lon Walras and Vilfredo Pareto, general equilibrium and pareto efficiency
NewClassical(1970s(1973))USA:neoclassicalmicroeconomicfoundationsformacroeconomics, rationalexpectations,failureofMPandFP JohnMuth andRobertLucas,ThomasSargent,EdwardPrescott
NeoKeynesian(alsoNeoClassicalSynthesis)(1940to1960s):synthesisbetweenneoclassicalmicroandKeynesianmacro, Stagflation,Hicks,Samuelson,Modigliani,
NewKeynesian(late1970s 1980s)USA:microfoundationtoKeynesianeconomics,EPhelps,JBTaylor,GAkerlof
PostKeynesian(1975s)USA:TaxbasedIncomepolicyforantiinflation,Wintraub andDavidson.Micha Kalecki,JoanRobinson,NicholasKaldor,PaulDavidson andPiero Sraffa.
MacroeconomicDebates ClassicalvsKeynesian KeynesianvsMonetarists FiscalistvsMonetarists RationalExpectationswithOthers
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Macroeconomic data base RBI Handbook of statistics on Indian Economy Economic Survey, Govt of India CMIE prowess India Stat EPW Research Foundation database CRISIL data base CEIC Indian Economy database IMF CDROM World Bank data base OECD database BIS CSO, NAS Govt of India, Ministry of Statistics and Programme
Impementations
References: Ch1,2,3 of Principles of Macroeconomics
by N G Mankiw, 6th edition.
Ch1 of Macroeconomics by D N Dwivedi
Any macroeconomic book Introductory part.
History of Economic thought in wikipedia.
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Thanks!!!!!!!!