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![Page 1: Introduction An Overview. 1. Economics Social / Behavioural science Material well-being Adam Smith, 1776 Alfred Marshall, 1890 Dismal science Scarcity,](https://reader036.fdocuments.net/reader036/viewer/2022062421/56649e245503460f94b12358/html5/thumbnails/1.jpg)
Introduction
An Overview
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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
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ab c
d e
f g
h
A
BO Civilian goods
Def
ence
go
ods
Figure 1 : Production Possibility Curve
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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
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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
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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
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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
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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)
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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
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4. Subject matter of Macro-economics
Measurement/monitor the economy
Economic fluctuations / stability (short-run)
-Unemployment
-Inflation
Growth(long-run)
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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
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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
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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
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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)
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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
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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
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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
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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
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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
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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