Macro Lect1

8/10/2019 Macro Lect1

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Course Description

Systems of national accounts; input outputsystem; money and exchange economy;

basic models of income determination;

classical model; Keynes’ model; derivation ofIS and LM functions; three sector models of

income determination; four sector models of

income determination; inflation & Phillips

curve; open economy macroeconomics;consumption, saving; investment and

Financial system.



Scope and Objective

The course aims at enabling the students to

understand the meaning, interdependence

and determination of the equilibrium level of

the macroeconomic variables like,

National Income, Saving, Investment,

Consumption, Employment, Interest Rate,

Price, Wage Rate, Foreign Exchange Rate,

etc. The methods and approach tomacroeconomic modeling and policy are

also emphasized.



Evaluation Scheme and other details

Mid Semester Test : 30% CB

Comprehensive Exam. : 40% Partly OB

Assignment/Term Paper : 10%

Unannounced Test/Quiz : 15%

Class Participation : 05%

Chamber Consultancy hour : Thursday 9th

Chamber number : 1201 – A

E-mail :[email protected]



Microeconomics and Macroeconomics

The Scope of Economics

ABLE Examples of Microeconomic and Macroeconomic Concerns

ivisions

f Economics Production Prices Income Employment

icroeconomics Production/output in

individual industries

and businesses

How much steel

How many cars

Price of individual

goods and

services

Price of medical

care

Price of gasoline

Food prices

Distribution of

income and

wealth

Wages in the

auto industry

Employment by

individual

businesses

and industries Jobs in the steel

industry Number of

employees in a firm

acroeconomics National

production/output

Total output

Gross domestic

product

Growth of output

Aggregate price

level

Consumer prices

Producer prices

Rate of inflation

National

income

Total wages

and salaries

Total profits

Employment and

unemployment in

the economy

Total number of jobs

Unemployment rate



Microeconomics and

MacroeconomicsMicroeconomics The study of how households and

firms make choices, how they interact in markets, and

how the government attempts to influence their choices.

Microeconomics examines the economic behavior of

individual households and firms – their responses to

prices, income, tastes, opportunities and other

fundamental variables.



Microeconomics and

MacroeconomicsMacroeconomics The study of the economy as a

whole, including topics such as inflation, unemployment,

national income, interest rate, exchange rate, stockprices and budget deficit etc….

Macroeconomics examines the sum of microeconomic

actions, their dynamics and interactions.Therefore, macro must be fully compatible with micro in

its explanations of behaviors.

To trust any macro answer, you must be sure of each off

its micro roots.



Course Strategy

Define the important concepts, magnitude and

questions in the real world.

Learn alternative theories suggesting answers

and explaining behaviorEvaluate data to test the validity and then

choose among theories

Put in a position to have a serious opinion onimportant topics.



Macroeconomic Issues

Why macroeconomic issues are more

controversial?

– Macro hits us on our pockets through its

policy prescription, so we want clear answer.

– Macro gets intimately involved in politically

sensitive issues.

– Media cares these issues and wants to findcontroversy to sell those.



Why Study Macroeconomics?

As an investor

As a planner

As a manager or employee

An intellectually curious person



As an Investor

Where are the interest rate heading?Which sector will do best/worst during the

next quarter, year or decade?

What is the real interest rate?What is the investment sentiments in the

economy?

What is the exchange rate currently.

Answer to exchange rate, interest rate and

inflation rate variables



Planner

What determines the interest rates and what areappropriate monetary targets?

What the appropriate monetary tools to apply?

What are the appropriate taxes to raise?

What is the composition of best budget?

How will international trade affect jobs, inflation

and credit?

What is the cost of inflation?

What is the cost of fiscal deficit?

What is the cost of unemployment?



Manager or Employee

What growth will my current market

provide if I maintain the share?

Can I raise my prices as rapidly as costs?

What opportunities are emerging in the

emerging and developed countries.

Should I employ more or not?Which sector I will target for investment

and growth?



Intellectually curious person

Why do business cycle exist?

Why inflation?

How inflation be cured?Why exchange rate is unstable?

What is interest rate?

Why interest rate is so important?Why financial market is unstable?

And so on……



What Macroeconomics Is About

Macroeconomics: the study of structure andperformance of national economies andgovernment policies that affect economicperformance

Issues addressed by macroeconomists: – Economic growth

– Business cycles

– Unemployment

– Inflation

– Investment – Consumption

– The international economy and exchange rate

– Macroeconomic policy – fiscal and monetary



Macroeconomic Variables

Total output in the economy (GDP/NDP/NNP..) Aggregate price level (Inflation/Deflation)

Employment/unemployment

Interest rateWage rate

Foreign exchange rate

Fiscal deficit

Stock prices

– Study all the variables in levels and how they

changes over t ime.



Macroeconomic models

To understand the complexity of economic

system, economist use models

Macroeconomic models allow economists

to link a phenomenon which they wish to

explain (dependent) to one, two or more

variables (independent) believed to be

largely responsible for the behavior of thephenomenon under study.



Macroeconomic models

Variables are exogenous/endogenous:

Endogenous variables are the variables whose

values are determined by the model.

A dependent variable is endogenous

Exogenous variables are those whose value is

determined by forces outside the model.

Macroeconomic theory will help us to identifythose variables from the system and establish

the theoretical linkages between those two set of

variables.



Macroeconomic Questions???

How are the levels of output, employment determinedand why do they fluctuate?

Why does inflation occur and when should we worry

about it?

How does government policies affect inflation andunemployment?

How do trade, international financial markets and

exchange rate affect employment and inflation

domestically?What policies are optimal in the sense of achieving the

most desirable behavior of aggregate variables?

Why some countries are rich and some are poor?



A World Tour

The United States

The European Union

China

India



1-1 The United States

When macroeconomists studyan economy, they first look at

three variables:

– Output

– The unemployment rate

– The inflation rate

– Fiscal deficit



1-1 The United StatesTable 1-1 Growth, Unemployment, and Inflation in the United States Since 1970

1970 –2006

(average)

1996 –2006

(average) 2007 2008 2009

Output growth rate 3.1% 3.4% 3.3% 2.1% 2.5%

Unemployment rate 6.2 5.0 4.6 4.6 4.8

Inflation rate 4.0 2.0 2.9 2.6 2.2

Output growth rate: annual rate of growth of output (GDP). Unemployment rate: average over the year. Inflation rate:

annual rate of change of the price level (GDP deflator).

The period 1996-2006 was one of the best decades in

recent memory:

– The average rate of growth was 3.4% per year.

– The average unemployment rate was 5.0%.

– The average inflation rate was 2.0%.



Table 1-

2

Growth, Unemployment, and Inflation in the Five Major European Countries

Since 1970 (Germany, France, UK, Italy, Spain)

1970 –2006

(average)

1996 –2006

(average) 2007 2008 2009


Unemployment rate 7.4 8.7 7.6 7.0 6.7

Inflation rate 5.4 1.8 1.7 1.8 2.2

Output growth rate: annual rate of growth of output (GDP). Unemployment rate: average

over the year. Inflation rate: annual rate of change of the price level (GDP deflator).

1-2 The European Union



The economic performance of the five countries inTable 1-2 has been far less impressive than that of the

United States over the same period:

– Average annual output growth from 1996 to 2006

was only 2.0%.

– Low-output growth was accompanied by persistently

high unemployment.

– The only good news was about inflation. Averageannual inflation for these countries was 1.8%, much

lower than the 5.4% average over the period 1970 to

2006.

1-2 The European Union



There is still disagreement about the causes of

high European unemployment:

– Politicians often blame macroeconomic policy.

– Most economists believe, however, that the

source of the problem is labor market

institutions.

– Some economists point to what they call labormarket rigidities.

– Other economists point to the fact that

unemployment is not high everywhere in

Europe.

1-2 The European UnionHow Can European Unemployment Be Reduced?



Since 1980, Chinese output has grown at close to 10%

per year, and the forecasts are for more of the same.

This is a truly astonishing number: Compare it to the

3.1% number achieved by the U.S. economy over the

same period. At that rate, output doubles every 7 years.

Table 1-3 Growth and Inflation in China Since 1980

1980 –2006 1996 –

2006

2007 2008 2009


Inflation rate 5.4 3.3 1.5 2.5 2.2

Output growth rate: annual rate of growth of output (GDP). Inflation rate:annual rate of change of the price level (GDP deflator).

1-3 China



Table 1-4 Growth, inflation and Fiscal deficit in

India Since 2006

2006 2007 2008 2009 2010 2011 2012

Output

growth rate

9.6% 9.3% 6.7% 8.4% 8.4% 6.5% 4.8%

Inflation rate 6.6 4.7 8.1 3.8 9.6 7.6 6.16

FiscalDeficit

3.5 2.7 6.0 6.7 4.9 5.8 5.1

Output growth rate: annual rate of growth of output (GDP). Inflation rate:

annual rate of change of the price level (WPI), Fiscal deficit: annual

percentage to GDP

1-4 India

Year Unemployment rate1972-73 1.6

1977-78 2.6

1982-83 1.9

1987-88 2.7

1993-94 1.9

1999-00 2.82004-05 3.1



GDP Growth Rates

2005-

06

2006-

07

2007-

08

2008-

09

2009-

10

2010-

11

2011-

12

2012-

13

Gross

Domestic

Product 9.48 9.57 9.32 6.72 8.59 9.32 6.21 4.96

Agriculture &

Allied Services 5.14 4.16 5.8 0.09 0.81 7.94 3.65 1.79

Industry andManufacturing 10.1 14.32 10.28 4.33 11.3 9.73 2.69 1.89

Services 10.91 10.06 10.27 9.98 10.5 9.75 8.2 6.59



Sector wise share to total GDP

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

griculture 18.2 17.3 16.81 15.77 14.64 14.45 14.1 13.6

Industry 27.9 28.6 28.74 28.13 28.27 28.23 27.51 27.0

Services 53.7 53.9 54.45 56.11 57.09 57.32 58.39 59.2



Employment- Sector wise (in %)

Sector 1999-2000 2004-05 2009-10

Agriculture 59.90 56.60 53.20

Industry 18.2 18.2 21.51

Services 23.74 24.66 25.27

Total Employment 396.76 millions 457.46 millions 460.22 millions



Fiscal Indicators

2007-

08

2008-

09

2009-

10

2010-

11

2011-

12

2012-

13

GrossFiscal

deficit

2.5 6.0 6.5 4.8 5.7 5.1

Revenu

e Deficit

1.1 4.5 5.2 3.2 4.3 3.5

Primary

Deficit

-0.9 2.6 3.2 1.8 2.6 1.9



Inflation

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

WPI 4.7 8.1 3.8 9.6 8.9 7.6 6.6

CPI 6.2 9.1 12.4 10.4 8.4 10.0 9.9



Monetary Tools

Sep 2012 Apr 2013 Nov 2013

Bank Rate 9.00 8.50 8.75

Repo Rate 8.00 7.50 7.75Reverse Repo

Rate

7.00 6.50 6.75

CRR 4.75 4.00 4.00

SLR 23.00 23.00 23.00



Exchange RateUSD vs INR

Dec 2012 Feb 2013 Aug 2013 Dec 2013 Jan 2014

USD 54.56 53.08 68.36 62.22 61.60



1-4 Looking Ahead

These are the questions to which you have been exposed in

this chapter:

What determines expansions and recessions? Can

monetary policy be used to prevent a recession in the

United States? How will the Euro affect monetary policy in

Europe?

Why is inflation so much lower today than it was in the

past? Can Europe reduce its unemployment rate? Should

the United States reduce its trade deficit?

Why do growth rates differ so much across countries, evenover long periods? Has the United States entered a New

Economy, in which growth will be much higher in the

future?

Macro Lect1

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