introduction to macroeconomics 1
Post on 06-Apr-2018
229 Views
Preview:
TRANSCRIPT
-
8/3/2019 Introduction to Macroeconomics 1
1/41
Economic Environment of
BusinessUnderstanding the coursecontent
-
8/3/2019 Introduction to Macroeconomics 1
2/41
Scope of Study
An Overview of macroeconomics and its impact onbusiness
An overview of growth and developmental economics
National income accounting
Various financial markets Indian economy : an overview
The world economy : International monetory system
Balance of payment
India and the world
-
8/3/2019 Introduction to Macroeconomics 1
3/41
Internal Assessment Pattern
Attendance/ Class Participation 5
Test 5
Project/ Presentation- 10
-
8/3/2019 Introduction to Macroeconomics 1
4/41
Click to edit Master subtitle style
Chapter-1
Macroeconomics:
An overview
-
8/3/2019 Introduction to Macroeconomics 1
5/41
The Essence of Macroeconomics
-
8/3/2019 Introduction to Macroeconomics 1
6/41
Macroeconomics vs.
Microeconomics
66
MICROECONOMIC QUESTION
Go to business school or take a job?
What determines what salary to be given to a new
MBA
What determines the cost to a university or college o
offering a new course?
What determines whether a bank opens a new office
in Shanghai?
-
8/3/2019 Introduction to Macroeconomics 1
7/41
Macroeconomics
77
MACROECONOMIC QUESTION
How many people are employed in the economy as awhole
What government policies should be adopted to
promote full employment and growth in the economyas a whole?
What determines the overall trade in goods, services
and financial assets between the our country. and the
rest of the world?
-
8/3/2019 Introduction to Macroeconomics 1
8/41
Click to edit the outline
text format
Second Outline Level
Third Outline
Level
Fourth Outline
Level Fifth Outline
Level
Sixth Outline88
Microeconomics focuses on how decisions ar
made by individuals and firms and theconsequences of those decisions.
Ex.: How much it would cost for a universitor college to offer a new course the cost the instructors salary, the classroomfacilities, the class materials, and so on.
Having determined the cost, the school can then decidewhether or not to offer the course by weighing the costs
and benefits.
Macroeconomics vs. Microeconomics
M
-
8/3/2019 Introduction to Macroeconomics 1
9/41
Macroeconomicsexamines the aggregate behavioof the economyhow the actions of all the
individuals and firms in the economy interact to
produce a particular level of economic performanceas a whole.
Ex.: Overall level of prices in the economyhow hi
or how low they are relative to prices last yearrath
than the price of a particular good or service.
Macroeconomics vs.
Microeconomics
M i Diff f
-
8/3/2019 Introduction to Macroeconomics 1
10/41
Click to edit the outline
text format
Second Outline Level
Third Outline
Level
Fourth Outline
Level Fifth Outline
Level
Sixth Outline1010
Macroeconomics Differs from
Microeconomics:
In macroeconomics, the behavior of the whole macroeconomy is, indeed,greater than the sum of individualactions and market outcomes.Macroeconomics is widely viewed as providing a rationa
for continualgovernment intervention to manage short-term fluctuations and adverse events in the economy. fiscal policy, control of government spending and
taxation, and monetary policy, control over interest rates and the
quantity of money in circulation
M i Diff f
-
8/3/2019 Introduction to Macroeconomics 1
11/41
Click to edit the outline
text format
Second Outline Level
Third Outline
Level
Fourth Outline
Level Fifth Outline
Level
Sixth Outline1111
Macroeconomics Differs from
Microeconomics
Macroeconomics is the study of long-run growth:What factors lead to a higher long-run growth rate? Anare there government policies capable of increasing thlong-run growth rate?
A distinctive feature of modern macroeconomics is that both theory and policy implementation focus on economicaggregates -- economic measures that summarize data acromany different markets for goods, services, workers and asse
-
8/3/2019 Introduction to Macroeconomics 1
12/41
1212
Macroeconomic Goals
Economistsand society at largeagree on threeimportant macroeconomic goals
Economic growth
Full employment
Stable pricesWhy is there such universal agreement on these three
goals?
Because achieving them gives us opportunity to make all of
our citizens better off
E i G th
-
8/3/2019 Introduction to Macroeconomics 1
13/41
1313
Economic Growth
Economists monitor economic growth by keeping trackof real gross domestic product (real GDP)
Total quantity of goods and services produced in a country over ayear
Real GDP has actually increased faster than thepopulation
During this period (1929 to 2002), while U.S. population didnot quite triple
Quantity of goods and services produced each year has increasedmore than tenfold
Indias GDP grew from 200 M in 1950 to 3912991 M US Dollarsat market prices
-
8/3/2019 Introduction to Macroeconomics 1
14/41
Economic Growth
Although output has grown, rate of growth has varied ovthe decades
Over long periods of time small differences in growthrates can cause huge differences in living standards
Economists and government officials are very concernedwhen economic growth slows down
Macroeconomics helps us understand a number of issuesurrounding economic growth
1414
Hi h E l t ( L
-
8/3/2019 Introduction to Macroeconomics 1
15/41
Lieberman & Hall;Introduction to
Economics, 20051515
High Employment (or Low
Unemployment)Unemployment affects distribution of economic well
being among our citizens
People who cannot find jobs suffer a loss of income
Joblessness affects all of useven those who have jobs
A high unemployment rate means economy is not achieving itsfull economic potential
High Employment (or Low
-
8/3/2019 Introduction to Macroeconomics 1
16/41
1616
High Employment (or Low
Unemployment)
Unemployment ratePercentage of the workforce that would like to work, but
cannot find jobs
Used to keep track of employment
All nations commitment to high employment has beenbeen written into law
With memory of Great Depression still fresh, the USCongress passed Employment Act of 1946
Indian Govt has also passed the employment act many times
-
8/3/2019 Introduction to Macroeconomics 1
17/41
Click to edit the outlinetext format
Second Outline
Level
Third Outline
Level
Fourth Outline
Level
Fifth Outline
Level1717
Employment and Unemployment
Discouraged workers are non-working people who are capable o
working but are not actively looking for a job.
Underemployment is the number of people who work during a
recession but receive lower wages than they would during an
expansion due to smaller number of hours worked, lower-paying job
or both.
The unemployment rate is the ratio of the number of people
unemployed to the total number of people in the labor force, either
currently working or looking for jobs.
-
8/3/2019 Introduction to Macroeconomics 1
18/41
1818
Employment and the Business Cycle
When firms produce more output, they hire more workers
when they produce less output, they tend to lay off workersWe would thus expect real GDP and employment to be closelyrelated, and indeed they are
Business cyclesFluctuations in real GDP around its long-term growth trend
ExpansionA period of increasing real GDP
ContractionA period of declining real GDP
-
8/3/2019 Introduction to Macroeconomics 1
19/41
1919
Employment and the Business
Cycle
Recession
A contraction of significant depth and duration
Depression
An unusually severe recessionIn the twentieth century, United States experienced one
decline in output serious enough to be considered a
depressionthe worldwide Great Depression of the 1930s
From 1929 to 1933, the first four years of Great Depression, U.S.output dropped by more than 25%
-
8/3/2019 Introduction to Macroeconomics 1
20/41
Lieberman & Hall;Introduction to
Economics, 20052020
Figure 3: The Business Cycle
Ti
me
Re
alGD
P
Expansion
Recession
Expansion
Long-runupward trendof real GDP
The businesscycle fluctuationof actual outputaround its long-
run trend.
-
8/3/2019 Introduction to Macroeconomics 1
21/41
Lieberman & Hall;Introduction to
Economics, 20052121
Stable Prices
With very few exceptions, inflation rate has been positive
During 1990s, inflation rate of US averaged less than 3% per
year
An extreme case was the new nation of Serbiaprices rose by 1,880% inAugust 1999
The inflation rate in India was last reported at 9.7 percent in October of 2010. It was5.58 % in Jan 2008.
The highest inflation rate is of Zimbabwe, As om Jan 1, 2009 the inflation is 533%.
-
8/3/2019 Introduction to Macroeconomics 1
22/41
Some interesting facts about
InflationThe term inflation is from the Latin term inflare,
meaning to blow up or inflate
The inflation rate is the percentage increase in the price
of goods per year. For example, if the inflation rate is2%, then a $1 candy will cost $1.02 this year.
The movie Cleopatra cost $44 million to make in 1963. With inflation taken
into account, the same movie would cost $300 million to make today
Lieberman & Hall;Introduction to
Economics, 20052222
-
8/3/2019 Introduction to Macroeconomics 1
23/41
Stable Prices
Why are stable pricesa low inflation rateanimportant macroeconomic goal?
Because inflation is costly to society
With annual inflation rates in the thousands of percent, the costsare easy to see
Purchasing power of currency declines so rapidly that people are no
longer willing to hold it
Economists regard some inflation as good
Price stabilization requires not only preventing inflationrate from rising too high
But also preventing it from falling too low, where it would be
dan erousl close to turnin ne ativeLieberman & Hall;Introduction to
Economics, 20052323
-
8/3/2019 Introduction to Macroeconomics 1
24/41
Lieberman & Hall;Introduction to
Economics, 20052424
The Macroeconomic Approach
In macroeconomics, we want to understand how
the entire economy behaves
Thus, we apply the steps to all markets simultaneously
How can we possibly hope to deal with all thesemarkets at the same time?
The answer is aggregationprocess of combiningdifferent things into a single category and treating
them as a whole
-
8/3/2019 Introduction to Macroeconomics 1
25/41
Lieberman & Hall;Introduction to
Economics, 20052525
Aggregation in
Macroeconomics
Aggregation plays a key role in both micro- and macro-
economics
In macroeconomics, we take aggregation to the extreme
Because we want to consider the entire economy at once, andyet keep our model as simple as possible
Must aggregate all markets into broadest possible categories
By aggregating in this way, can create workable and
reasonably accurate models that teach us a great deal
about how overall economy operates
-
8/3/2019 Introduction to Macroeconomics 1
26/41
Lieberman & Hall;Introduction to
Economics, 20052626
Macroeconomic Controversies
Macroeconomics is full of disputes and disagreements Modern macroeconomics began with publication ofThe
General Theory of Employment, Interest, and Money by Britisheconomist John Maynard Keynes in 1936
Keynes was taking on conventional wisdom of his time Which held that the macroeconomy worked very well on its
own Best policy for the government to follow was laissez faire
This new school of thought held that the economy does
not do well on its own and needed guidance
-
8/3/2019 Introduction to Macroeconomics 1
27/41
Lieberman & Hall;Introduction to
Economics, 20052727
Macroeconomic Controversies
While some of the early disagreements have beenresolved, others have arisen to take their place
For examplethe controversy over the Bushadministrations $330-billion ten-year tax cut
Because of such political battles, people who follow thenews often think that there is little agreement amongeconomists about how the macroeconomy works
In fact, the profession has come to a consensus on many basic
principles, and we will stress these as we go
-
8/3/2019 Introduction to Macroeconomics 1
28/41
2828
The Great Depression precipitated a thorough rethinking of macroeconomics
which gave rise to modern macroeconomics.
-
8/3/2019 Introduction to Macroeconomics 1
29/41
Click to edit the outline
text format
Second Outline Level
Third Outline
Level
Fourth Outline
Level
Fifth Outline
Level
Sixth Outline2929
The Business Cycle
The business cycle is the short-run alternation between
economic downturns, recessions, and economic upturns,
expansions.
A depression is a very deep and prolonged downturn.
Recessions are periods of economic downturns when outpand employment are falling.
Expansions, or recoveries, are periods of economic
upturns when output and employment are rising.
FOR INQUIRING MINDS: Defining
-
8/3/2019 Introduction to Macroeconomics 1
30/41
3030
FOR INQUIRING MINDS: Defining
Recessions and Expansions
In many countries, economists adopt the rule that arecession is a period of at least 6 months, or two quarters,
during which aggregate output falls.
n the United States, the task of determining when a recession begins and ends
assigned to an independent panel of experts at the National Bureau of Economi
Research (NBER). This panel looks at a number of economic indicators, with th
main focus on employment and production, but ultimately the panel makes a
judgment call.
e e ec s o recess ons an
-
8/3/2019 Introduction to Macroeconomics 1
31/41
3131
e e ec s o recess ons anexpansions on unemployment and
aggregate output:In general, the unemployment raterises during recessions
and falls during expansions. It moves in the direction
opposite toaggregate output, which falls during recessions
and rises during expansions.
Taming the Business Cycle
-
8/3/2019 Introduction to Macroeconomics 1
32/41
Click to edit the outline
text format
Second Outline Level
Third Outline
Level
Fourth Outline
Level
Fifth Outline
Level
Sixth Outline3232
Taming the Business Cycle
Although recessions are temporary phenomena, they produc
a considerable amount of economic pain for an economysmembers. So one of the key missions of macroeconomics i
to understand why recessions happen, and what, if anything
can be done about them.
-
8/3/2019 Introduction to Macroeconomics 1
33/41
Taming the Business Cycle
Policy efforts undertaken to reduce the severity of
recessions are called stabilization policy.
One type of stabilization policy ismonetary
policy, changes in the quantity of money or theinterest rate.
The second type of stabilization policy isfiscal
policy, changes in tax policy or governmentspending, or both.
Lieberman & Hall;Introduction to
Economics, 20053333
ECONOMICS IN ACTION: Has the Business Cycle
-
8/3/2019 Introduction to Macroeconomics 1
34/41
3434
Been Tamed?
Has progress in macroeconomics made the economy morestable? Answer: Sort of
Clearly, nothing like the Great
Depressionthe huge surge in
unemployment that dominates the figu
has happened since. But economists
who argued during the 1960s that the
business cycle had been completely
tamed were proved wrong by severe
recessions in the 1970s and early 1980
-
8/3/2019 Introduction to Macroeconomics 1
35/41
Click to edit the outline
text format
Second Outline Level
Third OutlineLevel
Fourth Outline
Level
Fifth Outline
Level
Sixth Outline3535
Long-Run Economic Growth
Secular long-run growth, or long-run growth, is thesustained upward trend in aggregate output per person over
several decades.
A country can achieve a permanent increase in the standard
living of its citizens only through long-run growth. So acentral concern of macroeconomics is what determines long
run growth.
Aggregate Price Level
-
8/3/2019 Introduction to Macroeconomics 1
36/41
Click to edit the outline
text format
Second Outline Level
Third OutlineLevel
Fourth Outline
Level
Fifth Outline
Level
Sixth Outline3636
Aggregate Price Level
A nominal measure is a measure that has not been adjust
for changes in prices over time.
A real measure is a measure that has been adjusted for
changes in prices over time.The change in real wages is a better measure of changes i
workers purchasing power than the change in nominal
wages.
The aggregate price level is the overall level of prices inthe economy.
Inflation and Deflation
-
8/3/2019 Introduction to Macroeconomics 1
37/41
3737
Inflation and Deflation
A rising aggregate price level is inflation.
A falling aggregate price level is deflation.
The inflation rate is the annual percent change in the
aggregate price level.
The economy has price stability when the aggregate pricelevel is changing only slowly.
Because inflation and deflation can cause problems, price
stability is generally desirable. In reality, the inflation rate hmainly been positive for decades, though we are not too far
from price stability today.
ECONOMICS IN ACTION: A Fast (Food) Measure o
-
8/3/2019 Introduction to Macroeconomics 1
38/41
3838
ECONOMICS IN ACTION: A Fast (Food) Measure o
Inflation
McDonalds opened in 1954: Hamburgers cost only 15 cent25 cents with fries.
Today a hamburger at a typical McDonalds costs five time
as muchbetween 70 and 80 cents.Too expensive?
Noin fact, a burger is, compared with other consumer goods, a better bargain than it was in 1
Burger prices have risen about 400 percent, from 15 cents to about 75 cents, over the last half
century. But the overall consumer price index has increased more than 600 percent.
If McDonalds had matched the overall price level increase, a hamburger would now cost betw
90 cents and a dollar.
O
-
8/3/2019 Introduction to Macroeconomics 1
39/41
Click to edit the outline
text format
Second Outline Level
Third OutlineLevel
Fourth Outline
Level
Fifth Outline
Level
Sixth Outline3939
The Open Economy
A closed economy is an economy that does not trade good
services or assets with other countries; an open economy
trades goods, services and assets.
The U.S. has become increasingly open, so that open-
economy macroeconomics has become increasinglyimportant.
Open-economy macroeconomics is the study of those
aspects of macroeconomics that are affected by movements
of goods, services and assets across national boundaries.
The Open Economy
-
8/3/2019 Introduction to Macroeconomics 1
40/41
Click to edit the outline
text format
Second Outline Level
Third OutlineLevel
Fourth Outline
Level
Fifth Outline
Level
Sixth Outline4040
The Open Economy
One of the main concerns introduced by open-economy macroeconomics is the
exchange rate, the price of one currency in terms of another. Exchange rates can affect the aggregate price level.
They can also affect aggregate output through their effect on the trade
balance, the difference between the value of the goods and services it se
to other countries and the value of the goods and services it buys in retu
Economists are also concerned about capital flows, movements of financialassets across borders.
GDP Growth in India a
-
8/3/2019 Introduction to Macroeconomics 1
41/41
GDP Growth in India a
comparison
Lieberman & Hall;Introduction to
Economics, 20054141
top related