economics for managers - session 15

8/3/2019 Economics For Managers - Session 15

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PSG INSTITUTE OF MANAGEMENTMBA 2011-13 BATCH

I TrimesterSession XV- For Batch C and D

Business Decisions and Government

ECONOMICS FORMANAGERS

10th Oct 20111 EFM Faculty P.Uday Shankar


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MacroeconomicsMacroeconomics is the study of theaggregated effects of the decisions of economic units.

The economic units are the firms andhouseholds.While in microeconomics we focused onthe decisions of individual units , inmacroeconomics we look at the behaviour of entire economies.

10th Oct 2011

2 EFM Faculty P.Uday Shankar


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ggrega on anMacroeconomics

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An economic aggregate is simply an

abstraction that people use to describe somesalient feature of economic life. The process by which real objects such aslaptops, cinema tickets, steel, cars , etc are

combined into an abstraction called totaldomestic product is an aggregation. The same demand and supply curves wedrew for the firms can be applicable here too.In this case the demand curve becomesAggregate Demand and the supply curvebecomes Aggregate Supply curve.Gross Domestic Product (GDP) is the sum of the money values of all final goods andservices produced in the domestic economy


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Trend of Inflation in India Courtesy:Businesswatch



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Inflation Linked to Oil Prices



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the society



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Inflation


This happens when theAggregate Demand curve getsshifted to the right due to

whatever reasons and in thatprocess pushing up the generalprice level. If the Aggregate

Demand curve keeps shiftingmonth after month theeconomy will suffer frominflation.Draw a ra h to de ict this


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Inflation


PRICE

QUANTITY

D

S

Q

P

Q1Q

P1

P

D

D1

S

QUANTITY

PR

ICE


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Recession andUnemployment


In this case the Aggregate Demandcurve shifts to the left. As a result anew equilibrium is set with a newDomestic Product output. This is aperiod of Recession whenproduction falls and people losetheir jobs.

This situation arised in India tosome extent during the period2007-2009 as a result of the globaleffect on the US prime-lendingembrogolio.


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Economic Growth


Economic Growth is the main concern of macroeconomists.To show growth with the help of thecurves assume that BOTH the AggregateDemand curve as well as the AggregateSupply curve shift to the RIGHT side.No doubt prices increase but there iscommensurate increase in theproduction of gross domestic product inthe country. As a result a newequilibrium is set on the right side. Thepath from the earlier equilibrium to thenew equilibrium is the economys


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National Income Accounting


National Income Accounting is the system

through which economic activity on anational scale is measured.

The concept of national income accounting isbased on the underlying principle that economic

activity in a country can be measured in terms of:a) Output : The firms (or government departments

and corporations) which produce the goods andservices in the national economy.

b) Income : The factors of production which earnfactor incomes.c) Expenditure : The people or organisations that

spend money to buy the goods and services such

as consumers (firms and households), thegovernment and foreign buyers.


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Identity


The national income accounting identity

follows from the three approaches to thecreation of economic wealth and states that:

Income Total of all

factor incomeearnedduring the

year

Output The total value

of final outputcreated during

the year

Expenditure The total

spending onfinal goods andservices during

the year


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Identity


The national income accounting identity isillustrated in the figure below:

HOUSEHOLDS FIRMSOUTPUT

EXPENDITURE

INCOME


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National Income


National Income is the sum of all incomes

which arise as a result of economic activity ;that is from the production of goods andservices.

There is a CIRCULAR flow of income in an

economy, which means that expenditure,income and output will all have the same totalvalue.Firms must pay households for the factors of production and households must pay firms forgoods and services. This creates a CIRCULARflow of income and expenditure and is underthe assumption that it is a basic closedeconomy without foreign trade.


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CIRCULAR FLOW OF INCOME


Fig:

HOUSEHOLDSFIRMS

PRODUCTIVE RESOURCES

GOODS ANDSERVICES

FACTOR INCOMES PAID BY FIRMS

EXPENDITURE ON GOODS AND SREVICES


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INCOMEThe circular flow (fig.) of income shows

how households earn income for thefactors of production provided by themto the firms to produce goods andservices. The income thus earned by

households is used as expenditure onthese goods and services.A) The total sales value of goodsproduced should equal the total

expenditure on goods and services,assuming that all goods that areproduced are also sold.B) The amount of expenditure should

also equal the total income of 10th Oct 2011EFM Faculty P.Uday Shankar 16


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income

a) It acts as producer of certain goods and

services instaed of privately owned firmsand of course the administrativeservices.police, army, health, education,water, The Government acts like the firmas a producer and has to pay wages to its

employees.b) It acts as a final purchaser of goods and

services and thus adds to the totalconsumption expenditure. National and local

governments tax the people to enablethemselves to buy goods and services formother firms.

c) It invests by purchasing capital goods likeroads, schools, bridges.

d) It makes transfer payments from one 10th Oct 2011EFM Faculty P.Uday Shankar 17

hd l d h l


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Withdrawals and Injections into the circularflow of income

Withdrawals: Movements of fundsout of the cycle of income andexpenditure between firms andhouseholds.A) Savings (S): Households too do notspend all their income and save some forthe future.B) Taxation (T): Households cannotspend parts of their income earmarkedas taxes. Taxes have to be paid togovernments.C) Imports (M): As payments for importsgo to firms in other countries, spendingon imports necessitates withdrawal of 10th Oct 2011EFM Faculty P.Uday Shankar 18


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income

A) Investment (I): Investment in

capital goods is a form of spending onoutput. Investments add to the totaleconomic wealth that is created by thecountry.B) Government spending (G): Thefunds to spend come from eithertaxation income or government

borrowing.C) Exports (X): Firms produce goodsand services for export. Exports earnincome from abroad and therefore an

injection into the countrys circular 10th Oct 2011EFM Faculty P.Uday Shankar 19


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ThanksInputs are from Business Essentials- Economics.


economics for managers - session 15

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