macro economic+framework
TRANSCRIPT
Macro-Economic Framework
Prof. Swaha ShomeMumbai
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Measurement & Determination of National Income : Identify appropriate Macro-economic concepts
Growth, Unemployment, Trade cycles & Inflation
Performance Indicators – significance
Outline (1)
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Elements of Monetary & Fiscal System Implications of Monetary & Fiscal Policy
Patterns of international trade & trade policy, regional trading blocks, globalization of production
Balance of Payments, Foreign Exchange Markets & European Monetary Union
Outline (2)
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Stock vs. Flow variables (1)
Stock variables : Accumulation of flows• No time dimension • Change in stock – discontinuous
Flow variables : Changes in stocks• change over time : time dimension• rate of change at some point of time
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Stock vs. Flow variables (2)
Stock Flow
Capital Investment
Wealth Income
Price Index Inflation
Balance Sheet Profit/Loss account
Forex Reserves Exports/wages/taxes
Unemployment level GDP
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Macro-economic variables
Price
GDP
Unemployment rate
Forex Reserves
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Macro-economic targets
Price stability
Adequate growth
Minimum unemployment
Stable Foreign exchange rate
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Opportunity cost
Situation X Y
1 0 20
2 1 18
3 2 15
4 3 11
5 4 6
6 5 0
• Opp cost of X = Amount of Y to be
compensated for one more unit of X
• Opp cost of X increases as you
produce more of X
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Opportunity Cost - Illustrated Sacrifice of alternatives in
production/consumption of a good
Eg. Let a farm produce 1000 tonnes of wheat or 2000 tonnes of sugar
Opportunity Cost of producing 1 ton wheat = 2 tonnes of sugar foregone.
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Production Possibility Curve
0
1
2
3
4
5
6
0 1 2 3 4 5 6
X
Y
Enclosed region – unemployment
Outside graph – not feasible
Various combinations of 2 classes of goods produced provided resources in the economy are
fully employed
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PPF – Illustrated
PPF
012345678
0 5 10
Clothing
Fo
od
Units of Food Units of Clothing
8 0
7 2.2
6 4
5 5
4 5.6
3 6
2 6.4
1 6.7
0 7
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• Downward sloping
• Concave to origin
• Resources have alternative uses but not equally efficient in all
Properties of a PPC
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Production Possibility Frontier Curve shows all possible 2-goods
combination that an economy can produce - Specified time period- Resources fully & efficiently employed- Issues of choice & opportunity cost Concave to origin – increasing opportunity
cost Region interior to PPF – economy has not
attained Productive Efficiency - unemployment
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Production Possibility Frontier Shifting
PPF Shift
0
1
2
3
4
5
6
7
8
0 1 2 3 4 5 6 7 8
X
Y
Economic Growth Improvement in skills
Improved Technology Increase in factors of production
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Economic growth shifting PPF
Necessities
Lu
xuri
es
Poor Nation High Income nation
Poor nation devotes resources mostly to food
Rich nation : expansion in food consumption low compared to increased consumption of luxuries
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Before Investment
Current consumption
Cap
ital
Investm
en
t
After Investment
Future Consumption
Cap
ital
Investm
en
t
Country I Country II Country III
Countries that invest more heavily forge ahead
Countries that invest heavily have higher investment and consumption in future
Households Firms
Real goods & services
Money FlowMoney
Flow
Factors of Production
Circular Flow
Payment for
Factors
Payment for
goods
Money Flow
Money Flow
Real flow
Real flow
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Leakages & Injections
Leakages :1. Savings2. Taxes 3. Imports
Injections : 1. Investment 2. Government expenditure 3. Exports