macro economics basics (for beginners)

8/22/2019 Macro Economics Basics (For Beginners)

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The Road Ahead

A Snapshot of Macroeconomics


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Micro vs. Macro

Macroeconomics deals with the Economy as a whole GDP

Unemployment

Prices

Consumption Investment

International Trade

Term coined by Ragnar Frisch in 1933

Microeconomics deals with Actions of individuals

Firms and Consumers


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Schools of Economic Thought

Mercantilism

Physiocracy Physiocrats Agrarian philosophy

Francois Quesnay

Land Agriculture

Term coined by Ragnar Frisch in 1933

Microeconomics deals with Actions of individuals

Firms and Consumers


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Schools of Thought - 1

Classical/ New Classical Started with Adam Smiths Wealth of Nations (1776)

Prices and wages are flexible

Markets carry out their functions efficiently

The supply side of the economy is very important

Changes in the demand side of the economy have onlytemporary effects on the economy

No role for the Government to play- Laissez-Faire

Alfred Marshall, Adam Smith, David Ricardo Failed to predict/correct the Great Depression of 1929

Early 1970s- New Classical School

Says Law


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Keynesian/New Keynesian Prices and wages are not flexible

Markets are not efficient

The demand side of the economy is very important

Government has a major role to play - Fiscal Policy

John Maynard Keynes 1930s The General theory of Employment, Interest and Money

Great Depression

Advocated Government Intervention

Multiplier Effect

Resurgence in 2008-2009 Global Financial Crisis Sub-prime Crisis

Paul Krugman, Joseph Stiglitz, Greg Mankiw, Akerlof


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Austrian School Von Mises, Murray Rothbard, Hayek

Unscientific Economist

Mathematical Modeling impossible

Rejected Mathematical & Statistical methods

No Government intervention

Criticizes Central Bank actions

Central Bank actions responsible for Depressions and Recessions

Inflation caused by Central Bank actions

Absolute Laissez Faire Praxeology logical processes of human action

Predicted the Great Depression Hayek

Advocate Gold standard

Criticized by Krugman, Friedman and Jeffrey Sachs

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Key Concepts - 1

GDP - Gross Domestic Product

Definition

Broadest measure of Economic activity

Who- Where is important Ex: MNC in India is incl. In GDP

Ex: Indian in the Gulf is not included in GDP

GDP = C + I + G + X M Personal consumption (C), Gross private domestic investment (I),

Government purchases (G), and Net Exports (X-M)

Product, Income and Expenditure Approach

GDP Growth rates - Worldwide


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Issues with GDP Parallel economy/Shadow economy

Barter Transactions

Double Counting

Quality of Data/ Estimates Household Production

Ignores Externalities

Distribution of wealth

Sustainability of Growth

Alternatives HDI Gini Coefficient

Key Concepts - 2


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Key Concepts - 3

GNP - Gross National Product

Gross National Product includes income earned by the factorsof production (assets and labor) owned by a country'sresidents but excludes income produced within the country'sborders by factors of production owned by nonresidents

Where - is immaterial

Who - is important

GNP = GDP + Receipts Payments


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Key Concepts - 4

CPI Consumer Price Index It is the annual percentage change in the cost of acquiring a

fixed basket of goods and services

Measures

Inflation Purchasing power of consumers Today vs. Yesterday

Basis for Dearness Allowance

4 types

Working class

Agricultural labor Industrial workers

Rural labor

Food-60% ;Clothing-8% ;Fuel-6% ;Housing-8% ;Misc-18%


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Key Concepts - 5

Wholesale price index - WPI

It is the index used to measure the change

in the average price level of goods traded in

wholesale market 600+ commodities data tracked

Captures price movements in a comprehensive way

Widely used in Business, Industry, Government

Better approximate of inflation Primary Articles - 22%

Mfcg. Goods - 64%

Fuel 14%


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Key Concepts - 6

Inflation An increase in the general level of prices

Measured by CPI and WPI

Is it Bad and undesirable?

Could it be an incentive to invest?

Deflation A fall in the general price level or a contraction of credit

and available money

Deflation, not inflation, is now the greatest concern for theworld economy

Disinflation A period or process of slowing the rate of inflation


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Key Concepts - 7

Causes of Inflation

Monetary Theory

Monetary policies of Central Banks Monetary and fiscal restraint

Neo-Keynesian Theory

Demand-Pull

Cost-Push


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Key Concepts - 8

How to control Inflation?

Monetary Policies Open Market Operations

Fiscal Policy Taxation

Government Spending


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Key Concepts - 9

Recession A recession is a prolonged period of time when a

nation's economy is slowing down, or contracting

Prerequisite: Two consecutive Quarters Trends indicating Recession

Decrease in Consumer Spending

Decrease in industrial production

Growing unemployment Slump in personal income

An unhealthy stock market


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Key Concepts - 10

Forex External assets that are readily available to and controlled by

monetary authorities for direct financing of external payments

imbalances, for indirectly regulating the magnitudes of such

imbalances through intervention in exchange markets to affectthe currency exchange rate, and/or for other purposes

Foreign exchange reserves targets are fixed to accommodate

imports of three months

Foreign exchange reserves include three items

Gold

SDRs

Foreign currency assets


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Liberalization - 1

The term is used for a more outward-orientedeconomic policy Elimination of anti-export biases

Lowering high import tariffs

Reducing/phasing out Quantitative Restrictions (QRs) on inputs

Switching to tariff-related measures

The goals of liberalization were to motivate Indianmanufacturers to Prefer updated technology

Deliver better products at lower costs Face global competition

Deliver world class goods and services


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Liberalization - 2

Liberalization in Various Sectors Infrastructure

Power

Telecom

Oil

Insurance Automobiles

Agriculture

Software

Second Generation of Reforms

Cutting down the fiscal deficit Reform the archaic labor laws

Remove the QRs on consumer goods imports


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Currency Convertibility - 1

Currency convertibility is defined as the

freedom to convert one currency into other

internationally accepted currencies

Two forms of convertibility

Current account convertibility

Capital account convertibility


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Currency Convertibility - 2

Current account convertibility has been defined as thefreedom to buy or sell foreign exchange for International transactions consisting of payments due in

connection with foreign trade, other current businessesincluding services and normal short-term banking and credit

facilities Payments due as interest on loans

Moderate remittances for family living expenses

Capital account convertibility means that the homecurrency can be freely converted into foreigncurrencies for acquisition of capital assets abroad

The rupee is currently not freely convertible on thecapital account


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Financial Markets

Provide facilities for the buying and selling of financialclaims and services

Classified as Primary

Secondary Also classified as

Money Short Term CP & CD

Capital Long term Stocks & Bonds

Stock Markets

SEBI

Forex Markets


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Annexures

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Fiscal Policy - 1

Government uses its revenue and expenditure

programs to produce desirable effects on

National income

Production

Economy

Used as a balancing device

Two elements of Fiscal Policy

Taxation Public Expenditure


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Fiscal Policy - 2

Objectives of Fiscal Policy Mobilization of resources

Acceleration of economic growth

Minimization of the inequalities of income and

wealth Increasing employment opportunities

Price stability

Reflationary Fiscal Policy Deflationary Fiscal Policy


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Says Law

Jean Baptiste Say - Products are paid for with Products

It is worthwhile to remark that a product is no sooner created than it, from

that instant, affords a market for other products to the full extent of its own

value. When the producer has put the finishing hand to his product, he is

most anxious to sell it immediately, lest its value should diminish in his

hands. Nor is he less anxious to dispose of the money he may get for it;

for the value of money is also perishable. But the only way of getting rid of

money is in the purchase of some product or other. Thus the mere

circumstance of creation of one product immediately opens a vent for

other products

What does it mean Supply equals Demands

In order to obtain a desired commodity, one must first and necessarily

produce a commodity which is itself desirable. Those who produce

undesirable commodities, or produce desirable commodities but at

unprofitable costs, will fail.25


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Great Depression

Coined by Lionel RobbinsGreat Depression

Started in 1929 and lasted till 1940

Global Scale

Black Tuesday 29th Oct, 1929

Large Scale Unemployment25% in US

Frantic Attempts at Protectionism Smoot Hawley Tariff Act

Causes

Collapse of banks

Smoot Hawley Act

Monetary Contraction

Recovery in 1933

Public Works

Government Spending

WWII

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US- GDP & Unemployment

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Worldwide Impact

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Great Depression in Pics

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Dorothea Lange

Migrant Mother

Stamp

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GDP Growth - Worldwide

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GDP - Nominal

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GDP - PPP

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Gini Coefficient

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HDI

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Key Terms - 1

Cash Reserve Ratio CRR is the portion of deposits (ascash) which banks have to keep/maintain with the RBI.This serves two purposes: Ensures that a portion of bank deposits is totally risk-free

Enables that RBI control liquidity in the system, and thereby, inflation

Bank Rate - is the rate at which the central bank lends tothe commercial banks

SLR is the portion of their deposits banks are required toinvest in government securities

Repo rate - is the rate at which the RBI borrows short

term money from the market. After economic reforms RBIstarted borrowing at market prevailing rates. So it makesmore sense to banks to lend money to RBI at competitiverate with no risk at all


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Key Terms - 2

Balance of Payments ( BoP)

A statement of economic transactions

showing the relative difference between the

inflow and outflow of goods, services, andcapital claims and liabilities between a

country and its trading partners

BoP= (Exports + Inflows)- (Imports + Outflows)

1991 Crisis


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Key Terms - 3

Exchange Rate the price of a national currency in terms of the currency of

another nation.

The exchange rate is a way of stating how many units ofcurrency (dollars, for example) it would take to buy a unit of a

foreign currency Changes in the exchange rate of a country's currency can make

a difference in the price of its imports and exports

Fixed Rate held fixed in terms of a foreign currency

Floating Market forces allowed to determine the rate

Mixed

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