module 1 ppt's

Amity School of Business

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Amity School of BusinessBBA, 2nd Semester

Macroeconomics for Business

Rajneesh Mishra (Lecturer)


Module- I

Introduction to Macroeconomics

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INTRODUCTION TO MACROECONOMICS• What Economics is all about?• Scarcity• Choice• Economic Activity• Economic systemsCapitalismSocialismMixed Economic System

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MACROECONOMICS

• “Macroeconomics is concerned with the economy as a whole or large segments of it. In macroeconomics, attention is focused on such problems as the level of unemployment, the rate of inflation, the nation’s total output and other matters of economy- wide significance.”

M.H.Spencer

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MACROECONOMICS

• Study of Aggregates.• Studied at the level of economy as a whole.• Scope of Macroeconomics:- Theory of national Income Theory of Employment Theory of Money Theory of general Price LevelTheory of Economic GrowthTheory of International Trade

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TWO SCHOOLS OF THOUGHTS• Macroeconomics is dominated by two school of

thoughts:- CLASSICAL SCHOOL

Mill, Malthus, Pigou, Ricardo etc. KEYNESIAN SCHOOL

Keynesian solution to the ‘GREAT DEPRESSION’

• Emergence of Macroeconomics.

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MICROECONOMICS vs. MACROECONOMICS

• Basis of Study

• Degree of Aggregation

• Different set of Assumptions

• Central Issue

• Method of Study

• Micro- Macro Paradox7


MICROECONOMICS AND MACROECONOMICS- THE

INTERDEPENDENCE

• Micro variables depend on the level and behavior of macro variables.

Investment in one industry depend upon overall level of income and investment

• Macro variables depend upon the level and behavior of micro variables.

Aggregate demand is sum total of individual demands

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ECONOMICS AND BUSINESS POLICY DECISIONS

• Managerial economics is the use of economic analysis to make business decisions involving the best use (allocation) of an organization’s scarce resources.

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ECONOMICS AND BUSINESS POLICY DECISIONS

• Relationship to other business disciplines– Marketing: Demand, Price Elasticity– Finance: Capital Budgeting, Break-Even Analysis,

Opportunity Cost, Economic Value Added– Management Science: Linear Programming,

Regression Analysis, Forecasting– Strategy: Types of Competition, Structure-

Conduct-Performance Analysis– Managerial Accounting: Break-Even Analysis,

Incremental Cost Analysis, Opportunity Cost10


NATIONAL INCOME ACCOUNTING

• Estimation of National Income and related Macroeconomic variables.

• Significance of NY Accounting:- estimation of national income structure of the economy relative significance of different sectors factoral distribution of income inter-regional and international comparisons

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Circular Flow of Income

Government

Consumption IndustryBuy

Products

PaySalary

PayTAXGovernm

ent

ExpenseProv

ide

Serv

ice

Pay

TAX

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The Circular Flow

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Gross Domestic Product, GDP: A Definition

– A nation’s gross domestic product (GDP)

• Total value of all final goods and services produced for the market during a given period within the nation’s borders.

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…of all final…When measuring production, we only count goods

and services that are sold to their final users.Avoids over-counting intermediate products when

measuring GDP.Value of all intermediate products is automatically

included in value of final products they are used to create.

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• …goods and services…– Goods: cars, furniture, computers, beer, etc.– Services: medical, financial, educational, etc.

• …produced…– In order to contribute to GDP, something must be

produced.

Q: should stocks or bonds be included in the calculation

of GDP? 16



• …for the market…

• GDP does not include all final goods and services produced in the economy

• Includes only the ones produced for the market—that is, with the intention of being sold.

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…during a given period…GDP measures production during some

specific period of timeOnly goods produced during that period are

counted.GDP is actually measured for each quarter,

and reported as an annual rate.

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• …within the nation’s borders– Indian GDP measures output produced within

Indian borders.– Regardless of whether it was produced by Indians– Incomes Indians earned abroad are not counted.– However, foreigners producing goods or services

within the country are included:

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GDP and NDP

• Net domestic product (NDP) – the sum of consumption expenditures, government expenditures, net foreign expenditures, and investment less depreciation.

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GDP,NDP and GNP• Net domestic product is GDP adjusted for

depreciation:

GDP = C + I + G + (X-M)

NDP = C + I + G+ (X-M) – depreciation

GNP = GDP+ Net factor income from abroad

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NDP & NNP

• NDP= GDP- DEPRECIATION

• NNP( National Income at Market Prices)= GNP- DEPRECIATION

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N.I. or National Income at Factor Cost

• N.I. or National Income at Factor Cost=

• N.N.P or National Income at Market Prices – Indiret Taxes + Subsidies.

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Other National Income Terms

• PERSONAL INCOME=

National Income – Social Security Contributions – Corporate Income Taxes – Undistributed Corporate Profits + Transfer Payments.

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Other National Income Terms

• Disposable personal income is personal income minus personal income taxes and payroll taxes.

Disposable personal income is what people have readily available to spend.

DPI = PI - Personal taxes

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Real and Nominal GDP

• Real GDP is arrived at by dividing nominal GDP by the GDP deflator.

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Real and Nominal GDP2001 Nominal GDP

2006 Nominal GDP

2006 Real GDP

Bread (ton) 1 at Rs.1 thousand

… Rs. 1thousand

2 at Rs.2 thousand

.. Rs. 4 thousand

2 at Rs. 1 thousand…………Rs.2 thousand

Milk (thousand Litres)

1 at Rs 0.5 thousand………....Rs. 0.5 thousand

3 at Rs.0.75 thousand…………..Rs. 2.25 thousand

3 at Rs.0.50 thousand…………..Rs.1.50 thousand

Total GDP Rs. 1.5

thousand

Rs. 6.25 thousand Rs. 3.50 thousand

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Nominal and Real GDP

•Nominal GDP is the sum of the quantities of final goods produced times their current price.

•Real GDP is constructed as the sum of the quantities of final goods times constant (rather than current) prices.

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Measuring GDP: A Summary

• Different ways to calculate GDP– Expenditure Approach

• GDP = C + I + G + NX– Value-Added Approach

• GDP = Sum of value added by all firms– Factor Payments Approach

• GDP = Wages and Salaries + interest + rent + profit

Therefore, Total output = Total income29


The Expenditure Approach to GDP• Expenditure approach divides output into four

categories according to which group in the economy purchases it as final users– Consumption goods and services (C)—purchased

by households– Private investment goods and services (I)—

purchased by businesses– Government goods and services (G)—purchased

by government agencies– Net exports (NX)—purchased by foreigners


The Expenditure Approach to GDP

• When we add up the purchases of all four groups we get GDP

GDP = C + I + G + NX

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Solve It• From the following data, calculate GDP at both factor

cost and market price

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ITEMS Rs. crore

Gross investment 90

Net exports 10

Net indirect taxes 05

Depreciation 15

Net factor income from abroad -05

Private consumption expenditure 350

Govt. purchases of goods and services 100


Find NDP at factor cost

Items Rs. crore

Gross domestic fixed investment 10,000

Inventory investment 5,000

Depreciation 2,000

Indirect taxes 1,000

Subsidies 2,000

Consumption expenditure 20,000

Residential construction investment 6,000

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The Value-Added Approach

• Value added – Firm’s contribution to a product or– Revenue it receives for its output

• Minus cost of all the intermediate goods that it buys

• GDP is sum of values added by all firms in economy.

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Amity School of BusinessNumerical• In an economy consisting of two firms find

a) Value added by firm A & B

b) GDP at factor cost

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ITEMS RS. LAC

Sales by firm A 100

Purchases from firm B by firm A 40

Purchases from firm A by firm B 60

Closing stock of firm A 20

Closing stock of firm B 35

Opening stock of firm A 25

Opening stock of firm B 45

Sales by firm B 200

Indirect taxes paid by both firms 30


• Calculate GDP at market price and National income

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ITEMS $ Billion

Output of primary sector 800

Output of secondary sector 200

Output of tertiary sector 300

Value of inputs used by primary sector 400

Value of inputs used by secondary sector 100

Value of inputs used by tertiary sector 50

Indirect taxes paid by all sectors 50

Consumption of fixed capital of all sectors 80

Factor income received from ROW 10

Factor income paid to non- residents 20

Subsidies received by all sectors 20


• Calculate NDP at factor cost from the following data

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ITEMS PRIMERY SECTOR

SECONDARY SECTOR

TERTIARY SECTOR

Sales 100 150 130

Closing stock 15 20 25

Intermediate consumption 15 25 15

Opening stock 10 10 15

Indirect Tax 12 13 17

Subsidies 7 8 7

Consumption of fixed Capital 10 12 15

Expenses of electricity and fuel 3 4 3


The Factor Payments Approach

• In any year, value added by a firm is equal to total factor payments made by that firm.

• Thus, GDP = total factor payments made by all firms in the economy

• Gives us an important insight into the macroeconomy

Total output of economy (GDP) = total income earned in the economy

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Income/Factor Payment Method

• Compensation of employees+ Operating surplus+ Mixed income of the self employed = NDPFC

• + Net factor income from abroad = NNPFC

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A question for you:Suppose a firm

X produces $10 million worth of final goods

but only sells $9 million worth.

Does this violate the expenditure = output identity?

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Why output = expenditure

Unsold output goes into inventory and is counted as “inventory investment”… . ….whether the inventory buildup was intentional or not.

In effect, we are assuming that firms purchase their unsold output.

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Using Income method calculatea) Net Domestic Income b) Gross Domestic Incomec) Net National Income d) NNP at mkt. price

ITEMS Rs. Crore

Indirect Taxes 9000

Subsidies 1800

Depreciation 1700

Mixed income of self employed 28000

Operating surplus 10000

Net factor income from abroad (-) 300

Compensation of employees 24000

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Calculate a) Domestic Income b) National Income

ITEMS RS. CRORE

Wages 10,000

Rent 5,000

Interest 400

Dividend 3,000

Mixed Income 400

Undistributed Profits 200

Social Security Contribution 400

Net Factor income from abroad 1,000

Corporate Profit Tax 400 44

Amity School of BusinessSummaryVALUE ADDAD METHOD INCOME METHOD EXPENDITURE METHOD

Gross value added in primary sector + GVA in secondary sec. + GVA in tertiary sector

Compensation of employees + Operating surplus + Mixed income of self employed

Final consumption expenditure + Investment expenditure + Govt. expenditure + Net Exports

= GDP at mkt. price = Net domestic income = GDP at mkt. price

- Depreciation + Net factor income from abroad

- Depreciation

= NDP at mkt. price = National Income (NNP at FC)

= NDP at mkt. price

- Net Indirect Taxes - Net Indirect Taxes

= NDP at factor cost = NDP at factor cost

+ Net factor income from abroad

+ Net factor income from abroad

= National Income (NNP at FC)

= National Income (NNP at FC) 45


Problems With GDP Measurement

• Changes in Quality

• Underground Economy

• Non-market Production

• Not a perfect measure of economic well-being

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