Course code: SLEC502 Macroeconomics and Business Environment

Dr. Swati Jain Room No: D015

Class 1-2

Macroeconomics vs Microeconomics Features of Macro-Economic Policy Indicators of Macroeconomics Positive /Normative Macro Economics Simple definitions Some Tradeoffs Task Ahead: National Income Accounting

Large/Whole System of Production and Distribution Macro Economics is the study of how an economy manages its scarce resources
Macroeconomics
is complementary to management strategies which enables you to decide how, why, and when regarding market expansion capital accumulation & mergers and acquisitions. policies. It also helps us various in understanding economies and about their interdependence between

Macroeconomic

developments

creates

challenges as well as opportunities for various businesses..

the BEST MBAs know Peter Navarro: What

MICROECONOMICS

MACROECONOMICS

functioning of individual markets for goods and services (from shoes to pizza to insurance) to determine cost of production and market prices, income distribution assumes that market is in equilibrium through demand and supply forces and tend to provide efficient allocation of resources without government intervention.

focuses on movements of business cycles and the implications of such movements for economic growth, inflation, employment, recession, interest rate, money supply, productivity, budget deficits, trade deficits and the value of the currency, WPI, CPI, GDS, GFCF . assumes that government intervention, in terms of discretionary policy actions, is required to stimulate investment and employment

Fallacy of composition Level of Production: PPF: given resources, full utilization, technology, capital formation, innovation, invention, improved institutions
Goals of Macroeconomic Policy: role of govt and market Monitoring or Managing the Economy Level & growth in national/per capita income , composition of GDP

Unemployment rate/Inflation rate Business Cycles: macroeconomic stabilization with growth Price Stability Economic Growth / (Economic Development)

Classical Macroeconomics Keynesian MacroeconomicsMonetarism Supplyside Economics Rational Expectations

Says law of market: Why market fails: government through fiscal and monetary policy manages demand and expectations to avoid recession and help stabilize cyclical fluctuations. Short terms fluctuations (cyclical trends) long term (secular) fluctuations Why government fails: Interdependence between markets - goods, labour, assets Trade Deficit: gap between imports and exports 80-20 Rule J curve, W Curve, S curve of East Asian development Laffer curve Okuns law Paradox of thrift Inflation targeting: to avoid inflationary spiral

Some

Trade-offs:

World Macro View Population, total (millions) Population growth (annual %) GNI, PPP (current international $) (billions) GNI per capita, PPP (current international $) GDP (current US$) (billions) GDP growth (annual %) Inflation, GDP deflator(%) Time required to start a business (days) Market capitalization of listed companies (% of GDP) Military expenditure (% of GDP) Fixed line and mobile phone subscribers (per 100 people) Internet users (per 100 people) Merchandise trade (% of GDP) Foreign direct investment, net inflows (BoP, current US$ mn) Workers' remittances and compensation of employees, received (US$) (millions) Official development assistance and official aid (current US$mn)

2000 2005 2006 2007 6,075.80 6,461.58 6,538.17 6,612.04 1.3 1.2 1.2 1.1 41,850.50 55,831.14 60,574.62 65,164.48 6,888 8,640 9,265 9,855

31,949.18 45,053.89 48,626.70 54,347.04 4.1 3.5 3.9 3.8 4.7 5.7 5.4 4.3 .. 46 47 44 102.4 2.3 28 97.8 2.5 54 111.8 2.5 62 121.7 2.5 69 22.7 51 .. 336,851 ..

6.5 15.6 18.5 41 47 50 1,518,420 1,049,491 1,352,442 131,519 57,760 265,994 107,292 302,720 105,292

Need for the Study of National Income

A national income measure serves various purposes regarding economy, production, trade, consumption, policy formulation, etc. The following are some such needs. 1. To measure the size of the economy and level of countrys economic performance. 2. To trace the trend or speed of the economic growth in relation to previous year(s) as well as to other countries. 3. To know the structure and composition of the national income in terms of various sectors and the periodical variations in them. 4. To make projection about the future development trend of the economy. 5. To help government formulate suitable development plans and policies to increase growth rates. 6. To fix various development targets for different sectors of the economy on the basis of the earlier performance. 7. To help business firms in forecasting future demand for their products. 8. To make international comparison of peoples living standards.

National Income Accounting

Formal structure for macro theory and models. From the Production side: factor payments From the Demand side: consumption and investment. Stock and flow, exogenous and endogenous factors, static and dynamic analysis

How the Economy as a Whole Works

Two of the Most Basic Economic Models Are: The

P P F: related to economic growth The Circular Flow Diagram

ENDOGENOUS FACTORS for industrial development Infrastructure (target & achievements) Infrastructure (% growth) Investors confidence Business confidence Inflation Trade

EXOGENOUS FACTORS for industrial development: Credit flows Deployment of gross bank credit Investments/capital formation Cash reserve ratio Interest rate Agriculture production Rainfall

The Circular-Flow Diagram:real flow (input

and output) and money flow (income and consumption expenditures-prices) leakages (withdrawls, outflow) and injections (inflow)

Revenue Goods & Services sold

Market for Goods and Services

Spending Goods & Services bought

Firms

Households

Inputs for production Wages, rent, and interest

Market for Factors of Production

Labor, land, and capital Income

Income Households Consumption Firms

Savings

Government

taxes
Transfer payments External Sector Imports

taxes

Investment

Government spending

Exports

Key methods of National Y accounting:

Output method - Value added = sales less purchases of working capital (materials, components etc.) Purchases of fixed capital inputs (machinery, buildings etc.) are not deducted since these are not immediately used up in production.

Intermediate goods/final goods Sales and purchase of following firms:

VA

Firm A (coal miner) sells 20 lakh of raw coal to B 20 B (steel plant owner) sells 50 lakhs of steel to C 30 C (automobile manufacturer) sells 100 lakhs of parts to D 50 D (Maruti Suzuki) sells 1000 lakhs of cars to households 900 Total Sales= 1170 total output =1000

Expenditure method - Intermediate expenditure by firms on working capital inputs is excluded, to avoid double counting.
2006-07 (in Rs. Crores) % share

Consumption: 2327331 56.4 Investment: 1398310 33.9 *GFCF: 1216552 *Inventories/change in stocks 120620 * Valuables: 61138 Government Expenditure: 467702 11.3 Exports: 947868 22.9 Imports: 1064606 25.8 Discrepancies: 49120 GDP: 4125725

 Income method

Wages and salaries/ compensation to employees Income of self-employed/ proprietors income Profits and dividends of business corporations Interest Rent Surplus of government enterprises Net flow of income from abroad All of them are known as factor incomes and they are paid in return for the inputs engaged in some productive process which have resulted in corresponding output. Transfer Payments. Indirect taxes not included in national income

Calculate GDP, NDP ,GNP NNP, Personal Income, Disposable Income, Factor cost, Market Price

GNP market prices: 5000 crores Personal Income Tax: 1000 crores Corporate Taxes: 800 crores Subsidies: 400 crores Factor income paid abroad: 800 crores Factor income received from abroad: 900 crores Undistributed profits/retained profits: 200 crores Indirect taxes: 450 crores Depreciation: 350 crores Savings: 600 crores Consumption: 2000 crores Other Transfer payments:780 crores

GDP vs GNP
GDP, GNP and NNP are the three crucial measures of a nations output. GDP measures the total output (i.e. value-added) of a nations resources regardless of ownership. GNP takes account of ownership and thus included net property income from abroad. Net product (NNP) also takes account of the depreciation of the nations capital stock. GNP includes profits earned from capital invested abroad. GDP at factor cost means total value of output produced by the factors of production available in the country (irrespective of the ownership). Thus, GDP measures income from where it is earned rather than who owns the factors of production (whether Indians or foreigners). While GDP indicates productive capacity of an economy, GNP is a crude indicator for living standard.

The significance of the distinction between GNP and GDP depends on the nature of a particular economy.

For instance, if a country has more non-resident inflows and produces a considerable portion of its output by multinational corporations (i.e. with the help of external factors of production), its GNP will be higher than GDP. Otherwise the distinction will be negligible. Many countries have foreign firms. In the case of US Ford Motors in Chennai, the income from the car factory would be counted as Indian GDP and not as US GDP. But the amount of profit the company sends to US will be added to their GNP. Similarly, our GNP can be arrived by adding to our GDP the net factor income receipts from abroad for the factor inputs owned by Indians. That is, the nonresident Indians income will be added to GDP to arrive at our GNP.

The financial balance of each sector is the difference between its saving and its investment; i.e. between its total receipts and its total (current and capital) expenditure. It is the amount the sector has to borrow from other sectors (including overseas) The identity between factor incomes, output (valueadded) and final expenditure leads to three ways of calculating GDP. In practice, error and omissions mean the three methods do not give the same answer. Hence, an unweighted average of the three is calculated - GDP average estimate. A key distinction must be drawn between values measured in current prices (nominal figures) and those in constant prices (real figures). The latter abstract from price changes - hence they correctly indicate changes in the volume of output, expenditure or income.

GDP/GNP and its various variant GDP/GNP at market prices GDP/GNP at factor cost

GDP/GNP at current Prices GDP/GNP at constant prices

Real

GDP/Nominal GDP GDP Deflator WPI: base year, collection, weights CPI: base year, types, weights, no. of commodities Per Capita GDP Growth rate

Year 1999-00 2006-07

Nominal GDP 2500 crores 3600 crores

GDP Deflator 120 145

GDP by Economic Activity (in Rs.crores) 1.Agriculture 2.Mining &quarrying 3.Manufacturing 4.Electricity, gas water supply 5.Construction 6.Trade 7.Financial/business 8.Social, community GDP factor cost

A 2006-07 B 2006real 07 nominal

% B 2007-08 A 2007-08 nominal real change& GDP Deflator

123029 13527 103639 15172 46207 173205 93943 92613 661335

148304 24031 139290 17630 59407 216359 125694 120082 850797

165247 25114 164691 19545 69292 251799 146603 136469 978760

127669(B/A) x100 13960 115965 16432 51149 193994 104281 99681 723132

 - real

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- real

Composition of GDP

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19 50 19 51 52 19 -53 54 19 55 56 19 57 58 19 -59 60 19 61 62 19 63 64 19 -65 66 19 67 68 19 69 70 19 -71 72 19 73 74 19 75 76 19 -77 78 19 79 80 19 81 82 19 -83 84 19 85 86 19 87 88 19 -89 90 19 91 92 19 93 94 19 95 96 19 -97 98 20 99 00 20 01 02 20 -03 04 -0 5

Composition of WholeSale Price Index

Major Group/Groups No. of items l993-94 l98l-82 l970-7l No. of Quotations l993-94 l98l-82 l970-7l

Series 2

Series 3

Series 4

Series 5

Series 6

Series 7

All Commodities I. Primary Articles II Fuel, Power , Light & Lubricants III Manufactured Products

435 98 19

447 93 20

360 80 10

1918 455 72

2371 519 73

1295 411 30

318

334

270

1391

1779

854

Item Description of Index of Industrial Production

Weigh 2003-04 2005-06 t Growth Growth (100% )

Apr-Aug 2007-08

Sector-wise Mining Manufacturing Electricity Use-Based Basic goods Capital goods

10.473 79.36 10.17 35.57 9.26

5.2 7.4 5.1 5.4 13.6 6.4 7.1

0.5 9.4 4.9 6 15.9 3 12.9 13.3 30 12.3 17.1 10.4 9.2

Intermediate goods 26.51 Consumer goods 28.66

Population and Percentage of World's Population in World Bank Income Classifications :

Population (thousands)

Percentage
15.6 8.2 35.3 40.9

High Income 955,000 Upper Middle Income 503,700 Lower Middle Income 2,163,500 Low Income 2,511,400 Total 6,133,600 Upper Y 22,818 15.6 76.8 73.8 487 0.03 490 170 97 3.3 76,507

100.0 Upper Middle 5,175 8.2 70.1 52.6 180 1.85 293 35 86 1.0 18,801 Lower Middle 1,808 35.3 68.1 43.2 113 4.51 205 11 81 1.3 10,008 388 40.9 54.6 28.0 17 5.31 65.1 2 54 0.4 336

Characteristics of World Bank Classifications

Low Y Average per capita income Percent of world pop. Life expectancy (years at birth) Manufactured Exports (as % of Total Exports) Phone lines per 1,000 Waiting years for phone line Televisions per 1,000 Personal Computers per Th. Literacy Rate (percent of adult pop.) Scientists & technicians per 1,000 people Patent Applications

Decade wise which country has the highest GDP and per capita GDP? GDP of India? Total countries in the world ? What is not included in GDP? Suppose GDP is 0 what it indicates? Which contributes more to GDP- the production of essential commodities & services or luxury goods and services? What has been the size of Indian Economy in the fiscal year 2006-07? What are the ratcheting up factors for the growth of Indian economy? What are your global and specific observations about the Indian economy? Trends in WPI, CPI over the years?

Assignment for students 1.Brief note on GDP/GNP deflators and price indices 2.Factors affecting demand and supply 3.Factors affecting consumption, savings and investment. 4.Some Tradeoffs in economics and the Indian Economy

Points to remember: World GDP: 65.96 trillion US$, Indias contribution? Macroeconomic variables are studied through models AD and AS depends on the changes in exogenous and endogenous variables Why all levels of output are not equilibrium levels of output? Aggregate demand and supply is in exante sense but national income accounts are in expost sense. 1. Consumption: for Indian economy 70% for High Income countries76%, (disposable income, stock of wealth, taxation and tax GDP ratio-for India12%,for high income17%,,expectations, r, )

Short Run and Long run C function Savings: for Indian economy30%, for high income 23% (population, r,
Y)

Investment:

Expenditure method - Intermediate expenditure by firms on working capital inputs is excluded, to avoid double counting.
2006-07 (in Rs. Crores) % share

Consumption: 2327331 56.4 Investment: 1398310 33.9 *GFCF: 1216552 *Inventories/change in stocks 120620 * Valuables: 61138 Government Expenditure: 467702 11.3 Exports: 947868 22.9 Imports: 1064606 25.8 Discrepancies: 49120 GDP: 4125725