Macroeconomics Ganesh Kumar N

Macroeconomics
Ganesh Kumar N.
Agenda
Course administration
Scope of macroeconomics
Overview of recent macroeconomic
news/data/events
Observed facts of economies
Long run, short run, medium run models
Business cycles
Course Evaluation
Component
%age
Quizzes
20
Mid Term
35
End Term
35
Class
Participation
10
Scope of Macroeconomics
Macroeconomics is concerned with economy

as a whole
Booms and recessions

Consumption and investment
Rate of inflation, wages
Interest rates
Unemployment
Exports, Imports, Balance of payments
Budget deficits
Monetary policy and Fiscal policy
Observed facts about economies

Over long periods of time economy grows at
steady rates Long run behaviour of the
economy
In some periods inflation rates are much
higher 1970s; Medium run behaviour of the
economy.
In bad year unemployment rate rises short
run behaviour year to year fluctuations
Macroeconomics help us understand the
reasons for these observed facts
Long run: Growth theory
GDP 80-81 prices
Actual Vs. Potential GDP
1950
In growth theory, we focus on

long term growth ignoring short
term fluctuations booms and
recessions.
1960
1970
1980
1990
Aggregate demand & aggregate

supply
Aggregate supply: amount of output an
economy can produce given resources and
technology
Aggregate demand: Total demand for goods
& services (consumption, investment, govt.
purchases, net exports)
Economy with fixed productive

capacity
Why in some countries prices are stable
for many years while in some prices
double every month?
In the long run output is determined by
supply side (productive capacity)
Price level is determined by demand
relative to the output economy can
supply.
Economy with fixed productive

capacity
Level of output
is determined by
productive
capacity
P
AS
AD
Y0
Inflation (price
rise) is generally
due to changes in
AD
Output, Y
AS in the long run

P
Time
AS
Output, Y
Short run
Fluctuations in output around the potential output
Flat AS: Any level of output can be produced at a
given price
Underlying assumption is output does not affect
prices in the short run
Fluctuations in output are due to fluctuations in
AD
Short run
P
AS
AD
Y0
Output, Y
Medium run
Positively
sloping AS:
AS
AD
Y0
When AD
demand pushes
output beyond
sustainable level
as per the long
run model, firms
start raising
prices
Output, Y
Business cycles
Inflation, growth and output are related
through business cycles
It is a regular pattern of expansion
(recovery) and contraction (recession)
in economic activity around the path of
trend growth
GDP (80-81 prices)
Business Cycles
1975
Recession
Peak
Recovery
Trough
1976
1977
1978
1979
1980
1981
1982
A recession is a decline in output that persists for more

than two consecutive quarters in a year.
Duration of Cycles and

Recession in USA
Average of all cycles
1854-1919 (16 cycles)
No. of months of
recession
22
1919-1945 (6 cycles)
18
1945-2001 (10 cycles)
10
Great Depression:
August 1929(III)March 1933(I)
43
Mother of all recessions - Great

depression
Between 1929 and 1933 in USA:
The stock market fell by 85%
GNP fell by nearly 30%
Unemployment rose from 3% to 25%
Consumer price index fell by 25%
Investment collapsed.
Inflation and business cycle

Output gap =actual output potential output
Inflation rates are positively related to output gap
During recession inflation comes down
During boom inflation rate picks up
USA: Rate of Inflation in Consumer Prices,

1960-2002
National Income Accounts:

Agenda
National income accounts

Circular flow of income, GDP, components
of aggregate demand
Inflation & its measurement WPI, CPI,

GDP deflator
Some important identities
Nominal & real variables
Data sources
CIRCULAR FLOW OF INCOME
Consumption Exp.
Goods and Services
Household
Sector
FIRMS
Factor Services
Payment of Factor Income
(Wages, Profit, Interest, Rent)
Govt.
Spending
Govt
Investment
Capital Mkt
Tax
Saving
Consumption Exp.
Goods and Services
Household
Sector
FIRMS
Factor Services
Gross Domestic Product (GDP)

Economic performance of country is measured
in terms of GDP growth
Indias GDP growth at current prices
2006-07 07-08
2010-11
---------------------------Growth rate % 16.3
16.1
20.3
In which year India has done better?
Gross Domestic Product (GDP)

GDP is the market value of all final goods and
services produced within a country in a given
period of time
Measuring GDP
1. Product approach
2. Income approach
3. Expenditure approach
Govt.
Expenditure
Govt
Investment
Capital Mkt
Tax
Saving
Consumption Exp.
Goods and Services
Household
Sector
FIRMS
Factor Services
Nominal GDP (GDP at current Prices)

Product approach
Items
2008
Price (Rs.)
Quantity
Market Value
Oranges
20
10,000
2,00,000
Apples
30
5,000
1,50,000
Total
3,50,000
2013
Items
Price (Rs.)
Quantity
Market Value
Oranges
25
20,000
5,00,000
Apples
50
10,000
5,00,000
Total
10,00,000
Real GDP (GDP at const. prices)

2013
Items
Price (Rs.)
2008
Quantity
2013
Value at
2008 prices
Oranges
20
20,000
4,00,000
Apples
30
10,000
3,00,000
Total
7,00,000
GDP and related indicators (Source: Economic Survey

2011)
GDP Rs. crore
(current prices)
GDP at
Constant prices
(2004-5)
2008-9
55,82,623
2009-10
65,50,271
2010-11
78,77,947
41,62,509
44,93,743
48,79,232
06-07 07-08 08-09 09-10 10-11

---------------------------------------------------16.3
16.1
12.0 17.3
20.3
Growth rate %
(current prices)
Growth of GDP
9.6
(constant prices) %
9.3
6.8
8.0
8.6
Components of Aggregate demand

We look at different purposes for which
domestically produced goods and services
are demanded.
Aggregate demand is the total demand for
goods and services in the economy.
AD= Consumption (C), Investment (I), Govt.
spending (G), and net exports (NX).
AD= C+I+G+NX
Consumption
Consumption is spending by household on
food, clothing, education etc.
Components of Aggregate
demand
Investment
Investment (I) means addition to physical
stock of capital. It also includes inventories
with firms.
Govt. Spending (G)
It refers to govt. purchases of goods and
services.
It includes such items as national defence
expenditure, costs of roads, salaries of govt.
employees etc.
Components of Aggregate
demand
Net exports (NX)
Spending by foreigners on domestic
goods [ export, X] minus spending by
domestic residents on foreign goods
(import, Q)
NX = X-Q
200 China (2004)
India (2012-13)
1
-10.1
42
45
12
C
G
I
NX
59.6
39
11.3
Problems of GDP Measurement

Productive Vs. Non-productive activity: In
general activities resulting in marketable goods
and services should be included in national
income.
Non-market transactions- Example: Produce
consumed by farmers also included in GDP
Problems of GDP Measurement

Excluded form GDP
Underground economy
Change in the quality of goods
Environmental pollution/ degradation
Healthcare, schooling, distribution of income,
happiness
GDP deflator
GDP deflator: Measure of price index
(Nominal GDP/Real GDP)*100
Our example: (10,00,000/7,00,000)*100
= 133.33
This means that prices have risen by
33.33% on an average over 2008-13.
GDP and related indicators (Source: Economic Survey

2011)
GDP Rs. crore
(current prices)
GDP at
Constant prices
(2004-5)
2008-9
5582623
2009-10
6550271
2010-11
7877947
4162509
4493743
4879232
Questions:
1. What is the GDP deflator for 2009-10 and 2010-11?
2. What is the inflation rate for 2010-11?
WHOLESALE PRICE INDEX

Base 2004-5
Primary atricles
Food
Non-food
Minerals
Fuel
Coal Mining
Mineral oil
Manufacturing
Food
Non-food
Weights
20.1
14.3
4.3
1.5
14.9
2.1
9.4
64.9
9.9
55
New WPI (Introduced in Aug.2010) tracks 676 commodities
Consumer Price Index (CPI)

(2010 base)
Basket:
Food, Beverages and Tobacco:
49.71%
Fuel and light:
9.49%
Housing:
9.77%
Clothing and foot wear:
4.73%
Misc. (Education, healthcare etc.):
26.31%
Inflation rate is the % change in price index.
Jul-11
Apr-11
Jan-11
Oct-10
WPI Inflation
Jul-10
Apr-10
Jan-10
Oct-09
CPI (IW)
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
25
Food Inflation
20
15
10
-5
Some important identities

Y=C+I+G+NX (income/output = expenditure)
YD=Y+TR-TA (disposable income)
YD=C+S
C+S=(C+I+G+NX)+TR-TA
S-I=(G+TR-TA)+NX
S-I= (TR+G-TA)+(X-Q) . Twin deficits
1992
269
30
U.S TRADE
1993 AND BUDGET
223 DEFICITS
65
Budget Deficit
Trade Deficit
Billions of Dollars
300
250
200
150
100
50
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
Year
INDIA FISCAL DEFICIT AND CURRENT A/C DEFICIT
7
6
5
4
3
2
1
0
-1
-2
-3
FD
CAD
Other NI concepts
Gross National Product (GNP) (Market Prices)
GNP(MP) = GDP (MP) + Net Factor Earnings from
abroad
Net National Product (NNP)
NNP(MP) = GNP(MP) depreciation
NNP(Factor Cost) (National income)
NNP(FC) = NNP (MP) Indirect taxes (IDT) +
subsidies
(Market price = factor cost + IDT subsidies)
Sources of Data
Government of India, Ministry of Statistics and
programme Implementation Web site:
http://mospi.gov.in/
CSO:The Central Statistical Organisation is
responsible for coordination of statistical activities
in the country, and evolving and maintaining
statistical standards.
Data: National accounts, CPI, WPI etc.f NSSO
The National Sample Survey (NSS), initiated in the
year 1950, is a nation-wide, large-scale,
continuous survey operation conducted in the form
of successive rounds. Surveys on consumption,
employment.

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Macroeconomics Ganesh Kumar N

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Macroeconomics

Macroeconomics is concerned with economy

Booms and recessions

Observed facts about economies

Long run: Growth theory

GDP 80-81 prices

Actual Vs. Potential GDP

In growth theory, we focus on

Aggregate demand & aggregate

Economy with fixed productive

Economy with fixed productive

AS in the long run

GDP (80-81 prices)

A recession is a decline in output that persists for more

Duration of Cycles and

1945-2001 (10 cycles)

Mother of all recessions - Great

Inflation and business cycle

USA: Rate of Inflation in Consumer Prices,

National Income Accounts:

National income accounts

Inflation & its measurement WPI, CPI,

CIRCULAR FLOW OF INCOME

Gross Domestic Product (GDP)

In which year India has done better?

Gross Domestic Product (GDP)

Nominal GDP (GDP at current Prices)

Real GDP (GDP at const. prices)

GDP and related indicators (Source: Economic Survey

06-07 07-08 08-09 09-10 10-11

Components of Aggregate demand

200 China (2004)

Problems of GDP Measurement

Problems of GDP Measurement

GDP and related indicators (Source: Economic Survey

WHOLESALE PRICE INDEX

New WPI (Introduced in Aug.2010) tracks 676 commodities

Consumer Price Index (CPI)

Fuel and light:

Clothing and foot wear:

Misc. (Education, healthcare etc.):

Inflation rate is the % change in price index.

Some important identities

INDIA FISCAL DEFICIT AND CURRENT A/C DEFICIT

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