macro lect1
TRANSCRIPT
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Course Description
Systems of national accounts; input outputsystem; money and exchange economy;
basic models of income determination;
classical model; Keynes’ model; derivation ofIS and LM functions; three sector models of
income determination; four sector models of
income determination; inflation & Phillips
curve; open economy macroeconomics;consumption, saving; investment and
Financial system.
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Scope and Objective
The course aims at enabling the students to
understand the meaning, interdependence
and determination of the equilibrium level of
the macroeconomic variables like,
National Income, Saving, Investment,
Consumption, Employment, Interest Rate,
Price, Wage Rate, Foreign Exchange Rate,
etc. The methods and approach tomacroeconomic modeling and policy are
also emphasized.
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Evaluation Scheme and other details
Mid Semester Test : 30% CB
Comprehensive Exam. : 40% Partly OB
Assignment/Term Paper : 10%
Unannounced Test/Quiz : 15%
Class Participation : 05%
Chamber Consultancy hour : Thursday 9th
Chamber number : 1201 – A
E-mail :[email protected]
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Microeconomics and Macroeconomics
The Scope of Economics
ABLE Examples of Microeconomic and Macroeconomic Concerns
ivisions
f Economics Production Prices Income Employment
icroeconomics Production/output in
individual industries
and businesses
How much steel
How many cars
Price of individual
goods and
services
Price of medical
care
Price of gasoline
Food prices
Distribution of
income and
wealth
Wages in the
auto industry
Employment by
individual
businesses
and industries Jobs in the steel
industry Number of
employees in a firm
acroeconomics National
production/output
Total output
Gross domestic
product
Growth of output
Aggregate price
level
Consumer prices
Producer prices
Rate of inflation
National
income
Total wages
and salaries
Total profits
Employment and
unemployment in
the economy
Total number of jobs
Unemployment rate
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Microeconomics and
MacroeconomicsMicroeconomics The study of how households and
firms make choices, how they interact in markets, and
how the government attempts to influence their choices.
Microeconomics examines the economic behavior of
individual households and firms – their responses to
prices, income, tastes, opportunities and other
fundamental variables.
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Microeconomics and
MacroeconomicsMacroeconomics The study of the economy as a
whole, including topics such as inflation, unemployment,
national income, interest rate, exchange rate, stockprices and budget deficit etc….
Macroeconomics examines the sum of microeconomic
actions, their dynamics and interactions.Therefore, macro must be fully compatible with micro in
its explanations of behaviors.
To trust any macro answer, you must be sure of each off
its micro roots.
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Course Strategy
Define the important concepts, magnitude and
questions in the real world.
Learn alternative theories suggesting answers
and explaining behaviorEvaluate data to test the validity and then
choose among theories
Put in a position to have a serious opinion onimportant topics.
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Macroeconomic Issues
Why macroeconomic issues are more
controversial?
– Macro hits us on our pockets through its
policy prescription, so we want clear answer.
– Macro gets intimately involved in politically
sensitive issues.
– Media cares these issues and wants to findcontroversy to sell those.
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Why Study Macroeconomics?
As an investor
As a planner
As a manager or employee
An intellectually curious person
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As an Investor
Where are the interest rate heading?Which sector will do best/worst during the
next quarter, year or decade?
What is the real interest rate?What is the investment sentiments in the
economy?
What is the exchange rate currently.
Answer to exchange rate, interest rate and
inflation rate variables
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Planner
What determines the interest rates and what areappropriate monetary targets?
What the appropriate monetary tools to apply?
What are the appropriate taxes to raise?
What is the composition of best budget?
How will international trade affect jobs, inflation
and credit?
What is the cost of inflation?
What is the cost of fiscal deficit?
What is the cost of unemployment?
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Manager or Employee
What growth will my current market
provide if I maintain the share?
Can I raise my prices as rapidly as costs?
What opportunities are emerging in the
emerging and developed countries.
Should I employ more or not?Which sector I will target for investment
and growth?
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Intellectually curious person
Why do business cycle exist?
Why inflation?
How inflation be cured?Why exchange rate is unstable?
What is interest rate?
Why interest rate is so important?Why financial market is unstable?
And so on……
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What Macroeconomics Is About
Macroeconomics: the study of structure andperformance of national economies andgovernment policies that affect economicperformance
Issues addressed by macroeconomists: – Economic growth
– Business cycles
– Unemployment
– Inflation
– Investment – Consumption
– The international economy and exchange rate
– Macroeconomic policy – fiscal and monetary
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Macroeconomic Variables
Total output in the economy (GDP/NDP/NNP..) Aggregate price level (Inflation/Deflation)
Employment/unemployment
Interest rateWage rate
Foreign exchange rate
Fiscal deficit
Stock prices
– Study all the variables in levels and how they
changes over t ime.
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Macroeconomic models
To understand the complexity of economic
system, economist use models
Macroeconomic models allow economists
to link a phenomenon which they wish to
explain (dependent) to one, two or more
variables (independent) believed to be
largely responsible for the behavior of thephenomenon under study.
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Macroeconomic models
Variables are exogenous/endogenous:
Endogenous variables are the variables whose
values are determined by the model.
A dependent variable is endogenous
Exogenous variables are those whose value is
determined by forces outside the model.
Macroeconomic theory will help us to identifythose variables from the system and establish
the theoretical linkages between those two set of
variables.
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Macroeconomic Questions???
How are the levels of output, employment determinedand why do they fluctuate?
Why does inflation occur and when should we worry
about it?
How does government policies affect inflation andunemployment?
How do trade, international financial markets and
exchange rate affect employment and inflation
domestically?What policies are optimal in the sense of achieving the
most desirable behavior of aggregate variables?
Why some countries are rich and some are poor?
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A World Tour
The United States
The European Union
China
India
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1-1 The United States
When macroeconomists studyan economy, they first look at
three variables:
– Output
– The unemployment rate
– The inflation rate
– Fiscal deficit
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1-1 The United StatesTable 1-1 Growth, Unemployment, and Inflation in the United States Since 1970
1970 –2006
(average)
1996 –2006
(average) 2007 2008 2009
Output growth rate 3.1% 3.4% 3.3% 2.1% 2.5%
Unemployment rate 6.2 5.0 4.6 4.6 4.8
Inflation rate 4.0 2.0 2.9 2.6 2.2
Output growth rate: annual rate of growth of output (GDP). Unemployment rate: average over the year. Inflation rate:
annual rate of change of the price level (GDP deflator).
The period 1996-2006 was one of the best decades in
recent memory:
– The average rate of growth was 3.4% per year.
– The average unemployment rate was 5.0%.
– The average inflation rate was 2.0%.
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Table 1-
2
Growth, Unemployment, and Inflation in the Five Major European Countries
Since 1970 (Germany, France, UK, Italy, Spain)
1970 –2006
(average)
1996 –2006
(average) 2007 2008 2009
Output growth rate 2.3% 2.0% 2.7% 2.6% 2.2%
Unemployment rate 7.4 8.7 7.6 7.0 6.7
Inflation rate 5.4 1.8 1.7 1.8 2.2
Output growth rate: annual rate of growth of output (GDP). Unemployment rate: average
over the year. Inflation rate: annual rate of change of the price level (GDP deflator).
1-2 The European Union
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The economic performance of the five countries inTable 1-2 has been far less impressive than that of the
United States over the same period:
– Average annual output growth from 1996 to 2006
was only 2.0%.
– Low-output growth was accompanied by persistently
high unemployment.
– The only good news was about inflation. Averageannual inflation for these countries was 1.8%, much
lower than the 5.4% average over the period 1970 to
2006.
1-2 The European Union
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There is still disagreement about the causes of
high European unemployment:
– Politicians often blame macroeconomic policy.
– Most economists believe, however, that the
source of the problem is labor market
institutions.
– Some economists point to what they call labormarket rigidities.
– Other economists point to the fact that
unemployment is not high everywhere in
Europe.
1-2 The European UnionHow Can European Unemployment Be Reduced?
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Since 1980, Chinese output has grown at close to 10%
per year, and the forecasts are for more of the same.
This is a truly astonishing number: Compare it to the
3.1% number achieved by the U.S. economy over the
same period. At that rate, output doubles every 7 years.
Table 1-3 Growth and Inflation in China Since 1980
1980 –2006 1996 –
2006
2007 2008 2009
Output growth rate 9.3% 8.8% 10.7% 10.0% 9.5%
Inflation rate 5.4 3.3 1.5 2.5 2.2
Output growth rate: annual rate of growth of output (GDP). Inflation rate:annual rate of change of the price level (GDP deflator).
1-3 China
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Table 1-4 Growth, inflation and Fiscal deficit in
India Since 2006
2006 2007 2008 2009 2010 2011 2012
Output
growth rate
9.6% 9.3% 6.7% 8.4% 8.4% 6.5% 4.8%
Inflation rate 6.6 4.7 8.1 3.8 9.6 7.6 6.16
FiscalDeficit
3.5 2.7 6.0 6.7 4.9 5.8 5.1
Output growth rate: annual rate of growth of output (GDP). Inflation rate:
annual rate of change of the price level (WPI), Fiscal deficit: annual
percentage to GDP
1-4 India
Year Unemployment rate1972-73 1.6
1977-78 2.6
1982-83 1.9
1987-88 2.7
1993-94 1.9
1999-00 2.82004-05 3.1
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GDP Growth Rates
2005-
06
2006-
07
2007-
08
2008-
09
2009-
10
2010-
11
2011-
12
2012-
13
Gross
Domestic
Product 9.48 9.57 9.32 6.72 8.59 9.32 6.21 4.96
Agriculture &
Allied Services 5.14 4.16 5.8 0.09 0.81 7.94 3.65 1.79
Industry andManufacturing 10.1 14.32 10.28 4.33 11.3 9.73 2.69 1.89
Services 10.91 10.06 10.27 9.98 10.5 9.75 8.2 6.59
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Sector wise share to total GDP
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
griculture 18.2 17.3 16.81 15.77 14.64 14.45 14.1 13.6
Industry 27.9 28.6 28.74 28.13 28.27 28.23 27.51 27.0
Services 53.7 53.9 54.45 56.11 57.09 57.32 58.39 59.2
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Employment- Sector wise (in %)
Sector 1999-2000 2004-05 2009-10
Agriculture 59.90 56.60 53.20
Industry 18.2 18.2 21.51
Services 23.74 24.66 25.27
Total Employment 396.76 millions 457.46 millions 460.22 millions
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Fiscal Indicators
2007-
08
2008-
09
2009-
10
2010-
11
2011-
12
2012-
13
GrossFiscal
deficit
2.5 6.0 6.5 4.8 5.7 5.1
Revenu
e Deficit
1.1 4.5 5.2 3.2 4.3 3.5
Primary
Deficit
-0.9 2.6 3.2 1.8 2.6 1.9
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Inflation
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
WPI 4.7 8.1 3.8 9.6 8.9 7.6 6.6
CPI 6.2 9.1 12.4 10.4 8.4 10.0 9.9
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Monetary Tools
Sep 2012 Apr 2013 Nov 2013
Bank Rate 9.00 8.50 8.75
Repo Rate 8.00 7.50 7.75Reverse Repo
Rate
7.00 6.50 6.75
CRR 4.75 4.00 4.00
SLR 23.00 23.00 23.00
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Exchange RateUSD vs INR
Dec 2012 Feb 2013 Aug 2013 Dec 2013 Jan 2014
USD 54.56 53.08 68.36 62.22 61.60
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1-4 Looking Ahead
These are the questions to which you have been exposed in
this chapter:
What determines expansions and recessions? Can
monetary policy be used to prevent a recession in the
United States? How will the Euro affect monetary policy in
Europe?
Why is inflation so much lower today than it was in the
past? Can Europe reduce its unemployment rate? Should
the United States reduce its trade deficit?
Why do growth rates differ so much across countries, evenover long periods? Has the United States entered a New
Economy, in which growth will be much higher in the
future?
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