overview of macroeconomics

8/7/2019 Overview of Macroeconomics

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Overview ofOverview of

MacroeconomicsMacroeconomics

a surveya survey


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1818 thth centurycentury

Classical EconomicsClassical Economics --17761776--AdamSmithAdamSmith--

An Inquiry into the Causes and Nature ofAn Inquiry into the Causes and Nature of

the Wealth of nationsthe Wealth of nations David Ricardo,David Ricardo,J.S Mill. Malthus etc.J.S Mill. Malthus etc.

Free marketsFree markets-- forces of DD and SSforces of DD and SS-- pricepricemechanismmechanism-- invisible handinvisible hand-- laissezlaissezfaire..faire..


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A little bit of mutinyA little bit of mutiny

17761776-- American Declaration of RightsAmerican Declaration of Rights

Industrial Revolution and the French revolutionIndustrial Revolution and the French revolution--

1789 ?1789 ?-- Division of labour, accumulation of capital and growingDivision of labour, accumulation of capital and growing

international tradeinternational trade

Benefits of freedom, democracy , a free state etc.Benefits of freedom, democracy , a free state etc.

The western world being more and more attracted toThe western world being more and more attracted tofree markets and the benefits of laissez fairefree markets and the benefits of laissez faire


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Basic assumptions ofBasic assumptions of

classical economicsclassical economics

Says Law of marketsSays Law of markets-- SS creates its ownSS creates its own

DDDD

Full employment of resourcesFull employment of resources-- nono

voluntary unemploymentvoluntary unemployment

Price mechanism clearing the market atPrice mechanism clearing the market at

equilibrium quantitiesequilibrium quantities

Wage price flexibilityWage price flexibility


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1919thth CenturyCentury

Emergence of the free market capitalist economy in theEmergence of the free market capitalist economy in the

global arenaglobal arena

led largely by British Industrial revolutionled largely by British Industrial revolution-- primarily dueprimarily dueto the English colonial Empireto the English colonial Empire

Emergence of the ideology of communism/socialism asEmergence of the ideology of communism/socialism as

an alternative to the free market capitalist economyan alternative to the free market capitalist economy--

Marx, Engels etc.Marx, Engels etc.

Emergence of the neo classical revolution inEmergence of the neo classical revolution in

economicseconomics the marginal revolutionthe marginal revolution-- Alfred MarshallAlfred Marshall--

1890.1890.


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20 th Century20 th Century-- the evolutionthe evolution

of macreconomicsof macreconomics Russian revolutionRussian revolution

I world warI world war increased military spending by the majorincreased military spending by the majorcountries of the worldcountries of the world-- diversion of expenditure fromdiversion of expenditure from

investmentinvestment Great Depression 1929Great Depression 1929--3333 unemployment ,underunemployment ,under

utilized capacity, volatile prices etc.utilized capacity, volatile prices etc.

Hitherto unprecedented in capitalist history shaking theHitherto unprecedented in capitalist history shaking thefoundations of the classical capitalist economyfoundations of the classical capitalist economy

Led economists and policy makers world wide toLed economists and policy makers world wide torethink the basics of classical market economicsrethink the basics of classical market economicsjuxtaposed against the fact the socialist Russia wasjuxtaposed against the fact the socialist Russia wasalmost unaffected by the depression and was alreadyalmost unaffected by the depression and was alreadyregistering the highest agricultural output growth ratesregistering the highest agricultural output growth ratesin human historyin human history


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Suggested that lack of effective demand isSuggested that lack of effective demand isthe major factor behind recessionthe major factor behind recession

And argued for a more active role for theAnd argued for a more active role for thestate in the form of govt. fiscal & monetarystate in the form of govt. fiscal & monetarypolicies [ stabilization policies] which couldpolicies [ stabilization policies] which couldaffect output and reduce unemployment andaffect output and reduce unemployment and

shorten economic downturnsshorten economic downturns


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New trend of the 1970s.New trend of the 1970s.

Keynesian Keynesian stabilization optimismstabilization optimism stayedstayedalive till 1970s..alive till 1970s..

Prolonged stagflationProlonged stagflation --[eco. Stagnation +[eco. Stagnation + Inflation] in the US in the 1970sforInflation] in the US in the 1970sfor

Keynes inflation wasnt a serious problemKeynes inflation wasnt a serious problemwith unemployed resources..with unemployed resources..

A new group called newA new group called new classicalsclassicals-- stressedstressedimportance of money & the role ofimportance of money & the role ofexpectations [ rational expectations] inexpectations [ rational expectations] in

analysinganalysing inflation.inflation.


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Consensus on a particular set ofConsensus on a particular set ofpolicies in dealing with macroeconomicpolicies in dealing with macroeconomic

problems is unfortunately absent evenproblems is unfortunately absent eventoday.today.

the general consensus seems to bethe general consensus seems to be

that the Keynesian approach is valid inthat the Keynesian approach is valid inthe shortthe short-- medium run, while in themedium run, while in thelong run the classical SS side forceslong run the classical SS side forcescome into operation page7,come into operation page7, SikdarSikdar


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The New InternationalThe New International

Economic Order [NIEO]Economic Order [NIEO] The post II world war regrouping of theThe post II world war regrouping of the

worldworld

The break down of the colonial empiresThe break down of the colonial empires The emergence of new nation states andThe emergence of new nation states and

their new growth agendastheir new growth agendas

The division of the world into two powerThe division of the world into two powerblocksblocks

The entry of the big business enterpriseThe entry of the big business enterprise


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Objectives ofObjectives of

macroeconomic policymacroeconomic policy High level and rapid growth of outputHigh level and rapid growth of output--

economic growtheconomic growth

Full employmentFull employment high level ofhigh level of

employment with low involuntaryemployment with low involuntary

unemploymentunemployment

PricePrice-- level stability &level stability & Exchange rateExchange rate stabiltystabilty ??


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Instruments ofInstruments of

macroeconomic policymacroeconomic policy FISCAL POLICYFISCAL POLICY-- use of taxes and govt.use of taxes and govt.

expenditureexpenditure

Govt. expenditure consists of purchases ofGovt. expenditure consists of purchases ofgoods and services, transfer payments etc.goods and services, transfer payments etc. govt. spending determines the relative size ofgovt. spending determines the relative size ofpublic and private sectorspublic and private sectors

Taxes impact in two ways, one by affectingTaxes impact in two ways, one by affectingpeoples incomes and two, by affecting pricespeoples incomes and two, by affecting pricesof goods & services & thereby incentives andof goods & services & thereby incentives andbehaviourbehaviour..


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MONETARY POLICYMONETARY POLICY-- regulating theregulating the

money supply of the country bymoney supply of the country by

managing money , credit and bankingmanaging money , credit and bankingsystem of the countrysystem of the country

Money supply influences many financialMoney supply influences many financial

and economic variables like interestand economic variables like interestrates, stock prices, housing prices andrates, stock prices, housing prices and

foreign exchange ratesforeign exchange rates

overview of macroeconomics

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