Introduction to Macro Economics

Macroeconomics examines the aggregate behavior of the economy – how the actions of all individuals and firms in the economy interact to produce a particular level of economic performance as a whole. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels.

Economics is what economist do.

  

Type of Economic Crises

1. Depression or recession: Recession is typically termed for the decline in output, income and employment. This lasts for more than few months. Whereas depression is typically termed for a recession that is large in both scale and duration.

2. Inflation

3. Foreign exchange crises

Great depression The sharp fall in aggregate output and employment levels which started in 1929 and lasted through the 1930s. It was believed until great depression that "supply creates its own demand". It is referred as Say's law. The great depression gave rise to modern macroeconomics. Macroeconomic theory changed dramatically with the 1936 publication of the book, The General Theory of Employment, Interest and Money by John Maynard Keynes. John Maynard Keynes gave the basis for modern economic theory which is referred as Keynesian economics. Important mission of modern macroeconomics is to prevent anything like the Great Depression from happening again.

Total physical capital stock (K) is total final investment goods (plant, machinery etc) installed in the economy at a point of time.

Potential output is maximum sustainable production level (at constant prices) during the period (year), given K, supply of labor, human capital, technology etc.

Aggregate demand < potential output ->Demand constrained economy

In recession or decline scenario, economy is demand constrained i.e. aggregate demand is less than (& decreasing further) potential output. In recession, it is due to the decreasing aggregate demand and typically potential output remains same.

To handle the recession or depression, economist need to find out ways to increase the aggregate demand need and to increase the total physical capital stock K (i.e. labor and productivity etc) so to accelerate growth. Long term supply management is important for  underdeveloped countries. For developed countries, short term demand managed works well.

Aggregate demand > potential output -> Demand pulled inflation or supply constrained economy

Measure of Economic success:

1. Gross domestic product (GDP), Gross national income (GNI)

    Annual growth rate = ((GDPt – GDPt-1) / GDPt-1 x 100
    Per capita GDP or GNI

2. Price level - described by inflation
    Inflation rate = (Pt – Pt-1) / Pt-1 x 100
    where  P: Annual averages of price indexes

3. External balance like trade deficit as % of GDP, current account deficit (CAD) as % of GDP
4. Unemployment (and poverty) rates

Glossary

Inflation can mean either an increase in the money supply or an increase in price levels. The inflation may not necessarily be bad always, it depends on the money income of the class of people. Based on the impact of inflation, people can be classified as below
1. one who's money income remain same with inflation,
2. one who's money income goes down with inflation
3. one who's money income going up by inflation

In India, majority of people are in 1 or 2 category.

Two type of inflation:
1. Demand pull inflation: This arise when aggregate demand outpaced the aggregate supply.
2. Cost push inflation: This arise caused by substantial increases in the cost of important goods or services where no suitable alternative is available.

Purchasing power parity (PPP) between two countries currencies is the exchange rate at which a given basket of goods and services would cost the same amount to buy in each country.

Human Development Index is a composite index prepared and published by UNDP based on three basic dimensions of human development:
1. Health: life expectancy at birth.
2. Education: Mean of years of schooling (adults) and expected years of schooling (children)
3. Living Standards: GNI per capita PPP $

Goods and Services

1. Intermediate goods and services are those which are used up in the process of production

2. Final consumption goods and services are those which are purchased by the household sector.

3. Final investment goods are durable goods like plant and machinery, buildings, roads, bridge

Gross domestic product (GDP) is the total market value of all officially recognized final goods and services produced within a country in a given period of time. "Final" does not mean intermediate goods & services are ignored.

Gross national income (GNI) consists of: the personal consumption expenditure, the gross private investment, the government consumption expenditures, the net income from assets abroad and the gross exports of goods and services, after deducting two components: the gross imports of goods and services, and the indirect business taxes.The difference is that GDP defines its scope according to location, while GNI defines its scope according to ownership. In a global context, world GDP and world GNP are, therefore, equivalent terms.

Some useful sources of data

• UNDP: http://hdr.undp.org/en/statistics/data/
• World bank: www.worldbank.org
• IMF: www.imf.org
• RBI, Handbook of Statistics on Indian Economy: www.rbi.org.in
• Min of Finance, Economic Survey: http://indiabudget.nic.in/
• http://www.planningcommission.nic.in/
• Center Statistically Office (CSO): http://mospi.gov.in/