Introduction to Macroeconomics

Definition of Macroeconomics
Microeconomics deals with the behaviour of
individual entities like individuals, markets,
firms, households, etc. Thus it looks into the
micro aspects of the economy.
Macro economics studies the broader aspects
of the economy and studies the behaviour of
an economy as a whole.
Development of Macroeconomics
J M Keynes pioneered a new approach to
look at the macroeconomics and
macroeconomic policy.

Classicaleconomists focused only on the

micro aspects of the economy. Business
cycles were considered to be inevitable
Development of Macroeconomics
Keynes argued that it is possible that high
unemployment and underutilization of the
capacities may take place and continue in the
market economy. He also argued that
government can play a bigger role during the
economic depressions by effective utilization
of monetary and fiscal policies.
Development of Macroeconomics
After the World War II, the focus of
economics was just aimed at countering
unemployment and inflation, and some
economists proposed a fixed money
growth rate to address these issues like
inflation and unemployment. Hence these
economists were called as monetarists as
they have given importance to money.
Development of Macroeconomics
In the last few decades, another school of
thought has gained prominence. These
economists are of the opinion that the
people should be given enough incentives
for their earnings, rather than imposing
taxes on their earnings. This group of
economists advocates incentives for
savings, known as supply side
economists.
Objectives of Macroeconomics
it is to achieve....
High level of output (GDP)
Full employment
Price stability
Sustainable balance of payment
Rapid economic growth
High level of output (GDP)
The ultimate aim of any economy is to
provide the desired goods and services. The
economy should be in a position to offer
these goods and services in ample number.
To measure the output of any economy,
Gross Domestic Product (GDP) is the most
comprehensive estimate. GDP measures the
market value of the entire output in a
country during a particular year.
High level of output (GDP)
There are two variants in GDP- Nominal
and Real. When nominal GDP is adjusted
for inflation, it gives real GDP.
The importance of GDP can be analyzed by
the fact that any predictions regarding the
future growth or fall in the economy or data
on the past economic performances are made
in the GDP percentage.
Full employment
The effect of this macroeconomic indicator
is directly felt by the individuals. It is
imperative on any government that it should
ensure full employment to the citizens of its
country.
Unemployment rate shows different pattern
in different phases of business cycles. During
depression unemployment is high.
Price Stability
Stable prices are the third macroeconomic
objective. Consumer price index (CPI) is the
most commonly used measure of overall
price level in an economy. CPI is the
measure of the cost of different types of
goods bought by the average customer.
Inflation denotes the rise or fall in general
price level in the economy. Inflation rates,
shows the rate of change in the price index.
When the inflation is high, the purchasing
power of the customers reduces.
Price Stability
A negative fall in the prices is known as
deflation, as witnessed during the Great
Depression of 1930s.
Hyperinflation refers to the rise in prices by
thousands of percentage points, resulting in
the collapse of the price systems.
Hyperinflation was witnessed in Weimer
Germany in the 1920s and again in Brazil in
1980s and Russia in 1990s.
Sustainable Balance of Payments
Globalization has resulted in increased
transactions between a country and the rest
of the world.
Balance of Payments records all these
transactions, both imports and exports.
Countries keep a close watch on their
international trade.
Sustainable Balance of Payments
The barometer that shows the efficiency of
international trade is the net exports. It is the
difference between the value of exports and
value of imports. Net exports are also called
as the balance of trade.
Every country desires to have a positive
balance of trade.
Economic Growth & Economic
Development
Every country wishes to and strives for
having a constant growth in its economy.
There are two parameters that judge the rate
of growth that an economy achieves.
1. Increase in production possibility curve or
schedule
2. Growth in GDP and per capita income
Instruments of Macroeconomic
Policy
In order to address the problems of the
economy and solve them, there are various
policy instruments available.
1. Fiscal Policy
2. Monetary Policy
3. International Trade Policy
4. Exchange Rate Policy
5. Employment Policy
6. Price and Incomes Policy
Fiscal Policy
Fiscal policy is concerned with the use of
taxes and government expenditures.
Government has to meet various expenditures
like salaries, defence expenses, infrastructure
development, etc. Another part of government
expenditure also goes in the form of transfer
payments like financial assistance to the
elderly and unemployed.
Fiscal Policy
All these expenses leave a positive effect on
the overall economy. The impact of
government spending is also felt on the overall
spending in the economy, thus influencing the
size of the GDP.
Fiscal Policy
The other part of the fiscal policy is
generation of revenues for the government.
Taxes are the main source of revenue for any
government. Taxes affect the economy and the
individuals in two ways.
First, taxes imposed on the income of the people
bring down the disposable income in the
hands of the consumers. This reduces the
spending in the economy.
Second, the taxes levied on goods and services
make them costlier. This encourages
individuals to save and invest in financial
instruments.
Monetary Policy
Monetary policy is the second most widely
used macroeconomic policy instrument.
Monetary policy helps government,
managing the nation’s money, credit, and
banking system. Central bank regulates the
monetary system, and other entities like
banks, insurance companies, NBFCs are also
a part of the monetary system.
Monetary Policy
In India, Reserve Bank of India is the
custodian of the monetary system of the
economy. Central bank brings changes in the
interest rates, reserve requirements, etc.
These changes make significant impact on
the overall functioning of the economy. 
For example, the lowering of interest rates
on housing loans helped the growth of the
housing sector. As a result of low rate of
interest, it became easier to avail a housing
loan and to own a house. This has resulted in
the growth of many allied industries as well.
International Trade Policy
Globalization has given a big push to the
international trade. This has resulted in
framing of specific polices by many
countries to cope with the new challenges.
International trade policy addresses issues
like tariff and non tariff barriers.
In India, in order to move along with the
changing economic scenario, government
came out with export-import (EXIM) policy
in 1997. The policy’s primary aim is to
increase the exports.
International Trade Policy
Example: The EXIM policy aims at bringing
down the transaction costs.
The policy also aims at accelerating the
exports and making the country a
manufacturing hub for quality goods and
services.
The government also plans to have gold card
scheme for credit-worthy exporters with
good track record for easy availability of
export credit on best terms to be worked out
by the RBI.
International Trade Policy
To make the country a manufacturing hub,
government has announced relaxations on
different imports.
To give a boost to R&D, import of
prototypes will be allowed to actual users for
R&D purposes without any limit, which is
now restricted to 10 numbers p.a.
The import duty on various other capital
goods have been either reduced or abolished.
Exchange Rate Policy
To have a growing international trade, a
country requires a clear policy on the foreign
exchange. Foreign exchange policy is a part
of the monetary policy.
Foreign exchange is the rate at which a
country’s currency can be exchanged with a
foreign currency.
Exchange Rate Policy
Different countries follow different exchange
mechanisms. Some countries have a fixed
exchange rate, some countries adopt a
flexible exchange rate, where the exchange
rates are determined by the demand and
supply functions.
Exchange Rate Policy
Indiafollows a flexible exchange rate policy,
which is determined by the demand and
supply, where RBI has a right to intervene in
the market. In order to regulate the foreign
exchange transactions, government has come
out with an act FERA, which was replaced
by Foreign exchange management act
(FEMA).
Employment Policy
Employment policies are adopted by
government in order to increase the
employment level in the country. As a part of
this policy, governments come out with
various polices. 
For example, in India, government has
introduced various policies and schemes like,
Jawahar Rozgar Yojna etc.
Price and Incomes Policy
This policy aims at regulating the prices in
the market and also to ensure the minimum
wages to the workers.
Basic Variables in
Macroeconomics
In macroeconomics study, various
variables are used.

 Variables like money supply, CPI and

WPI, Foreign exchange rates, which can
be measured at any given point of time
are called as stock variable.
Basic Concepts of Macroeconomics
Variables like GDP, inflation, imports,
consumption and investment, which can
be measured only over a period of time,
are flow variables.

Equilibrium states a balance in the

opposing forces
Disequilibrium states lack of balance or
equilibrium.
Basic Concepts of Macroeconomics
Economic models consist of stock and
flow variables. These can be either in the
state of equilibrium or disequilibrium at a
given point of time