Macroeconomics for MBA II

sem
Dr Shubhada Sabade,
2013-14
Topic 1 Intro: Definition

• ‘Macroeconomics is the study

of the structure and
performance of national
economies and of policies that
governments use to try and
affect economic
performance.’ –Ben Bernanke
Issues addressed by Macroeconomics

1. What determines a nation’s long-run

economic growth? (Why do some countries
grow much faster than others?)

2. What causes a nation’s economic activity to

fluctuate? (What explains business cycles?)

3. What causes unemployment? (eg Great

Depression: 25% unemployment in USA)
4. What causes prices to rise?
(Inflation and
hyperinflation)

5. How does being a part of global

economic
system affect a nation’s
economy?

6. Can government policies be used

to
 Classical V/s Keynesian
Intellectual Traditions

• Classical: Scottish Adam Smith’s invisible

hand (1776) i.e. flexible prices and
wages automatically correct all market
imbalances, so govt should NOT impede.
• British J M Keynes (1936) assumed slow
price and wage adjustments, hence long
market disequilibrium, govt MUST
intervene by raising expenditure.
• (But 1970s US stagflation challenged
this.)
 Topic 2 National Income
• Definition: National income is the value
of goods and services produced and
available during an accounting year.
• Circular Flow: 4 sector, Open model

• Methods of Measurement of ‘Y’:

• Product Approach
• Income Approach
• Expenditure Approach
• Limitations of Measurement:
• Non-market production is left out (eg
home-maker’s services)
• Untraded goods are left out (eg
farmer using his produce for home-
consumption)
• GDP is underestimated to the extent
of black economy
• GDP measures level of economic
activity, not welfare. (eg GDP
includes power generated, not
pollution created.)
• Forms of National Income:
• GNP, NNP, GDP, NDP at market price;
and at factor cost

• Real and Nominal GDP

• GDP Deflator as a measure of

inflation
Production Possibility Frontier

• Production Possibility Frontier

(PPF) shows the maximum
amounts of production that
can be obtained by an
economy, given its
technological knowledge and
quantity of inputs available.
 Aggregate Demand
and Aggregate Supply
• The aggregate demand schedule,
AD, represents the quantity of
goods and services that consumers,
businesses, governments and
foreigners would buy at different
aggregate price levels, with other
factors affecting aggregate demand
held constant.
• Aggregate supply schedule,
AS, represents the
quantities of goods and
services that businesses
are willing to produce and
sell at each price level, with
other determinants of
aggregate supply held
constant.
Difference bet micro and macro dd-ss
curves:

• Microeconomic demand and supply curves

show the quantities and prices of
individual commodities, with ‘Y’ and other
prices held constant.

• Macroeconomic AD and AS curves show

determination of total output and overall
price level, with money-supply; fiscal
policy and capital stock held constant.
• Microeconomics supply curve is
vertical in the short run and
horizontal in the long run,
representing zero and infinite price
elasticities of supply respectively.

• By contrast, AS is vertical in the long

run, horizontal in the short run, with
intermediate slopes in the mid-term.
• In recession we are on the flat part of
‘AS’, so demand management
policies can boost the economy
without raising prices.

• But as the economy approaches full

employment level, policymakers
must become wary of too much
stimulus to avoid running the ‘AD’ up
the vertical portion of ‘AS’.