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Program
Business Economics
Session: Macroeconomics
Course: Business Economics
Session: Macroeconomics
- Leading indicators
- Coincident indicators
- Lagging indicators
GDP: The calculation encompasses all
private and public consumption,
government outlays, investments,
additions to private inventories, paid-in
construction costs, and the foreign
balance of trade.
Remember: Exports are added to the
value and imports are subtracted.
GNI calculates the total income earned by a nation's people Gross Value Added = $1.175 trillion (GDP) +
and businesses, including investment income, regardless of
where it was earned. It also covers money received from $25 billion (SUB) - $50 billion (TAX) = $1.15
abroad such as foreign investment and economic
development aid. trillion
HOW TO CALCULATE
GDP?
1. Expenditure Approach/ Spending
Approach:
GDP = C + G + I + NX
3. Income Approach
https://www.visualcapitalist.com/80-trillion-world-economy-one-chart/
Q. Which country has the highest trade deficit & which has highest trade surplus?
Shortcomings of GDP...
https://data.worldbank.org/
https://www.worldbank.org/en/country/india
https://www.imf.org/en/Data
https://www.oecd-ilibrary.org/
https://www.oecd.org/india/
https://www.rbi.org.in/
Macroeconomic Model#2
ISLM Model
• Output
• Employment
• Inflation
Expansion
Can you respond to fall in output to counter Can you guess a common cause for it in India?
inflation by printing more money? What can we call this phase…?
What can we call this phase ….?
Recession and fall in investment and aggregate demand
Recession and Unemployment: fall in aggregate output
Recession and Consumption Expenditure and Savings
Recession with Deflation & Recession with Inflation
Clippings from the news..
1929 the Great Depression “Between 1930 and 1933, about 9,000 banks failed—4,000 in 1933 alone. By March 4, 1933, the
banks in every state were either temporarily closed or operating under restrictions…..” Among the other causes of the stock
market crash of 1929 were low wages, the proliferation of debt, a struggling agricultural sector and an excess of large bank
loans that could not be liquidated…”
1974 Recessions “The 1974-1975 Recession in the U.S. Policy makers in 1974 perceived inflation as a major problem. The
Federal Reserve pursued a tighter monetary policy which produced higher interest rates which reduced the level of investment
purchases…The pre-1974 recession level of 4.6% unemployment was not reached again until November 1997, when the
Federal Reserve deviated from its prior policy…”
1991 Recessions (UK) “The UK recession of 1991 was primarily caused by high-interest rates, falling house prices and an
overvalued exchange rate. The recession also came after the late 1980s economic boom – a period of high economic growth and
rising inflation… due to restrictive monetary policy enacted by central banks, primarily in response to inflation concerns,
the loss of consumer and business confidence as a result of the 1990 oil price shock..”
1991 Recessions (India) “The 1991 Indian economic crisis was an economic crisis in India that resulted from poor economic
policies, inefficient public sector units, and the resulting trade deficits leading to balance of payments crisis..caused mainly by
high fiscal deficits, the loss of confidence in the government, and mounting current account deficits…Singh worked to bring
the new economic policy in 1991. The main objectives of the policy were globalisation, building foreign reserves, higher
economic growth, economic stabilisation, and building the gap between public and private sectors..”
Clippings from the news..
Early 2000 “The collapse of the dotcom bubble, the 9/11 attacks, and a series of accounting scandals at major U.S.
corporations contributed to this relatively mild contraction of the U.S. economy...decline in economic activity which
mainly occurred in developed countries..From 2000 to 2001, the Federal Reserve, In the wake of the 2001 recession
and the World Trade Center attacks of 9/11/2001, the U.S. Federal Reserve pushed interest rates to the lowest levels
seen up to that time in the post-Bretton Woods era in an attempt to maintain economic stability..
2008 The Great Recession “The Great Recession was the sharp decline in economic activity during the late 2000s. It
is considered the most significant downturn since the Great Depression...during which U.S. GDP declined by 0.3% in
2008 and 2.8% in 2009 and unemployment briefly reached 10%,. failure on the part of the government to regulate the
financial industry. This failure to regulate included the Fed’s inability to curb toxic mortgage lending. too many
financial firms taking on too much risk..The shadow banking system, which included investment firms, grew to rival
the depository banking system but was not under the same scrutiny or regulation. The Fed held low interest rates
through mid-2004. Combined with federal policy to encourage home ownership.. However, from 2004 through 2006, the
Federal Reserve steadily increased interest rates in an attempt to maintain stable rates of inflation in the
economy..When the shadow banking system failed. excessive borrowing..loans began to reset at much higher rates
than many borrowers expected or were led to expect. The result was the bursting of what was later widely recognized to
be a housing bubble..
Clippings from the news..
2008 impact on India .. 2012-13 recessions “The initial impact on India was muted: GDP growth slowed from
9% in 2007-08 to 7.8% in April-September 2008, still a very high rate. ... In 1997, India's foreign exchange
reserves were strained, interest rates went sky-high, companies defaulted on loans and dragged down banks
..India's trade collapsed alongside global trade, although its decline started earlier due to a concerted effort
by the Reserve Bank of India to cool the economy in 2008.
…In 2012 the Indian economy also lacked momentum in infrastructure investment and development. There
was an increased gap between supply and demand for electricity,some worrying trends include a slowdown
in the manufacturing and mining sectors, both of which are labour intensive sectors and crucial for the
growth of other sectors. Also worrying was a widening trade gap and poor investments.
….Persistent price rises, even during the period where commodity prices were down internationally,
does not leave much space for monetary easing. It is hoped that the government will carry out reforms
including fiscal consolidation and regaining investor confidence... However, next year’s budget is the last one
for the present government and they may revert to populist measures instead of taking strong economic
measures. In that case, any hopes for fiscal consolidation will be lost.“
Application of shift in
Demand & Supply curves
Relative price of currencies of two
Exchange Rates countries - NER
Relative price of goods of two
The rate at which Indians can countries - RER
exchange foreign and domestic goods
RER = NER x (Price of domestic goods/
depends on 2 things:
Price of foreign goods)
1. Price of the goods in local If the domestic price rises (inflation),
currency the value of rupee falls and the RER will
2. Exchange rates fall. A low RER means that foreign
goods are relatively expensive,
domestic goods are relatively cheap.
Application of
Demand & Supply
curves in
exchange rates
Therefore, we see an inverse
relation between domestic
inflation and NER
Q2. Name the currencies that are valued more than the
US$?
https://economictimes.indiatimes.com/
wealth/personal-finance-news/banks-pa
ss-on-rbi-rate-hike-to-borrowers/articles
how/91340966.cms
https://economictimes.indiatimes.com/
opinion/et-editorial/all-rbi-is-saying-is-gi
ve-growth-a-chance/articleshow/92090
052.cms
https://economictimes.indiatimes.com/
news/economy/policy/rbis-decision-to-r
aise-policy-rate-to-help-economy-in-med
ium-term-says-assocham/articleshow/9
2110266.cms
HOW DOES THE FISCAL MULTIPLIER WORK?
k = Y/J, where k is multiplier; Y is change in real GDP; J is change in injections made by the government
Economic Benchmark: Yield Curves
Why: To predict GROWTH & OUTPUT
Thank you!