WhatI

sMacr
oeconomi
cs?

Macroeconomicsisabr anchofeconomi csthatstudieshowanov er

alleconomy —themarketor
othersy
stemst hatoperateonalargescale—behav es.Macr
oeconomi csstudieseconomy-
wide
phenomenasuchas  inf
lati
on,pr
icelev
els,rat
eof economicgrowth,nati
onalincome, 
gross
domesticproduct(GDP),andchangesin unemployment .

Someoft hekeyquest i
onsaddressedbymacroeconomi
csincl
ude:Whatcausesunempl oy
ment
?
Whatcauses inf
lat
ion?Whatcreatesorst
imul
ateseconomicgrowth?Macroeconomics
att
emptst omeasur ehowwellaneconomyisperformi
ng,t
ounderstandwhatforcesdr
iveit
,
andtoprojecthowper f
ormancecani mpr
ove.

Macroeconomicsdealswit
htheper
for
mance,structur
e,andbehav
ioroft
heenti
reeconomy ,
in
contr
astto 
microeconomi
cs,whi
chismorefocusedont hechoi
cesmadebyindi
vidualact
orsin
theeconomy(li
kepeople,
househol
ds,
indust
ri
es,etc.)
.

Thescopeofmacr
oeconomi
csi
ncl
udest
hef
oll
owi
ngpar
ts:

Clearl
y,t
hestudyoft
hepr
oblem ofunemploy
mentinIndi
aorgeneral
pri
celevel
orpr
obl
em of
balanceofpaymenti
smacroeconomicst
udybecausetheser
elat
etotheeconomyasawhole.

I
mpor
tanceofMacr
oeconomi
cs:

1.I
thelpstounder
standthef
uncti
oningofacompli
cat
edmoderneconomicsystem.I
t
descr
ibeshowtheeconomyasawhol ef
uncti
onsandhowthel
evel
ofnationali
ncomeand
employmentisdet
erminedonthebasisofaggr
egat
edemandandaggregatesuppl
y.

2.I
thel
pstoachi
evethegoalofeconomicgrowth,hi
gherl
evelofGDPandhi
gherlev
elof
employ
ment.I
tanaly
sestheforceswhichdet
ermineeconomicgrowt
hofacountr
yandexpl
ains
howtoreacht
hehighestst
ateofeconomicgrowthandsustai
nit.

3.I
thelpstobri
ngst
abi
l
ityi
npri
celev
elandanal
ysesfl
uctuat
ionsi
nbusi
nessact
ivi
ti
es.I
t
suggestspol
i
cymeasur
estocontr
olI
nfl
ati
onanddefl
ati
on.

4.I
texpl
ainsfactor
swhichdet
ermi
nebalanceofpay
ment.Att
hesamet
ime,
iti
dent
if
iescauses
ofdef
ici
tinbalanceofpay
mentandsuggestsr
emedial
measures.

5.I
thelpst
osolveeconomi
cprobl
emsli
kepovert
y,unemployment
,busi
nesscy
cles,
etc.
,whose
sol
uti
onispossi
bleatmacr
olevel
onl
y,i
.e.
,att
helevelofwhol
eeconomy.

6.Wit
hdetai
l
edknowl edgeoffuncti
oningofaneconomyatmacrol ev
el,i
thasbeenpossi
blet
o
for
mulat
ecorrecteconomicpoli
ciesandalsocoor
dinat
eint
ernat
ionaleconomi
cpoli
cies.

7.Lastbutnott
heleast
,ist
hatmacroeconomict
heor
yhassavedusfr
om t
hedanger
sof
appli
cati
onofmicr
oeconomictheor
ytotheprobl
emsoftheeconomyasawhol
e.
Top6Di
ff
erencesBet
weenMi
croeconomi
csAndMacr
oeconomi
cs

Paramet
ers Mi
croeconomi
cs Macr
oeconomi
cs
of 
Dif
fer
ent
iat
ion

  Microeconomi
csstudiest
he Macroeconomicsstudi
esthewhole
part
icul
armarketsegmentoft
he economy,thatcov
ersseveral
market
Meani
ng
economy segments

Deal
swi
th Micr
oeconomi csdealswithvarious Macroeconomicsdealswithvari
ousi
ssues
i
ssuesli
kedemand, supply
,factor likenati
onali
ncome,distr
ibut
ion,
pr
ici
ng,productprici
ng,economi c employment,
generalpri
celevel
,money,et
c.
welf
are,
production,consumption,
et
c.

Busi
ness Appl
i
edt
oint
ernal
issues Env
ironmentandext
ernal
issues
Appl
icat
ion

Scope Coverssev erali

ssueslikedemand, Coverssev er
ali
ssuesli
kedi
str
ibut
ion,
supply,
factorpr i
cing,
product nati
onalincome,employment
,money ,
pri
cing,economi cwelfare, general
pr i
celev
el,et
c.
producti
on, consumption,etc.

Si
gni
fi
cance Usef uli
nregulati
ngt hepr i
cesofa Perpetuatesfir
mnessi nthebroadpri
celev
el
productalongsidet hepricesof andsol vesthemaj orissuesoftheeconomy
fact
or sofproduction( l
abour,l
and, l
ikedef l
ati
on,infl
ation,ri
singpri
ces
entrepreneur
,capital,et
c)wi t
hint
he (r
eflati
on),unemploy mentandpov ert
yasa
economy whol e

Li
mit
ati
ons Iti
sbasedoni mpractical Ithasbeenscr uti
nizedthatMisconcepti
on
presupposi
tions,i.
e.,i
n ofComposi t
ion’ i
ncorporates,
which
microeconomi cs,i
tispresumed sometimesf ail
stopr oveaccuratebecause
thatther
eisf ull
empl oymenti
nthe i
tisfeasi
blet hatwhatist r
ueforaggregate
communi ty
,whi chisnotatall (comprehensive)maynotbet ruefor
feasi
ble i
ndivi
dualstoo
Li
mit
ati
onsofmacr
o-economi
cs

Thesi
gnif
icancesoft
hestudyofmicr
o-economi csremar
kabl
yincr
easedafteri
twasdev
eloped
andpopul
arisedbyJ.
M Keynes.
Butmacro-economicshasfol
l
owingli
mitat
ions.

1. 
  
  
 Dangerofexcessi
vethi
nkingintermsofaggregat
es:Thereisdangerofexecutiv
e
thi
nkinginter
msofaggr egat
eswhichar enothomogeneous.Forexampl
e,2apples+3appl
es=5
applesisthemeaningfull
aggregat
e,si
milar
ly2appl
es+3or angesismeaningfultosomeextent
.

2.
  
  
  
Aggregatetendencymaynotaf fectal
lsect
orsequal
ly:Forexampl e,
thegeneral
incr
ease
i
npriceaff
ectsdiff
erentsect
ionsofthecommuni t
yorthedif
ferentsectorsoftheeconomy
di
ff
erentl
y.Theincr
easeingenerall
evelofpri
cebenef
itst
hepr oducers,
buthurtstheconsumer
s.

3. 
  
  
 I
ndi
catesnochangehasoccur ed:Thest udyofaggregatesmakeusbeli
ev et
hatnochange
hasoccuredevenifthereisachange.I
tindicatest
hatthereisnoneedofnewpol i
cy.
For
example,
a5per centfal
linagr
icul
tur
alpriceand5per centri
seinindust
ri
alpr
icesdoesnot
aff
ectthepri
celevel.

4.
  
  
  
Dif
fi
cul
tyinthemeasurementofaggregates:
Therear
eatti
mes,di
ff
icul
tyi
nt he
measurementofaggregat
es.
Iti
sdif
fi
cultt
omeasur ethebi
gaggregat
es.
Thisproblem hasnow
beenmoreorlesserasedbytheuseofcal
culat
orsandthethi
ngswhicharenothomogeneous.

5. 
  
  
 Thefallacyofcompositi
on:Theaggr egateeconomi cbehavi
oristhesum ofi ndiv
idual
behav i
or.
Thisiscall
edfal
laci
esofcomposi tion.
Whati struei
ncaseofani ndiv
idual maynotbe
tr
ueint hecaseofeconomyaswhol e.Forexample,
indivi
dualsav
ingisav i
rtue,
wher esthepubli
c
savi
ngi svice.Accor
dingt
oK. E.Boulding"Thesedif
ficult
iesar
eaggregati
vepar adoxeswhi chi
s
tr
uewhenusedt ooneperson,butfalsewhenusedt ot heeconomyasawhol e.

6. 
  
  
 Fall
acyofCompositi
on;
 
InMacroeconomicanal
ysi
sthe“ f
all
acyofcompositi
on”is
i
nvolved,i.
e.aggr
egat
eeconomicbehavi
ourist
hesum tot
al oft
heeconomyofi ndi
vidual
acti
viti
es.Butwhati
strueofi
ndi
vi
dualsi
snotnecessar
il
ytruetothefi
scalent
ir
ely.

7. 
   
  
ToRegardtheAggr egatesasHomogenous:  Themai ndefectinmacr oanal
ysi
si sthati
t
regardstheaggregat esashomogenouswi thoutcaringabouttheirint
ernalcomposi
ti
onand
structur
e.Theaver agewagei nanat ionist
hesum t otalofwagesi nallpr
ofessi
ons,i
.e.wages
ofclerks,t
ypi
sts,teachers,nursesetc.Butthevolumeofaggr egateempl oymentdependson
therelati
vest
ructur eofwagesr atherthanontheav eragewage..

8. 
  
  
 Aggregat
eVariabl
esmaynotbeI mpor t
antNecessari
ly:
 Theaggregat
evar
iabl
eswhich
for
mt heeconomicsystem maynotbeofmuchsignif
icance.Forinst
ance,t
henati
onal
income
ofacount ryi
sthetotal
ofalli
ndi
vidual
income.Ahikeinnati
onalincomedoesnotmeant hat
i
ndivi
dual i
ncomeshav eri
sen.
.

9. 
  
  
 Indiscri
minateUseofMacr oEconomi csMi sl
eading: 
Anindiscr
iminat eanduncr i
ti
caluse
ofmacr oeconomi csinanalysi
ngt hecomplexit
iesoftherealworldcanf requentlybe
misleading.Forinstance,i
fthepol i
cymeasuresneededt oachieveandmai ntainfull
empl oymenti ntheeconomyar eappl iedt
ostructur
alunempl oy
menti nindividualfi
rmsand
i
ndust ri
es, t
heybecomei rr
elevant.Likewi
se,measuresaimedatcont roll
inggener alpri
ces
cannotbeappl i
edwi t
hmuchadv antageforcontrol
l
ingpricesofindiv
idual products.
10. 
 Stat
isti
calandConceptualDi f
fi
culti
es: Themeasur ementofmacr oeconomi csconcepts
i
nvolvesanumberofst ati
sticalandconcept ualcomplexit
ies.Theseprobl
emsr elatetothe
aggregati
onofmi cr
oeconomi cvari
ables.Ifindi
vidual
unitsarealmostsimil
ar,aggregati
on
doesnotpr esentmuchdif
ficulty
.Butifmi croeconomi cvari
ablesrel
atetodissi
mi l
arindi
vidual
uni
ts,theiraggr
egat
ionint
ooneaggr egationi nt
oonemacr oeconomi cvari
ablemaybe
i
ncor r
ectandhazardous.

Nat
ionalI
ncome

Nati
onalincomeisanuncer t
ainterm whichisusedi
nter
changeablywit
hnational
div
idend,
nat
ionaloutputandnati
onalexpendit
ure.Ont hi
sbasi
s,nat
ionali
ncomehasbeendef inedi
na
numberofway s.Incommonpar lance,nati
onali
ncomemeanst hetotalval
ueofgoodsand
ser
vicesproducedannuall
yinacount ry.

I
notherwords,t
hetotalamountofi
ncomeaccrui
ngtoacount
ryf
rom economicacti
vi
ti
esina
year
’st
imeisknownasnat i
onali
ncome.I
tincl
udespay
mentsmadetoallresour
cesinthef
orm
ofwages,
inter
est,
rentandprof
it
s.

 
Met
hodsofCal
cul
ati
ngNat
ionalI
ncome

Nowthatyouar ef
ami l
i
arwit
htheconceptofthecircul
arf
lowofincome, let
’sunderst
andthe
met
hodsofcal cul
ati
ngnati
onali
ncome.Calculat
ingandmeasur i
ngnat i
onalincomeis
i
mportantbecausethat’
showwecanassessaneconomy ’sgrowthrate.Therearesever
al
met
hodsofcal cul
ati
ngnati
onali
ncome.Let’
sbr i
efl
ylookateachmet hod.

I
ncomeMet
hod

Theincomemet hodofcal
cul
atingnati
onali
ncomef ocusesont heproducti
onper
specti
ve.Now
producti
onofgoodsandservi
cesinvolv
estheuseofland,labour,capi
tal
,andsoon.Andifwe
considerthesef
act
orsofpr
oduction,
incomeisgeneratedviarent
, wagesandsal
ari
es,pr
ofit
s,
andinterest.

Wecant hencalcul
atethenational
incomebyaddi ngall
thesetypesofincome.Anot
her
i
mportantsourceofincomei smixedincome.Mi xedi
ncomer ef
erstotheincomegener
atedby
sel
f-
employedpr of
essional
sandsol epropr
iet
ors.

Accor
dingt
othei
ncomemet
hod:

Nat
ionalI
ncome=Rent+Wages+I
nter
est+Pr
ofi
t+Mi
xed-
Income
Theincomemet
hod,howev
er,doesnotconsi
dert
ransf
erpay
ment
s,pr
izemoney(
lot
ter
ies)
,
i
ll
egalmoney
,pr
ofi
ttax,
andsaleofsecond-
handgoods.

Expendi
tur
eMet
hod
Theexpendit
uremethodofcalculat
ingnati
onali
ncomef ocusesontheexpendit
ures.Now
expendi
tur
erefer
stoallt
hepur chasesmadebyr esi
dents,gover
nment,
orbusinessenter
pri
ses.
Theexpendit
uremethodtakesthef ol
l
owingelementsintoconsi
der
ati
on:

 Pur
chaseofconsumergoodsandser
vicesbyr
esi
dent
sandhousehol
ds(
C)

 Gov
ernmentexpendi
tur
eongoodsandser
vices(
G)

 Busi
nessent
erpr
ises’
expendi
tur
eoncapi
tal
goodsandst
ocks(
I)

 Netexpor
ts(
expor
ts-
impor
ts)(
NX)

Hence,
accor
dingt
otheexpendi
tur
emet
hod:

Nat
ionalI
ncome=C+G+I+NX
However
,theexpendi
tur
emet
hodexcl
udesexpendi
tur
eonsecond-
handgoodsandpur
chaseof
shar
esandbonds.

Val
ue-
AddedMet
hod

Thev alue-
addedmet hodofcalcul
atingnationali
ncomefocusesontheval
ueaddedtoa
productateachstageofpr oducti
on.Tocal cul
atethenat
ional
incomeusi
ngthi
smet hod,wewill
havet ofir
stcal
culat
ethenetv al
ueaddedatf act
orcost(
NVAFC).Andt
ocalcul
atet
he( NVAFC)
,
wewi llhavetodeductthenetindi
recttaxes.

Usual
ly,t
hismet hodinvolv
esdividingtheeconomyi
ntovar
iousindustri
essuchasagricult
ure,
fi
shi
ng,transport,
communi cati
on, andsoon.Thenbycal
culati
ngthevalueadded((NVAFC)at
eachstage,wecander ivethenationali
ncome.Nowsincethismethodconcentrat
esont henet
val
ueaddedbyeachcomponent ,wewoul dneedtoexcl
udeorsubtractthef
oll
owingelement s
fr
om theout putofeachenterpr
ise:

 Consumpt
ionofr
awmat
eri
als

 Consumpt
ionofcapi
tal

 Neti
ndi
rectt
axes

Nowi fweaddt heNVAFC ofal

lent
erpri
sesofani
ndustry
,wegett henetval
ueaddedatfact
or
costforthati
ndustry
.AndbyaddingtheNVAFC 
ofal
l i
ndust
ri
es,wegett henetdomest
ic
productatfact
orcost,whichi
srepr
esentedasNDPFC.
 Andtothis,i
fweaddt henetf
actor
i
ncomef rom abroad,wegetthenati
onali
ncome.

Hence,
accor
dingt
othev
alue-
addedmet
hod:

Nat
ionalI
ncome=(
NDPFC)+Netf
act
ori
ncomef
rom abr
oad
WhatI
sPer
sonalI
ncome?

Personalincomer efer
st oalli
ncomecollecti
vel
yr ecei
vedbyal l
indivi
dualsorhouseholdsina
country
.Per sonali
ncomei ncl
udescompensat i
onf r
om anumberofsour ces,i
ncludingsal
ari
es,
wages,andbonusesr eceivedfrom employmentorsel f
-employment,divi
dends
and di
stri
butions 
recei
vedf rom inv
estments,r
entalreceipt
sfrom realest
ateinvestments,
and
profi
tsharingfrom businesses.

WhatI
sDi
sposabl
eIncome?

Disposableincome, al
soknownasdi sposablepersonalincome(DPI)
,istheamountofmoney
thathouseholdshav eavail
abl
eforspendingandsav ingafter 
i
ncometaxes hav
ebeen
accountedf or
.Disposableper
sonali
ncomei soft
enmoni t
oredasoneoft hemanykey
economi cindi
catorsusedtogaugetheov erall
stateoftheeconomy .

GDPatFC

Grossv alueofout
put=Valueofthetot
alsal
esofgoodsandser
vices+Valueofchangesi
nthe
i
nv entor
ies.Thesum ofnetv
alueaddedinvar
iouseconomi
cact
ivi
tiesi
sknownas GDPat
factorcost

Cr
it
ici
smsofKey
nesi
anTheor
y:

ThoughKeyneshasrev
olut
ioni
sedt
hemoder
neconomi
cthi
nki
ng,
hisanal
ysi
shassome
i
nherentweakness:

(i
)Key nesi
antheoryisnotacompl et
et heor
yofempl oymentinthesensethatitdoesnot
provi
deacompr ehensi
vetreatmentofunemployment ,
(a)I
tdealsonlywit
hcy cli
cal
unempl oymentandignoresotherfor
msofunempl oyment,suchas,f
ri
cti
onalunempl oy
ment,
technologi
calunemployment ,
etc.(
b)Itdoesnottell
ushowt osecur
efull
andf airemploy
ment.

(i
i)Thereexist
snodirectanddet
erminabl
erel
ati
onshipbetweeneff
ecti
vedemandandv ol
ume
ofempl oyment.I
tall
dependsupontherel
ati
onshipbetweenwagerate,pr
icesandmoney
supply.Moreover
,inmodernti
mes,mostcountri
esarefacingthepr
oblem ofst
agfl
ati
on(i
.e.
,
unempl oy
mentwi t
hinfl
ati
on).

(i
ii
)Keynesi
ant heor
yassumesper
fectcompet
it
ionwhi
chi
snotav
eryr
eal
i
sti
cassumpt
ion.He
completel
yignoredthepr
obl
emsofmonopoly.

(i
v)Keynesi
antheorydeal
swithshor
t-
runphenomenon.I
tpay
snoat
tent
ioni
nthel
ong-
run
probl
emsoft hedynamiceconomy.

(v)Key
nesianeconomicsisstati
cinnat
ure.I
tignorest
het
imelagsi
nthebehavi
ourof
economicvari
ables.However
,thepost-
Keynesianshav
efi
l
ledt
hisgapbyprovi
dingt
rul
y
dynamicanaly
sis.
(vi
)Keynesi
antheor
yispur
elymacr
o-economictheor
ywhi
chdeal
swi
thaggr
egat
es.Mi
cro-
economicprobl
emshavebeencompletel
yignor
ed.

(
vii
)Key
nesassumesacl osedeconomy.I
nthi
sway,hi
sanal
ysi
sdoesnott
akeint
oaccountt
he
i
mpactofi
nter
nat
ional
tradeont hegr
owthofempl
oymentandi
ncomeoftheeconomy.

(v
ii
i)Keynesi
aneconomi
csis,byandlarge,
adepressi
oneconomi cs.Iti
sthepr
oductofGr
eat
Depressi
onof1930sandattemptstosuggestmeasur
est osolv
et heprobl
emsof
unemployment.I
tpaysl
i
ttl
eattent
iontodealwi
ththeinf
lati
onarysit
uati
on.

(i
x)Itisbasical
l
yacapit
ali
sti
ctheor
y.I
texaminesthedetermi
nant
sofempl oy
mentinafr
ee
enterpri
seeconomy.ThoughKeyneshassuggestedgovernmenti
nter
vent
ionandcont
rol
l
ed
capit
alism,hist
heor
yfail
stodealsoci
ali
steconomicsy
stem.

(x)Keynesiantheoryisnotappl
icablei
nunderdevel
opedcountr
ies.Key
nesdeal
swit
hthe
problem ofcycl
icalunemployment ,
whereast
heunderdevel
opedcountri
esf
acethepr
obl
emsof
chronicunemploy mentanddisguisedunempl
oy ment.

Recar
diant
heor
yofr
ent

Dav idRi cardo( 1772- 1823) propoundedhi stheor yofr entont hebasi soft heideaofAdam
Smi thandMal thus.Ri car dof indsr entas, “
Renti st hatpor ti
onoft hepr oduceoft heear t
hwhi ch
i
spai dt othel andlor df ort heuseofor iginal andi ndest ruct i
blepoweroft hesoi l
.”TheRi car dian
theor yofr entassumest heoper ationoft wopr inciples–t hedi fferentpr inci pleandt hemar ginal
principle.Thef i
rstpr i
nci pl eexpl ainst hedi ff
er entnat ur eoft hel and, whi let hesecondgi vest he
measur eofr ent.Indi f
f erent i
al,princi pler entar isesei therThr oughext ensi vecult i
v ati
onor
Thr oughi nt ensivecul t
iv ation.Inpl aceofext ensi vecul tivat i
onwi thdiffer entquant iti
esofl abour
andcapi t
al,mor ef erti
lel andswi lly i
eldgr eaterr ent sandl essf erti
lelandswi llyi
eldl esserr ent s.
Incaseofi ntensivecul t i
v ati
on, duet ot hel awofdi mi nishingr eturns,theout putdi fferswhent he
equal quant it
yofcapi tal andl abourar eused, successi v elyont hesamel and.Her er entarises
duet ot helawofdi mi nishi ngr eturns.Undert hemar gi nal princi pl
e,ther enti sthesur plusof
revenueov erthecostofpr oduct i
onoft hemar ginal pr oducer .Sol ongast hemostf erti
lelandi s
avai l
abl e,t
hequest i
onofr entwi llnotar ise.Rentar iseswhenl essfertilel andst artscul tivation.
Letussupposet hef i
rst -
gr adel andpr oduces6qui nt alsgr ai
nsandt he2ndgr adeofequal area
produces5qui ntal
s.Thust hedi fferenceof1qui nt alwi llbet her ent,thesecondgr adel and
beingt hemar ginalland.I fthe3r d- gradel andi sbr oughtundercul ti
vationwhi chy i
el ds4quant al
only ,
thenr entar i
sesasf ol l
ows: -Ont hef ir
stpl otofl and: 6-4=2qui ntal Ont he2ndpl otofl and:
5-4=1qui ntal

Quant
it
ytheor
yofmoney

In 
monetaryeconomi cs,t
he quant
ityt
heor yofmoney (
QTM)statesthatt
hegeneral pri
celevel
ofgoodsandser v
icesi sdi
rectl
yproport
ionaltotheamountofmoneyincircul
ati
on,or  
money
supply
.Forexample,iftheamountofmoneyi naneconomydoubles,QTM predi
ctsthatpr i
ce
l
evelswil
lalsodouble.Thetheorywasor igi
nall
yformul
atedbyPoli
shmathemat i
cian Nicol
aus
Copernicus i
n1517,
 andwasinf
luent
ial
l
yrestat
edbyphi
losophers 
JohnLocke,
 Dav
id
Hume, JeanBodin,andbyeconomist
s Mil
tonFri
edman 
and AnnaSchwart
z i
n AMonetar
y
Hist
oryoft heUni
tedStat
es 
publi
shedin1963.

Thet heorywaschallengedby  Keynesianeconomi cs,

 butupdatedandr einvi
goratedby
the 
monet ari
stschool ofeconomi cs.Cri
ticsofthetheoryarguet hat
 moneyv el
ocity 
isnot
stabl
eand, intheshort-r
un, pr
icesare st
icky,sothedirectr
elati
onshipbet weenmoneysuppl y
andpr i
celeveldoesnothol d.Inmai nstr
eam macr oeconomict heory,changesint hemoney
supplyplaynor ol
eindet erminingtheinfl
at i
onrat
easi tismeasur edbyt heCPI,althoughsome
outspokencr i
ti
cssuchas  PeterSchiff 
believet
hatanexpansi onoft hemoneysuppl y
necessaril
ybegetsani ncreasei npri
cesinanon- zeronumberofassetcl asses.Inmodel s
wheret heexpansionoft hemoneysuppl ydoesnoti mpactinfl
ation,inf
lati
onisdet er
mi nedby
the 
monet arypoli
cyreact i
onfunction.

Al
ter
nat
ivet
heor
iesi
ncl
udet
he 
real
bil
l
sdoct
ri
ne 
andt
hemor
erecent
 f
iscal
theor
yoft
hepr
ice
l
evel

Moder
ntheor
yofmoney

Moder nMonet aryTheory 

or 
ModernMoneyTheory 
(MMT)isa het
erodoxmacroeconomic
theorythatdescribescur
rencyasapubli
cmonopolyandunemploymentasevi
dencet hata
currencymonopol isti
soverl
yrest
ri
cti
ngthesuppl
yofthef
inanci
alasset
sneededtopayt axes
andsat i
sfysavingsdesir
es.

MMTi sanalter
nati
veto mainst
ream macroeconomi
ctheory
.Ithasbeencri
ti
cizedbywell
knowneconomistsbutisclai
medbyi tspr
oponentst
obemor eeffect
ivei
ndescr i
bingt
heglobal
economyintheyearsf
ollowingthe 
GreatRecessi
on 
of2007–2009.

MMTar guesthatgovernment s 
creat
enewmoney  byusi
ng  f
iscalpol
icy.Accor di
ngto
adv ocates,thepri
mar yriskoncet heeconomyr eachesful
l empl oymentisinflati
on,whi
chcan
beaddr essedbygat heringt axestoreducet hespendingcapaci tyofthe pr
ivatesector.
 MMTi
s
debat edwi t
hact i
vedial
oguesabouti tstheoret
icalint
egri
ty, 
theimpli
cationsoft hepoli
cy
recommendat ionsofitspr oponents,andtheext enttowhichi ti
sactuall
ydiv ergentf
rom
orthodoxmacr oeconomi cs.

Q9 ?
???
???
???
???
?
WhatI
saFor
eignDi
rectI
nvest
ment(
FDI
)?

Afor
eigndi
recti
nvest
ment(FDI
)isaninvest
mentmadebyaf i
rm ori
ndi
vidual
inonecountr
y
i
ntobusi
nessint
erest
slocat
edi
nanothercount
ry.Gener
all
y,FDIt
akesplacewhenaninvest
or
est
abl
ishesforei
gnbusi nessoper
ationsoracquiresfor
eignbusi
nessasset
sinaforei
gn
company.Howev er,FDI
sar edi
sti
nguishedfrom port
fol
ioinv
estment
sinwhichaninvest
or
merel
ypurchases equit
ies 
offor
eign-basedcompanies.

Adv
ant
agesofFor
eignDi
rectI
nvest
ment

1.EconomicDev elopmentSt
imulati
on.
Foreigndi
rectinv
estmentcanstimulat
ethet
argetcountr
y’seconomicdevel
opment,cr
eat
inga
mor econduciv
eenv ir
onmentforyouasthei
nvestorandbenefi
tsfort
helocali
ndust
ry.

2.EasyInt
ernati
onalTr
ade.
Commonl y,acountr
yhasitsownimportt
ari
ff
,andthisisoneoft
hereasonswhyt radingwithit
i
squitedif
fi
cult.Al
so,t
herearei
ndust
ri
esthatusual
lyrequi
ret
hei
rpresenceintheinternat
ional
marketstoensurethei
rsal
esandgoalswil
lbecompletelymet
.WithFDI,al
lthesewil
l bemade
easi
er.

3.EmploymentandEconomi cBoost.
Forei
gndir
ectinv
estmentcreatesnewjobs,asi
nvestorsbui
l
dnewcompani
esint
hetar
get
countr
y,cr
eatenewopportunit
ies.Thi
sleadst
oani ncr
easeini
ncomeandmor
ebuyi
ngpower
tothepeopl
e,whichi
nturnleadst oaneconomicboost.

4.DevelopmentofHumanCapi talResources.
Onebigadv ant agebroughtaboutbyFDIi sthedev elopmentofhumancapitalresources,
which
i
salsoof tenunder st
atedasi tisnotimmedi atelyapparent.Humancapit
alisthecompet ence
andknowl edgeoft hoseabl etoper f
orml abor,mor eknownt ousastheworkforce.The
att
ri
butesgai nedbyt raini
ngandshar ingexperiencewoul dincr
easetheeducationandov er
all
humancapi talofacount r
y.It
sr esour
ceisnotat angibl
eassetthati
sownedbycompani es,but
i
nsteadsomet hingthatisonl oan.Withthisinmi nd,acountrywit
hFDIcanbenef i
tgreatl
yby
devel
opingi t
shumanr esour
ceswhi lemai nt
ainingowner shi
p.

5.TaxIncenti
ves.
Parententer
pri
seswouldalsoprovi
defor
eigndi
recti
nvest
mentt ogetaddit
ional
expert
ise,
technol
ogyandpr oduct
s.Asthefor
eigni
nvest
or,youcanrecei
vetaxincent
ivesthatwi
l
l be
highl
yusefuli
ny oursel
ect
edfiel
dofbusi
ness.

6.Resour
ceTransf
er.
Forei
gndir
ecti
nvest
mentwil
lall
owresour
cetransferandot
herexchangesofknowl
edge,
wher
e
var
iouscount
ri
esaregiv
enaccesst
onewt echnologi
esandski
ll
s.

7.ReducedDispari
tyBetweenRevenuesandCosts.
Forei
gndir
ectinvestmentcanreducethedi
spar
itybet
weenrevenuesandcost
s.Wi
thsuch,
countri
eswi
llbeabletomakesur ethatpr
oduct
ioncostswi
l
l bethesameandcanbesold
easil
y.

8.IncreasedProducti
vit
y.
Thef acil
i
tiesandequipmentprov
idedbyf
orei
gni
nvest
orscani
ncr
easeawor
kfor
ce’
s
productivi
tyinthet
argetcount
ry.

9.I
ncr
ementi
nIncome.
Anotherbigadvantageofforei
gndirecti
nvestmenti
st heincreaseofthetargetcount
ry’
s
i
ncome.Wi thmor ejobsandhigherwages,thenati
onal i
ncomenor mallyincr
eases.Asaresul
t,
economicgrowthisspurred.Takenot et
hatlar
gercorporati
onswoul dusuallyoff
erhi
gher
sal
arylevel
sthanwhaty ouwoul dnormall
yfindint
het argetcountr
y,whichcanleadto
i
ncrementinincome.

Li
stofDi
sadv
ant
agesofFor
eignDi
rectI
nvest
ment

1.Hindrancet
oDomesti
cInv
estment.
Asitfocusesi
tsr
esour
ceselsewher
eotherthantheinv
estor
’shomecount
ry,
for
eigndi
rect
i
nvestmentcansometi
meshinderdomesti
cinvestment.

2.Ri
skf r
om Poli
ti
calChanges.
Becausepoli
ti
cali
ssuesinothercount
riescaninst
ant
lychange,f
orei
gndir
ecti
nvest
mentis
ver
yrisky.Pl
us,mostoftheri
skfactor
st haty
ouaregoingtoexperi
encear
eextr
emelyhi
gh.

3.Negati
veInfl
uenceonEx changeRates.
Forei
gndir
ectinvest
mentscanoccasionall
yaf
fectexchanger
atest
otheadv
ant
ageofone
countr
yandt hedetr
imentofanother
.

4.Hi
gherCost s.
I
fyouinvestinsomeforei
gncount
ri
es,youmightnoti
cethatiti
smoreexpensi
vethanwhen
youexportgoods.So,
iti
sver
yimperat
ivetoprepar
esuff
icientmoneyt
osetupy ouroper
ati
ons.

5.Economi cNon-
Viabil
it
y.
Consideri
ngthatf
oreigndir
ecti
nvest
mentsmaybecapit
al-
int
ensi
v ef
rom t
hepoi
ntofv
iewof
theinvest
or,i
tcansomet i
mesbev er
yri
skyoreconomi
cal
lynon-
viabl
e.

6.Expropr
iat
ion.
Remembert hatpol
i
tical
changescanal
soleadtoexpropr
iat
ion,
whi
chi
sascenar
iowher
ethe
governmentwill
havecontr
olovery
ourpr
opertyandasset
s.

7.Negat
iveImpactontheCountr
y ’
sInvestment.
Therul
esthatgover
nforei
gnexchanger atesanddi
recti
nvestment
smightnegat
ivelyhav
ean
i
mpactont heinv
esti
ngcountr
y.I
nv est
mentmaybebannedi nsomefor
eignmarkets,whi
ch
meansthatiti
simpossibl
etopursueani nvi
ti
ngopport
uni
ty.

8.Modern-
DayEconomi cColoni
alism.
Manythi
rd-
worldcountr
ies,oratleastt
hosewithhi
stor
yofcoloni
al i
sm,wor
ryt
hatforei
gndir
ect
i
nvest
mentwoul dr
esultinsomeki ndofmoderndayeconomiccol oni
ali
sm,
whichexposeshost
count
ri
esandleavethem vulner
abletofor
eigncompanies’
exploi
tati
ons.