Session 1

Introduction to Macroeconomics

Prof Subramania Raju Rajasulochana

Associate Professor
SBM, NMIMS Mumbai
GROUND RULES…

Do’s Don’ts
Pre-read of the relevant materials in the CELLPHONES-ALERTS/ALARMS/RINGS-
prescribed text a must. STRICTLY NOT ALLOWED IN THE CLASS.

Any queries/doubts/suggestions related to LATE TO CLASS

the topics discussed in the class. let me
know directly.
Active participation in the class. LACK OF DISCIPLINE/SARCASTIC REMARKS
OR TEASING PEERS NOT ALLOWED
Course Learning Objectives
CLO 1) Providing an understanding of the basic macroeconomic
concepts and theories so that the students can relate the
techniques and tools to real world economy in order to develop a
critical understanding of the Macro environment in a domestic as
well as in a global setting.

CLO 2) Critically analyze the macroeconomics policies used by

economists and policy makers in practice for an open economy.

CLO 3) An understanding of ESG challenges to understand and

interpret modern day policy making.
Evaluation Components
Type of Assessment
Sl No. Weightage Schedule in the session plan

Quiz (MCQs) 20% After completing Session 10

1
Class Participation
2 10% Across all sessions
Group Assignment ( Details in Course 30% 6th session (Submission of a one-page
outline) proposal & Get approval)
3
12th session (draft report & feedback)
20th session (Final Report- soft copy)
Final Examination 40% After completing session 20
6
Rules for Class Participation (CP)
• Discussion of Pre-reads & Post reads.
• Good question that adds value to classroom discussion.
• Peer support in terms of addressing queries, providing updates.

Any act of mockery/indiscipline/ridicule/ absenteeism beyond 3

sessions during the class will invite subtraction of CP marks.
Historical development of Macro – From Classical
to Keynes to merging of Keynes and Classical
Classical Keynesian
• Before the Great • After the Great Depression
Depression of 1929 of 1929
• Macroeconomics focused • Macroeconomics started
on the problem of focusing on the short run
growth and how to keep issues such as
the economy growing in unemployment and
the long run. economic ups and downs.
Classical Economics
• Believed the market was self-regulating through the invisible hand
(pricing mechanism of the market)
• They believed business cycles were temporary and generally favoured
laissez faire economics
• Their laissez-faire policy prescription: Eliminate labour unions and
change government policies that held wages too high. If government
did so, wage rate would fall and unemployment would be eliminated
and the Great Depression would end.
Keynesian Economics
• Keynesian economists are those who believe that business cycles
reflect underlying problems that can be addressed with activist
Government policies.
• According to Keynes, demand deficiency is what caused the Great
Depression
• Keynes created a model that showed how too little spending created
the problem of unemployment
Two frameworks…

Short run Long run

• Prices are sticky • Prices are flexible
• Business cycles • Issues of growth
• Inflation • Inflation
• Unemployment • Unemployment
• Supply side economics – since it
• Demand side economics – since focuses on incentive to increase
it focuses on ways to increase or supply- to promote work, capital
decrease aggregate accumulation and technological
expenditures. change.
How does an economy work??
Circular flow of income
The Five-sector Model of the Economy
Income

Household Firms
sector sector
Expenditure
I
Financial N
L J
E Savings sector Investment
E
A C
Government
K T
A sector Government
Taxation I
G expenditure O
External
E N
S sector
Imports S
Exports
 Circular flow of income illustrates
Gross Domestic Product (GDP) as a flow of
- Product( Goods &Services),
-Income, and
- Expenditure
Business Cycle

Expansion Recession Expansion

Total Output Peak

Secular
growth
trend
Trough

0
Jan.- Apr.- July- Oct.- Jan.- Apr.- July- Oct.- Jan.- Apr.-
Mar June Sept. Dec. Mar June Sept. Dec. Mar June
Three Key Facts about Economic Fluctuations
1. Economic fluctuations are irregular and unpredictable
- Correspond to changes in business conditions- Growth (Increasing Sales and growing profits)-
Recession(declining sales and dwindling profits)
- In the US context, some recessions 1980 and 1982 come together, while no recession was experienced
during 1991 and 2001.
2. Most macroeconomic quantities fluctuate together
- Real GDP is the most comprehensive measure
- Recession is a economy-wide phenomenon and they show up in major macroeconomic indicators
such as personal income, corporate profits, consumer spending, investment spending, industrial
production, retail sales, home sales, auto sales and so on.
3. As the output falls, unemployment rises
- the level of output ultimately dictates the utilization of labor force within the economy.
- During recession, unemployment rises substantially.
- As GDP expands, the unemployment rate gradually declines and fluctuates around its natural rate
of about 5 or 6 percent.
Growth
• Economists measure growth with changes in real
gross domestic product (real GDP) — the market
value of final goods and services produced in an
economy, stated in the prices of a given year.
• Secular growth trend in GDP- the average rate of
growth in total output and total income.
• Per capita real output is real GDP divided by the total
population.
Unemployment
• Industrial Revolution was accompanied by a shift to wage labor and
to a division of responsibilities. Some individuals (capitalists) took on
ownership of the means of production and hired others to work for
them, paying them a wage per hour. This change in the nature of
production marked a significant change in the nature of the
unemployment problem.
• Potential output is the output that would materialize at the target
rate of unemployment and the target rate of capacity utilization
• Cyclical unemployment
• Frictional unemployment
• Seasonal unemployment
Any queries??