Macroeconomics (HUL213)

Lectures 01-02
Jan 01, 04; 2024
Course Outline

Instructor:
Name: Debasis Mondal
Office: MS 606; Phone: 2659-6089
Email: debasis[at]hss[dot]iitd[dot]ac[dot]in
Office Hours: Monday and Thursday 12-1 pm (by appointment,
please send an email)
(T)eaching (A)ssistants (PhD students at the HuSS):
Suranjana Kundu: Suranjana.Kundu[at]hss.iitd.ac.in
Sudesna Mandal: huz238413[at]hss.iitd.ac.in
Shabnam: huz218163[at]hss.iitd.ac.in
Course Outline

▶ Synopsis:
This course provides a comprehensive exploration of
macroeconomic principles, theories, and policies. Students will
delve into the fundamental concepts shaping economies at the
aggregate level. Topics include, but not limited to, economic
indicators, national income accounting, money and banking,
fiscal policy, monetary policy, economic growth, international
trade, etc. The target audience includes those seeking
in-depth knowledge of macroeconomics in the long/short run
and current problems and policies.
▶ Prerequisites:
There is no prerequisite in economics for this course.
However, students are encouraged to consider the Economics
Minor Program to maximize the benefits of undertaking this
course in their second/third year.
Assessment

1. Assignments/Quizzes: 20%
2. Midterm Exam: 30%
3. Final Exam: 40%
4. Class/Tutorial Participation/Attendance: 10%
Attendance:
Submit a short excuse note (or email) to the respective teacher if
you miss a class/tutorial. More than 80% attendance in lectures
plus tutorials is mandatory to write the Major exam.
Audit Policy:
More than 40% marks in aggregate and 80% attendance in
lectures and tutorials.
Text/References

▶ Main Textbook/References:
▶ (Main text) Macroeconomics, (Author: Charles I Jones,
Stanford University), Fourth Edition, Publisher: W. W.
Norton Company, New York, 2018.
http://web.stanford.edu/∼chadj/macrobook.html
▶ Reference book 1: Macroeconomics: Stephen Williamson,
Sixth Edition, Pearson https://www.pearson.com/en-us/
subject-catalog/p/macroeconomics/P200000006442/
9780137538201?tab=table-of-contents
▶ Reference book 2: Macroeconomics, Andrew B. Abel, Ben S.
Bernanke, Dean Croushore, Pearson
https://www.pearsonhighered.com/assets/preface/0/1/3/4/
0134896440.pdf
Text/References

[] [] []
Introduction to Macroeconomics

▶ Macroeconomics:
▶ The study of how the interactions of people and firms through
markets affect overall economic activity
▶ Microeconomics:
▶ The study of individual people, firms, or market behavior
Preliminaries

▶ Macroeconomics
▶ Branch of economics that deals with aggregate economic
variables, such as the level and growth rate of national output,
interest rates, unemployment, and inflation.
▶ Microeconomics:
▶ Branch of economics that deals with the behavior of individual
economic units - consumers, firms, workers, and investors - as
well as the markets that these units comprise.
Important Macroeconomic Questions to Consider

▶ Why is today’s average Indian more than 5 times richer than

30 years ago? Almost 3 times poorer than the average
Chinese?
▶ Do we understand and know the causes of the recent global
financial crisis?
▶ What role do stock markets play in the economy?
▶ What is the role of government in affecting the lives of
people, by affecting the price of healthcare, rate of economic
growth, and government expenditures?
Macroeconomic questions: an example

▶ An average Indian worker used to earn Rs. 51,872 ($1,036.32)

in 1983. This figure increased, rather nominally, to Rs. 62,815
($1,254.94) in 1991 but to the most impressive figure at Rs.
289,491 ($5783.59) in 2017.
▶ Overall, during 1981–2017, a 5.6 times jump in earnings
implies a mean rate of economic growth (or, productivity
growth) of 5.19% per annum.
▶ During 1983–1991, the average productivity growth rate was a
meagre 3.03% per annum, but during 1991–2017, it became a
phenomenal 6.06% per annum.
Positive Vs Normative analysis

Theories and Models:

▶ In economics, explanation and prediction are based on
theories. Theories are developed to explain observed
phenomena in terms of a set of basic rules and assumptions.
▶ A model is a mathematical representation, based on economic
theory, of a firm, a market, or some other entity.
Positive versus Normative Analysis:
▶ Positive analysis: Analysis describing relationships of cause
and effect.
▶ Normative analysis: Analysis examining questions of what
ought to be.
Real Vs Nominal prices

▶ Nominal price: Absolute price of a good, unadjusted for

inflation.
▶ It refers to the stated or current price of a good or service in terms of money. It is the face value

of a product or service without adjusting for inflation or deflation. Changes in nominal prices may
be due to shifts in supply and demand, variations in production costs, or other market forces.
Nominal prices do not account for changes in the purchasing power of money over time, making

them susceptible to the effects of inflation or deflation.

▶ Real price: Price of a good relative to an aggregate measure

of prices; price adjusted for inflation.
▶ Real price, on the other hand, takes into account the impact of inflation or deflation on nominal

prices. It is the adjusted price of a good or service, reflecting its actual purchasing power. The real
price is calculated by adjusting the nominal price using an appropriate price index, such as the
Consumer Price Index (CPI) or the Producer Price Index (PPI). This adjustment allows for a more
accurate comparison of prices over time, enabling analysts to assess changes in the true value of
goods or services. Real prices provide a clearer understanding of how the cost of living or

production has changed, considering the effects of changes in the overall price level.
CPI versus PPI

▶ Consumer Price Index: The Consumer Price Index (CPI) is a measure that examines the

average change in prices paid by consumers for goods and services over time. It is a key indicator of

inflation, reflecting the purchasing power of a currency. The CPI is calculated by comparing the current

cost of a fixed basket of goods and services with the cost of that same basket in a reference base year. It

includes a wide range of items typically consumed by households, such as food, housing, clothing,

transportation, and healthcare. The CPI is widely used by governments, businesses, and economists to

assess changes in the cost of living.

▶ Producer Price Index: The Producer Price Index (PPI), also known as the Wholesale Price

Index (WPI) in some countries, measures the average change in the selling prices received by domestic

producers for their goods and services over time. Unlike the CPI, which reflects prices at the consumer

level, the PPI focuses on the prices received by producers at various stages of the production process. This

index encompasses raw materials, intermediate goods, and finished goods. The PPI is valuable for

analyzing inflationary pressures within the production sector and is often considered an early indicator of

potential future trends in consumer prices. It serves as a tool for businesses and policymakers to monitor

changes in input costs and production expenses.

1.3 REAL%VERSUS%NOMINAL%PRICES%

Table 1.1 The Real Price of Eggs and of a College Education

1970 1980 1990 2000 2007
Consumer Price Index 38.8 82.4 130.7 172.2 205.8
Nominal Prices
Grade A Large Eggs $0.61 $0.84 $1.01 $0.91 $1.64
College Education $2,530 $4,912 $12,018 $20,186 $27,560
Real Prices ($1970)
Grade A Large Eggs $0.61 $0.40 $0.30 $0.21 $0.31
College Education $2,530 $2,313 $3,568 $4,548 $5,196

The real price of eggs in 1970 dollars is calculated as follows:

CPI1970 38.8
Re al price of eggs in 1980 = × nominal price in 1980 = × $0.84 = $0.40
CPI1980 82.4
CPI1970 38.8
Re al price of eggs in 1990 = × nominal price in 1990 = × $1.01 = $0.30
CPI1990 130.7
Real Vs Nominal prices
1.3 REAL VERSUS NOMINAL PRICES

The Real Price of Eggs and of a College Education (continued)

1970 1980 1990 2000 2007
Consumer Price Index 38.8 82.4 130.7 172.2 205.8
Nominal Prices
Grade A Large Eggs $0.61 $0.84 $1.01 $0.91 $1.64
College Education $2,530 $4,912 $12,018 $20,186 $27,560
Real Prices ($1980)
Grade A Large Eggs $2.05 $1.33 $1.01 $0.69 $1.04
College Education $2,530 $2,313 $3,568 $4,548 $5,196

The real price of eggs in 1990 dollars is calculated as follows:

CPI1990 130.7
Re al price of eggs in 1970 = × nominal price in 1970 = × $0.61 = $2.05
CPI1970 38.8
CPI1990 130.7
Re al price of eggs in 2007 = × nominal price in 2007 = × $1.64 = $1.04
CPI 2007 205.8
Real Vs Nominal prices
1.3 REAL VERSUS NOMINAL PRICES

The Real Price of Eggs and of a College Education (continued)

1970 1980 1990 2000 2007
Consumer Price Index 38.8 82.4 130.7 172.2 205.8
Nominal Prices
Grade A Large Eggs $0.61 $0.84 $1.01 $0.91 $1.64
College Education $2,530 $4,912 $12,018 $20,186 $27,560
Real Prices ($1980)
Grade A Large Eggs $2.05 $1.33 $1.01 $0.69 $1.04
College Education $2,530 $2,313 $3,568 $4,548 $5,196

The percentage change in real price is calculated as follows:

real price in 2007 − real price in 1970 1.04 − 2.05

Percentage change in real price = = = −0.49
real price in 1970 2.05
How Macroeconomics Studies Key Questions?

▶ Macroeconomists have a general approach to study questions

of interest:
▶ Document the facts.
▶ Develop a model.
▶ Compare predictions of the model with original facts.
▶ Use the model to make other predictions that will eventually
be tested.
▶ Models
▶ Models simplify the complicated real world into its most
relevant elements.
▶ Model is useful if it has good predictive power.
▶ Economic models often involve systems of multiple equations.
An overview of the subject
Thank You