Final Principles of Macro

Principles of Macro Economics
DR. ANUSHREE PODDAR

Concepts
v What is GDP
v How Inflation affects the economy
v How deflation affects the economy
What is GDP ?
GDP is the level of economic activity in the country.

What is GDP ?
By MARKET VALUE we In a given period of time

mean the price that is usually means a year or
actually paid for goods and a quarter
services
Produced within a country
means everything was
By FINAL we mean goods and services that are consumed and not made in the country
things that are used as inputs into something else that is sold later including exports
So if you buy a screw to fix your home then this is counted as part of GDP
but if an airline buys a screw to fix its plane it is not counted as GDP only
the final ticket price that passengers pay for their travel is included in GDP
this is done to avoid double counting of items that are used as inputs
What is GDP ?
We then add
exports since
these are
produced at home
but consumed
abroad
We subtract
imports since
Consumption by household Investments by these are
Government
companies on things like consumed at
spending on goods home but made
machines and equipment
and services in another
country
What is GDP ?
We can look at GDP as the result of the quantity of goods and

services produced multiplied by the price level
Here we see that if GDP increases as a result of an That's why economists calculate GDP as
constant prices or real GDP
increase in the price level then the standard of
living in the country has not actually changed Changes in real GDP are the result of increases in
real output and not the result of price inflation
What is GDP ?
To compare the GDP between different years or

countries we can look at the level of GDP per person
also called GDP per capita
This is calculated by dividing the total GDP by the

number of people in a country a small country can
have a smaller total GDP than a big country but its
people may be better off
What is GDP ?
Comparing GDP between countries gets

difficult if price levels vary a lot five dollars in
china will buy you a lot more cups of coffee
than in Switzerland
We can calculate GDP in both countries after

taking into account these differences in price
levels and this is called GDP at purchasing
power parity
What is GDP ?
An increase in GDP usually

indicates that the standard of
living is rising since the year
2000 global GDP has been
increasing by nearly 3 per year
What is GDP ?
When the GDP in an economy is falling

for two quarters in a row
It is in a recession
What is GDP ?
First GDP does not include GDP does not take into account the quality
the value of activities that are The level of GDP does not tell us about of the environment or other aspects of the
not paid for such as the distribution of income even when quality of people’s lives it is possible to
housework or volunteering overall GDP per capita is high there may increase GDP by taking less vacation but this
be a few extremely rich and many poor may not make people happier
people in the country
How Inflation affects the economy
v What is inflation?
v How it affects the economy
v How govt controls inflation
v What effect does it have on your lifestyle,
investments and overall standard of living.
The United States has witnessed historic inflation since the economy began to reopen in 2021
following the COVID-19 lockdowns.
U.S. inflation got risen to 7.5 it is the highest it has been in 40 years since 1982.
Inflation simply means price rise or increase in the prices of commodities
When inflation rises the value of the currency goes down
WHICH MEANS: the cost of living gets higher when prices of goods and services in an economy increase
When prices of goods and

services in an economy increase
WHY SO: it is because of the

increase in demand
When demand increases and

supply is low
Consumers are willing to pay

more for a commodity
that is how the cost of goods

and services increases in an
economy
WHY DOES SUPPLY

DECREASE?
There could be many reasons
Example: If there is a drought then naturally

the supply of agricultural products will
decrease
When the cost of goods and services

increases in an economy that automatically
triggers a consumer to go on a savings
mode
It is very simple when you know prices have

increased and your income has not There are many reasons why supply
decreases some of them are:
WHICH MEANS: The value of your
currency has decreased because now you
have to pay more money to get the same
amount of goods which you previously got
for less amount.
So naturally you will spend less on things

that you don't need you will save money as
much as you can
If everyone reduces their spending
that will trigger another problem
How will the economy sustain or

expand so it is always recommended
that a certain level of inflation is
required in the economy to ensure
that consumer expenditure is
promoted
Holding money through savings is

demotivated
So now that you have understood

what is inflation and how it affects the
economy now the next question is
what do you do about it ???

There are two ways a country's

economy is controlled
one is using fiscal policy and
the other one is monetary policy as

discussed in the previous session
Central bank uses these tools to

control the flow of money into the
market
that is how the central bank controls

the inflation and liquidity in the
economy
Federal reserve raises the

interest rates
if interest rates are high that will discourage
people and businesses to borrow money from
banks because due to high interest rates loans
will become more expensive
People don't want to pay a high rate of

interest on your borrowed money
so what they will do is you will postpone your

project that involves financing it could be a
house loan vehicle loan study loan etc
If they pay attention indirectly the government

is discouraging people and businesses not to
borrow money by increasing the interest rates
rather the government is signalling people to
save money to earn higher interest payments
now this reduces

the supply of
money in circulation
and then that will cause
earnings to fall economic

activities to reduce and eventually
prices of the commodity will drop
the market will automatically

adjust the price according to
everyone’s buying capacity
the main idea behind the central

bank’s decision of increasing the
interest rates is to control the
flow of money into the market so
that the economy is not too hot
or not too cold but just right
So what effect does inflation have on peoples lifestyle investments and overall standard of living??
Now if you are someone who belongs to the working class then what you need to keep in
mind is that if your salary does not increase that means you have less buying power now
than a year ago due to an increase in inflation since the U.S.A inflation has now risen to 7.5
percent
That means ideally your salary should have also raised by 7.5 or more annually so that you compensate
for your lost money similarly if your bank is not giving you a savings interest rate of 7.5 or more even
then you have lost money to inflation
let's say you invest in stock market and if at all your overall investment or
portfolio did not yield a 7.5 return or higher you have still lost money to
inflation as inflation means price rise
That means consumers like you and me are going to feel the pinch in our everyday
routines price of some essential commodities like food fuel housing electricity will
rise more
Suppose there are five things that are running a country's economy
Assume five things for easier to understanding

As for the last two years due to the pandemic people have lost their jobs salary has not increased many are working on
less salaries and then there are many travelling restrictions
The ones that have suffered have also contributed significantly to the unemployment rate
The ones that have suffered have also contributed significantly to the unemployment rate so in this situation the government will have two jobs
1. it wants to keep inflation under control by using monetary policy and

2. to maximize employment a high inflation rate has a direct relation with a high unemployment rate because rising prices can easily become a major threat to the
labor market so in an economy we cannot focus on few sectors on industries
every sector and industry has to perform that's what leads to a country's economic growth
Government has to make some arrangements like increasing government spending on infrastructures and schemes so
that the economy keeps moving
The government on one hand they have to keep the interest rates high on the other hand they also have to pump in
money through infrastructure spending so that the economy keeps moving and hopefully with the increase in interest
rates government spending drop-in travel restrictions and other forms of interventions by the end of this year economy
will revive
How Deflation Works?
Deflation means taking out the air

so anything that is removed or
decreased is termed as deflation
In economics, deflation simply means

a decrease in the general price
level of goods and services
When consumer prices fall it might sound attractive if you want to do shopping but
then that's called discount
When consumer prices fall due to deflation, it simply means there is a long-term drop
in demand not a short term.
Reasons for drop in long-term demand:
Largely deflation occurs due to fallen consumer income or recession

Over a long period when consumer income has not increased or the market is facing a recession that leads to:
1. declining wages 2. job losses and 3. falling investment portfolios
As the situation worsens so does deflation
With that economic growth slows down

Whenever the government and the central bank uses these tools to increase the money supply
people often think that the central bank or the government is printing money
that is not true at least not in the case of the Indian economy
but the united states federal reserve does print money

Price
Indian government does is with the help of fiscal policy they can lower or increase the taxes
In the case of deflation the government lowers the taxes then they also increase government spending it could be on
infrastructure welfare schemes etc
Government also increases the bond rates likewise the central bank decreases the interest rate
Price
Price
By increasing the money supply the government wants people to have more money in their hands to spend this way people will stop waiting for
prices to fall further
That increases the demand and then businesses also expand more jobs are also created the moment demand increases prices will go up
And that is how you reverse the deflation

Whenever central bank increases the lending
interest rate, the bond prices will go down
when interest rate goes up government
bonds are supposed to be the safest
investment option but the return on
investment is less since it is a fixed income
asset people generally invest in it and in
return the government raises money to
support its spending so generally government
controls inflation by reducing the money
supply
The money supply is controlled by increasing Price

interest rates and lowering bond rates if not
controlled that may cause recession and job
losses.
So government aims to balance the Price

economy in such a way that too much
deflation is bad and too much inflation
is also bad
It's a balancing act at the end of the

day
THANK YOU !

Final Principles of Macro

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Final Principles of Macro

Uploaded by

Copyright:

Available Formats

Principles of Macro Economics

DR. ANUSHREE PODDAR

GDP is the level of economic activity in the country.

By MARKET VALUE we In a given period of time

We can look at GDP as the result of the quantity of goods and

To compare the GDP between different years or

This is calculated by dividing the total GDP by the

Comparing GDP between countries gets

We can calculate GDP in both countries after

An increase in GDP usually

When the GDP in an economy is falling

Inflation simply means price rise or increase in the prices of commodities

When inflation rises the value of the currency goes down

When prices of goods and

WHY SO: it is because of the

When demand increases and

Consumers are willing to pay

that is how the cost of goods

WHY DOES SUPPLY

Example: If there is a drought then naturally

When the cost of goods and services

It is very simple when you know prices have

So naturally you will spend less on things

How will the economy sustain or

Holding money through savings is

So now that you have understood

what do you do about it ???

There are two ways a country's

one is using fiscal policy and

the other one is monetary policy as

Central bank uses these tools to

that is how the central bank controls

Federal reserve raises the

People don't want to pay a high rate of

so what they will do is you will postpone your

If they pay attention indirectly the government

now this reduces

and then that will cause

earnings to fall economic

the market will automatically

the main idea behind the central

Assume five things for easier to understanding

1. it wants to keep inflation under control by using monetary policy and

Deflation means taking out the air

In economics, deflation simply means

Largely deflation occurs due to fallen consumer income or recession

As the situation worsens so does deflation

With that economic growth slows down

but the united states federal reserve does print money

And that is how you reverse the deflation

The money supply is controlled by increasing Price

So government aims to balance the Price

It's a balancing act at the end of the

You might also like