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Macroeconomics Is Important For All: Individual, Consumer, Firm or Government
Macroeconomics Is Important For All: Individual, Consumer, Firm or Government
D I V I D E D
INTO DISTINCT AREAS OF S T U D Y, MICROECONOMICS AND
MACROECONOMICS.
A D V E N T O F K E Y N E S ’ B O O K , ‘ T H E G E N E R A L T H E O R Y O F E M P L O Y M E N T,
INTEREST AND MONEY” IN THE YEAR 1936.
E X E R C I S E :
L E A R N I N G T H AT T H E VA R I A B L E S I N A N Y E C O N O M I C M O D E L C A N B E A
S T O C K O R A F L O W.
S T AT I C R E L AT I O N S H I P ( W H E N A L L VA R I A B L E S R E L AT E T O T H E S A M E
TIME PERIOD)
D Y N A M I C R E L AT I O N S H I P ( W H E N ALL THE VA R I A B L E S R E L AT E TO
DIFFERENT TIME PERIODS).
G I V E N S E T O F R E L AT I O N S H I P S B E T W E E N T H E VA R I A B L E S M AY L E A D T O
EQUILIBRIUM OR A DISEQUILIBRIUM SOLUTION.
Macroeconomics and Microeconomics
• ECONOMIC PROBLEMS
• of limited resources and unlimited wants.
• of scarcity
• EXERCISE:
• Criticism:
• Too much restrictive policy measures led to 1970 recession, not successful in
checking recession.
• Tools focused too much on controlling the aggregate demand and neglected the
supply side.
3. Post Keynesian Economics, monetarism.
• In the 1970’s the classical theory took a new turn with the introduction of the concept of
rational expectations.
Economic concept
People make choices based on their rational outlook, available information and
past experiences.
This contrasts with the idea that government policy influences people's decisions
CASE: Great Recession 1929
Great Depression was a worldwide economic depression that lasted 10 years. Its
kickoff was “Black Thursday," October 24, 1929. That's when traders sold 12.9
million shares of stock in one day, triple the usual amount. Over the next four
days, stock prices fell 23 percent in the stock market crash of 1929. The
Great Depression had already started in August when the economy contracted.
VIEWPOINT OF AN INDIVIDUAL:
W H O I S M A N A G I N G H I S O W N A S S E T P O R T F O L I O ; I T M AY B E O F C O N S I D E R A B L E
I M P O R T A N C E T O B E AWA R E O F T H E C U R R E N T F I S C A L P O L I C Y ; G O V T M A Y B U Y B A C K
OR RE-ISSUE BONDS
VIEWPOINT OF BUSINESS:
L I E S I N WA N T I N G T O K N O W W H E T H E R O R N O T T O E X P A N D P R O D U C T I O N
V I E W P O I N T O F G O V E R N M E N T;
TURNS TO MACRO-ECONOMY W H E N P L A N N I N G I T S B U D G E T A N D TA X E S , D E C I D I N G
O N T H E I N T E R E S T R AT E S A N D MAKING ITS OTHER POLICY DECISIONS.
VIEWPOINT OF AN ECONOMY:
I T S P E R F O R M A N C E I S E VA L U A T E D B Y T H E N A T I O N A L O U T P U T , T H E R AT E OF
U N E M P L O Y M E N T, T H E I N F L AT I O N R AT E A N D T H E T R A D E P E R F O R M A N C E . 11
E C O N O M Y ’ S S TA B I L I T Y A N D G R O W T H ,
V I E W P O I N T O F A N M A C R O E C O N O M I S T S A R E I N V O LV E D I N T R Y I N G T O A N A LY S E T H E
S H O R T- R U N F L U C T U AT I O N S I N T H E N AT I O N A L I N C O M E W H I C H L E A D T O T H E
Concepts in Macroeconomics
• STOCK
•• Quantity which is measured at a point in time.
• W H I L E A C H A N G E I N S T O C K O C C U R S D U E T O A C H A N G E I N T H E F L O W, A
C H A N G E I N F L O W M AY A L S O B E I N F L U E N C E D B Y A C H A N G E I N S T O C K .
• E Q U I L I B R I U M I S A S TAT E O F B A L A N C E O R A S TAT E W H E R E T H E R E I S N O
C H A N G E . D I S E Q U I L I B R I U M I S A S TAT E O F I M B A L A N C E .
• FLOW E Q U I L I B R I U M C A N B E TA K E N A S S H O R T R U N E Q U I L I B R I U M .
S T O C K E Q U I L I B R I U M C A N B E TA K E N A S L O N G R U N E Q U I L I B R I U M .
• DYNAMIC MODELS 12
•• Trace the changes that occur in the values of the different variables over time.
Partial Equilibrium and General Equilibrium
• PA R T I A L E Q U I L I B R I U M A N A LY S I S ( M A R S H A L L’ S )
• G E N E R A L E Q U I L I B R I U M A N A LY S I S ( L E O N WA L R A S… )
• Involves a state where all the markets and the decision making units in
the economy are in a simultaneous equilibrium.
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