Macroeconomics

Measurement
Part1: Prices and Unemployment
Macroeconomics is About
 Macroeconomic Problems

 Macroeconomic Theories

 Macroeconomic Policies

 Different Views of How the Economy Works

Macroeconomic Problems
 High Inflation Rate
 High Unemployment Rate
 High Interest Rates
 Low Economic Growth

 What is the cause of the problem?

 What needs to be done to end the problem?
* Many of the questions macroeconomist ask do not have
the obvious answers
Macroeconomics Theories

 To answer the macroeconomics questions,

macroeconomics theories are built .

 Theories like Keynesian Theory, Monetarist

Theory, New Classical Theory
* Not all monetarist agree on the causes of
certain macroeconomic problems
Macroeconomics Policies
 Macroeconomist propose certain types of policies
to address macroeconomic problems
 Two Types of policies: Fiscal and Monetary Policies
 Fiscal Policy deals with the change in the
government expenditure and/or taxes to achieve
the particular macroeconomic goals.
 Monetary Policy deals with the changes in the
money supply to achieve the particular
macroeconomic goals.
Different views on How the
Economy Works

 Self-regulating economic

 Inherently unstable economic

Macroeconomic Measures:
Price Level
 Price level is the weightage average of the prices of all
goods and services.

 Measure Price Level by constructing a Price Index

 Price Index: Percentage number that shows the extent to

which a price (or a ‘basket’ of prices) has changed over
a period (month, quarter, year) as compared with the
price (s) in a certain year (base year) taken as a
standard.
Price Index: CPI Cont.

 Consumer price index expresses the current prices of a basket

of goods and services in terms of the prices during the same
period in a previous year, to show effect of inflation on
purchasing power.
 This index is designed to reflect changes in the prices of a
“market basket” of goods and services purchased by
households.
 NRB updates the CPI basket once every 10 years.
 NRB revised the CPI based on surveys conducted in 8,028
households of 55 districts for a year beginning February 13,
2014.
 NRB has included 496 goods and services in the new CPI
basket previously it was comprised 410 different types of goods
and services
Price Index: CPI
 CPI based has allotted a weight of 43.91 per cent to food
items and 56.09 per cent to non-food items.
 Food and Beverage items: Cereal grains and their products,
Pulses & Legumes, Vegetable, Meat & Fish, Milk Products &
Eggs, Ghee & Oil, Fruit, Sugar & Sugar products, Spices,
Non-alcoholic drinks, Alcoholic drinks, Tobacco products,
Restaurant & Hotel,
 Non-Food and Services: Clothes & footwear, Housing &
utilities, Furnishing & household equipment, Health,
Transportation, Communication, Recreation & culture,
Education, Miscellaneous goods & services
 CPI is also known as cost of living index number
CPI Calculation
Inflation and the CPI

 When you know the inflation rate, you can find out
whether your income is (1) keeping up with, (2) not
keeping up with, or (3) more than keeping up with
inflation
GDP Deflator or GDP Implicit
Price Deflator
Case
 Explain about CPI and base year?
 Explain about real income and nominal income?

 In year 1, your annual income is $45,000 and the CPI is

143.6; in year 2, your annual income is $51,232, and the
CPI is 150.7. Has your real income risen, fallen or
remain constant? Explain your answer.

 In year 2011, Loot movie had made a business of NRs. 6

crore and the CPI is 109.3 and in year 2016, Loot2
movie had made a business of NRs. 8 crore and the CPI
is 165.9. Has the real earning risen, fallen or remain
constant? Explain your answer.
Reading Materials
 Economics at the Movies, Page: 133
 Woodstock, 1969, Page: 134