I hear and I forget

I see and I believe

I do and I understand
Confucius
 Session coverage:
Introduction to Economic
Analysis

Micro vs. Macro

Objectives and Instruments of Macroeconomics
Goals of Macroeconomic Policy
 Micro vs. Macro - Main Differences

Difference in the degree of aggregation

Difference in objectives

Different importance to Price and Income

Differences in the method of study (Partial and Quasi General equilibrium)

Paradoxes

Different assumptions

On the basis of elements

 Difference
Micro Economics Macro Economics

Study of individual economic

Study of economy as a whole.
unit

Central problem is price Central problem is

determination and allocation determination of level of
of resources. income and employment.

Main tools : aggregate demand

Main tools : demand and
and aggregate supply of the
supply. economy as a whole.
Discusses how equilibrium of a Concerned with determination
consumer and a producer or an of equilibrium level of income
industry is attained. and employment.

Income is the major

Price is the main determinant of
determinant of macro economic
micro economic problems.
problems.
Elements - PESTLE (Political,
Elements : COSMICS (Consumer,
Economic, Social, Technological,
Organization, Market, Industry,
Legal and Environmental
Competitors, Suppliers)
factors)

Elements can be controlled. Elements can’t be controlled.

Examples: individual income, Examples: National income,

savings. national savings.
 Macro Economics

Deals with the functioning

of the economy as a whole

studies the overall

aggregates of the system”
 Definition of Macro Economics

According to Shapiro: “Macro Economics deals

with the functioning of the economy as a whole

According to Boulding:“Macro economic theory

is that part of the economics which studies the
overall averages and aggregates of the system”
• Who is credited with bringing the term "the invisible hand"
in Economics?

a) Adam Smith
b) John Maynard Keynes
c) F. Hayek
d) Samuelson
• Macroeconomics as a separate branch came to be studied
after the contributions of which economist?

a) Adam Smith
b) John Maynard Keynes
c) F. Hayek
d) Samuelson 
• When did the Great Depression hit the United States?

a) 2007
b) 1929
c) 1936
d) 2001
 DEVELOPMENT of MACROECONOMICS

• Classical theory
• Keynesian theory
• Post-Keynesian
Different Schools Theory/Monetarism
of thought • Rational expectations

October effect

Black Thursday, October 1929

Macroeconomic Policy Objectives

High level of output (GDP)/Rapid Economic Growth

Full employment/ Low Unemployment

Price stability/ Low inflation

Sustainable balance of payments

Reduction in poverty and inequalities

Potential GDP vs. Actual GDP

Potential GDP = the real GDP that the economy could produce
if the labor force and other resources were fully employed

The growth rate of potential GDP depends on:

• The growth rate of the labor force

• The growth rate of the nation’s capital stock
• The rate of technical progress
GDP gap - The amount by which actual GDP falls short of
potential GDP

GDP gap = Potential GDP – Actual GDP

GDP numbers
• 2020-2021 : -7.6%
• Q1 : -24.4%
• Q2 : -7.4%
• Q3 : 0.5%
• Q4 : 1.6%
• 2021-22 (growth forecast at 9.5% for FY22)
• Q1: (April, May, June) : 20.1%

http://mospi.nic.in/

Read more at:

https://economictimes.indiatimes.com/news/economy/indicators/rbi
-retains-gdp-forecast-at-9-5-revises-inflation-estimate-down-at-5-3/
articleshow/86883910.cms?utm_source=contentofinterest&utm_m
edium=text&utm_campaign=cppst
https://economictimes.indiatimes.com/news/economy/indicators/rbi-retains-gdp
-forecast-at-9-5-revises-inflation-estimate-down-at-5-3/articleshow/86883910.cm
s
• https://www.thehindu.com/opinion/op-ed/what-th
e-q1-gdp-numbers-say/article36422391.ece
• https://economictimes.indiatimes.com/news/economy/in
dicators/india-will-become-the-worlds-third-largest-
economy-by-2050-says-lancet
%20study/articleshow/78599772.cms?
utm_source=newsletter&utm_medium=email&utm_cam
paign=Dailynewsletter&utm_content=Story7&ncode=bde
cce823c961199dda685a39a1c3bb3
• https://www.outlookindia.com/website/story/busi
ness-news-india-grows-at-201-aided-by-low-base-e
ffect/393243
Low Base Effect
• Low base effect in business and economics is
the tendency of a small absolute change from a
low initial amount to be translated into a large
percentage change.
 2. Full Employment

https://economictimes.indiatimes.com/jobs/employment-ambit-may-be-
widened-to-include-gig-and-platform-workers/articleshow/87122198.cms

GIG AND PLATFORM

WORKERS
• https://www.newindianexpress.com/nation/2021/o
ct/07/september-records-highest-employment-in-2
0-months-since-covid-2368929.html
• https://economictimes.indiatimes.com/news/econ
omy/indicators/india-reports-29-surge-in-employm
ent-across-nine-sectors-in-june-quarter-labour-mini
stry-survey/articleshow/86552437.cms
• https://www.cmie.com/kommon/bin/sr.php?kall=w
article&dt=20211001204309&msec=240
• https://economicoutlook.cmie.com/kommon/bin/sr
.php?kall=wshreport&nvdt=20211004120642123&
nvtype=INSIGHTS
• https://economictimes.indiatimes.com/news/econ
omy/policy/labour-ministry-to-fast-track-national-e
mployment-policy/articleshow/76422702.cms?fro
m=mdr
3. Price stability/ Low inflation

A market economy uses prices as a yardstick to measure economic

values.

Rapid price changes lead to economic inefficiency

The most common measure of the overall price level is the consumer
price index (CPI).

The CPI measures the cost of a fixed basket of goods bought by the
typical urban consumer.

The rate of inflation measures changes in the level of prices.

It denotes the rate of growth or decline of the price level from one year
to the next.
Inflation Rate
• https://economicoutlook.cmie.com/kommon/bin/sr
.php?kall=wshreport&nvdt=20211009123007196&
nvtype=INSIGHTS
• https://economicoutlook.cmie.com/kommon/bin/sr
.php?kall=wshreport&nvdt=20211006191232850&
nvtype=INSIGHTS
https://www.livemint.com/economy/indias-retail-inflation-drops-to-5-
month-low-of-4-35-in-sep-aug-iip-at-119-11634037130836.html
Inflation & Deflation
An inflation occurs when the level of price
is growing (the rate of inflation is positive).

A deflation denotes that the level of price

declines (the rate of inflation is negative).

A disinflation - a temporary slowing of the

pace of price inflation
 India: Inflation rate from 1990 to
2020

Source: World bank

4. International trade

International trade includes import

and export of goods, services,
capital, borrowing and lending
money etc.

International trade is becoming

increasingly important to most
country’s economy.
Net export is the numerical difference
between the value of a country’s exports
and the value of its imports.

When net exports are positive, a trade

surplus exists.

A trade deficit occurs when the value of

imports is greater than the value of
exports.
 Exchange Rate Stability
Foreign exchange rate represents the price of own currency in
terms of the currency of other nation.

When a nation’s exchange rate rises, the prices of imported goods

fall while exports become more expensive for foreigners, the nation
becomes less competitive in world markets and net exports
decline.

Changes in exchange rates can also affect output, employment,

and inflation.
Sustainable Balance of Payments

Balance of Payments is a
systematic record of all
economic transactions
between that country and
the rest of the world.
• In the BOP
• Receipts from abroad are regards are credits (inflows)
and entered in the accounts as positive.
• Outflows are regarded as debits and taken as
negatives.
• When the credits and debits are taken, they must sum
to zero.
 Current Account
Goods Balance

BOT
 Imports and exports of physical goods
Service Balance
 Import and exports of services (e.g., insurance)
Income Balance
 Wages, interest and profits flowing into and out of the country
FDI
 Inflow and outflow of investments – investments overseas will be seen as
outflows, investments from foreign MNCs (for example) will be seen as an
inflow
 Note that profits from such investments are to be credited into the current
Capital Account

account and not here.

Overall Balance
 A positive currency flow indicates BOP surplus – increase in foreign
currency available for adding to foreign reserves/paying off foreign debts
 A negative currency represents a BOP deficit
Official Reserves (Net)
 Changes in foreign reserves and reserves of monetary gold held by
monetary authority
A surplus on the BOP refers to a situation in
which international receipts (credits) are greater
than international payments (debits) over a year.

Conversely, a deficit on the BOP refers to a

situation in which international receipts are less
than international payments.
• A surplus in the capital account may not be a
positive factor for a country's overall economic
health as it indicates the sale or ownership of assets
by foreign entities.
• A surplus in the current account is generally
viewed as a positive, as it shows an increase in the
goods and services sold by a country.
Consequences of a capital
account deficit / surplus
 Surplus on the capital account
• A surplus on the capital account means that there are more
investment funds flowing into the country than out.
• This may be to fund a deficit on the current account of the balance
of payments.
• This inward investment may be helpful to the economy and help
create jobs and boost growth, but anyone investing in an economy
expects a return.
• This means that a surplus on the capital account will lead to
outflows of interest and dividends in the future.
• The inflow of funds may exert an upward pressure on the
exchange rate as the demand for the domestic currency will
increase.
• This might adversely affect the current account if the increase in
export prices makes exports less competitive.
• A capital account deficit on the other hand will mean a
net outflow of investment funds.
• This means the country is building up a portfolio of
overseas investments, which may lead to future returns of
interest, profit and dividends.
• This may be beneficial in the medium-term.
• However, short term speculative outflows of funds may
have disastrous effects on an economy in terms of the
depreciation of the exchange rate, loss of confidence,
impact on investment, output and jobs.
• Several countries in recent years, e.g. Thailand, Indonesia,
Russia and Brazil have been badly affected by these
speculative outflows of funds.
5. Reduction in poverty and
inequalities

• https://www.cmie.com/kommon/bin/sr.php?kall=w
article&dt=20211009173058&msec=033
 Which macroeconomic
objective is the most
important?

Are there any conflict between

these objectives?

Goals cannot be mutually

compatible
 Complementary goals

For example, the

Enacting policy to When the achievement
stimulation of
achieve one goal of one goal helps to
economic growth
may also lead to achieve another, these
may also lower the goals are said to
the achievement of
unemployment be complementary.
another goal.
rate.
 Conflicting goals

Economic growth (or low

Unfortunately, stimulating the
unemployment) and low inflation
economy to promote economic
are conflicting goals. This conflict,
growth and lower the
one of many tradeoffs, is the
unemployment rate may also lead
reason economics has been
to an increase in price inflation.
described as the "dismal" science.
 Low
Healthy
unemployment
Macroeconomi economic Growth and
and low
c dilemmas growth and low equality
inflation
inflation
(Phillips curve)
• https://economicoutlook.cmie.com/kommon/bin/sr
.php?kall=wshreport&nvdt=20211009123007196&
nvtype=INSIGHTS
Instruments of Macroeconomics

A policy instrument is an economic variable

under the control of government that can
affect one or more of the macroeconomic
goals.

Who are the policy makers?

Instruments of Macroeconomics
Fiscal policy
Monetary policy
Exchange rate policy
International trade policy/ Export-import
policy (tariff and non-tariff trade regulations)
Employment policy
Prices and incomes policy
1. Fiscal policy

Policy of the government

Government spending (or expenditure)

and mobilization of resources.

Taxation
 2. Monetary policy

The monetary policy of a

country is formulated and
implemented by its central
bank (in India, the Reserve
Bank of India).
Monetary policy determines the
money supply as well as interest
rates, in order to achieve desired
economic objectives.

Changes in the money supply move

interest rates up or down
and affect spending in sectors such as
investment, housing, and net exports.
• https://www.youtube.com/watch?v=opdPPxqish4
• https://www.rbi.org.in/
 3. International Economic Policy

International Economic Policy consists of

two sets of policies:
• Trade policies, which consist of tarrifs, quotas, and
other devices that restrict or encourage imports and
exports.
• Exchange-rate setting. Exchange rate represents
the price of one currency in terms of the currencies
of the other nations. There are different systems to
regulate foreign exchange market.
• https://commerce.gov.in/
• https://economictimes.indiatimes.com/news/econ
omy/foreign-trade/government-extends-foreign-tra
de-policy-by-one-year/articleshow/74919920.cms?f
rom=mdr
• In 2000, the Foreign Exchange Regulation Act (FERA) was
replaced by the Foreign Exchange Management Act
(FEMA), to boost foreign investment in the country.
• https://www.rbi.org.in/scripts/Fema.aspx
 Goals of Macroeconomic policy

Rapid Economic Growth

Low Unemployment/ Full Employment

Low Inflation / Price Stability

To keep the BOP in equilibrium (Avoid trade deficit)

Reduction of economic inequality and removal of poverty or Redistribution of Income

(use of taxation)

High living standards

 Objectives Instruments/tools

High output level Monetary policy

Fiscal policy
Low unemployment rate
Exchange rate policy
Stable price level
International trade policy
Maintenance of Balance of
Payments Prices and incomes
Policies
Steady economic growth
Employment Policy
 Circular flow of income
Two Sector
Three Sector
Four Sector

Real Flow

Monetary Flow
• Axis Bank ad
• https://www.youtube.com/watch?v=c25Qv7Ez8nU
• HDFC Bank ad
• The economy is made up of the flow of money and
resources among businesses, households, the
product market (where consumers buy goods and
services) and the resource market (where businesses
buy materials and labor).
• Real flows refer to the flow of the actual goods or
services, while money flows refer to the payments
for the services (wages, for example) or
consumption payments.
Two Sector (Closed Economy)
Withdrawals and leakages
Three Sector
Four Sector
Discuss the various goals and instruments of
macroeconomics? Do you find any contradiction
between these goals? If yes, suggest measures to solve
the problem with appropriate policy instruments?

What are the major objectives of macroeconomics?

Explain why each objective is important for the economy
and the firms.

What are the major objectives of macroeconomic

policies? Do you think that these goals are contradictory?
Explain with examples?