Economics

 Man is a bundle of desires.

 Economics is the study of the production and consumption
of goods and the transfer of wealth to produce and obtain
those goods.
 Economics explains how people interact within markets to
get what they want or accomplish certain goals.
 Economics is a driving force of human interaction, studying it
often reveals why people and governments behave in
particular ways.

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 Economics - Branches
There are eight main branches of economics
 International Economics
 As the countries of the modern world are realizing the significance of
trade with other countries.
 Public Finance
 The great depression of the 1930s led to the realization of the role of
government in stabilizing the economic growth besides other
objectives like growth, redistribution of income, etc.
 Development Economics
 After the Second World War many countries got freedom from the
colonial rule, their economics required different treatment for growth
and development.
 Health Economics
 A branch of economics concerned with issues related to efficiency,
effectiveness, value and behaviour in the production and consumption
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 Economics - Branches
 Environmental Economics
 Unchecked Emphasis on economic growth without caring for natural
resources and ecological balance, is facing a new challenge from the
environmental side.
 It is one of the major branches of economics that is considered
significant for sustainable development.
 Urban and Rural Economics
 Role of location is quite important for economic attainments. There is
also much debate on urban-rural divide. Economists have realized that
there should be specific focus on urban areas and rural areas.
 Regional economics is also being emphasized to meet the challenge of
geographical inequalities.

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Economics - Branches
 Microeconomics
 It studies behaviour of an individual economic unit. eg. a
firm, a consumer, a businessmen.
 It has a narrow scope and based on partial equilibrium.
 Its central problem is price determination and the main
tools are demand and supply .
 Major variables are an individual market, price of a
commodity , a consumer's demand.

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The Great Depression

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The Roots of Macroeconomics
 Classical economists applied microeconomic models, or
“market clearing” models, to economy - wide problems.
 Micro talks about the distribution of output among firms-
takes care of the distribution aspect.
 Micro assumes output, employment, price level as
constant.
 However, simple classical models failed to explain the
prolonged existence of high unemployment during the
Great Depression.
 This provided the impetus for the development of
macroeconomics.

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 Introduction to Macroeconomics
 Macroeconomics deals with the economy as a whole, it
examines the behavior of economic aggregates such as
aggregate income, consumption, investment, and the overall
level of prices.
 Aggregate behavior refers to the behavior of all households
and firms together.

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Economics - Branches
 Macro economics
 Macro economics seeks to explain the aggregate variables
in the economy such as total output GDP, employment
level, total Spending ,inflation, investment ,trade ,deficits
etc
 It has a very wide scope (e.g. a country) and is based on
general equilibrium.
 Its central problem is production and employment
determination.
 Main tools are demand aggregate supply, aggregate
saving and investment.

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The Roots of Macroeconomics
 In 1936, John Maynard Keynes published The General Theory
of Employment, Interest, and Money.
 Keynes believed governments could intervene in the
economy and affect the level of output and employment.
 During periods of low private demand, the government can
stimulate aggregate demand to lift the economy out of
recession.

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The Roots of Macroeconomics

 The Great Depression was

a period of severe
economic contraction and
high unemployment that
began in 1929 and
continued throughout the
1930s.

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The Great Depression
 The Great Depression was a severe worldwide economic
depression in the decade preceding World War II.
 The timing of the Great Depression varied across nations, but
in most countries it started in 1930 and lasted until the late
1930s or middle 1940s.
 It was the longest, deepest, and most widespread depression of
the 20th century.
 In the 21st century, the Great Depression is commonly used as
an example of how far the world's economy can decline.
 The depression originated in the U.S., after the fall in stock
prices that began around September 4, 1929, and became
worldwide news with the stock market crash of October 29,
1929.
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The Beginning
 The economic contraction that began with
the Great Crash triggered the most severe
economic downturn in the nation’s history—
the Great Depression.
 In the beginning in mid-1930, a severe
drought ravaged the agricultural heartland
of the US.
 The Great Depression lasted from 1929 until
the United States entered World War II in
1941. The stock market crash of 1929 did not
cause the Great Depression. Rather, both
the Great Crash and the Depression were
the result of deep underlying problems with
the country’s economy.
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The Beginning
 Together, government and business spent more in the first
half of 1930 than in the corresponding period of the
previous year.
 Consumers, many of whom had suffered severe losses in
the stock market the previous year, cut back their
expenditures

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Causes of Great Depression
 Banks failure
 Decline of international trade
 Overproduction of agricultural goods
 Over production of industrial goods
 Unequal distribution of wealth
 Decline of farming industry

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 IBS B

Macro Economics

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Module 1

Learning objectives
 Microeconomics Vs. Macroeconomics
 Goals of Macroeconomic policy
 Objectives of Macroeconomics
 Instruments of Macroeconomics

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Results of Great Depression
 Nations economy crashed.
 Farmers struggled a lot.
 Rising price resulted in declining of consumers.
 Gap between rich and poor widened.
 Banks failed.
 Gross National Product decreased,
 Unemployment increased, hardship, homelessness
increased.

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World Wide Effects
 AUSTRALIA
 EAST ASIA
 FRANCE
 GERMANY
 LATIN AMERICA
 INDIA
 USA

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How Great Depression Ended
 https://www.youtube.com/watch?v=eXVDNM2UyE4

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Macro Economics
 How do we determine these aggregates and assess the
Country over a period of time – Eg which stage of business
Cycle is the country/world in?

 How to track and explain movements in these variables and

compare countries over a period of time on all these
variables?

 Give policy recommendations for improving the overall well

being of the economy? fiscal/ Monetary policy Investments
etc.

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Positive and Normative Economics

 Micro economics is largely positive in nature all statements

in Microeconomics are empirically verifiable Eg. LAW OF
DEMAND.

 Macro economics concerns itself with Value judgments Eg.

inflation is bad for the country.

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Goals of Macro Economics

 Full employment
 Price stability
 Economic growth
 Balance of payment equilibrium and exchange rate stability
 Social objectives

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Important Issues in Macro Economics
 Macroeconomics, the study of the economy, addresses many
topical issues:
 Why does the cost of living keep rising?
 Why are millions of people unemployed, even when the
economy is booming?
 What causes recessions?
 Can the government do anything to combat recessions? Should
it?
 What is the government budget deficit? How does it affect the
economy?
 Why does the India have such a huge trade deficit?
 Why are so many countries poor? What policies might help them
grow out of poverty?
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GDP Ranking 2021
 https://statisticstimes.com/economy/projected-world-gdp-r
anking.php

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GDP Ranking 2021

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Richest Countries of the World
 https://worldpopulationreview.com/country rankings/richest-countries-i
n-the-world

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Richest Countries of the World

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Poorest Countries of the World
 https://worldpopulationreview.com/country-rankings/poorest-countries-
in-the-world

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Poorest Countries of the World

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Government in the Macro Economy

 There are three kinds of policy that the government has

used to influence the macro economy:
 Fiscal policy
 Government policies concerning taxes and spending.
 Monetary policy
 Tools used by the Central Bank to control the quantity of
money in the economy.
 Growth or supply-side policies
▪ Government policies that focus on stimulating
aggregate supply instead of aggregate demand.

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Components of Macro Economics

 Macroeconomics focuses on four groups

 Households
 Firms (the private Sector)
 The government (the public sector)
 Rest of the world (the international sector)

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Components of Macro Economy

The circular flow diagram shows the income received and

payments made by each sector of the economy.

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Circular Flow of Money-Two Sector

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Circular Flow of Money- Saving,
Investment

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Three Market Arenas
 Households, firms, the government, and the rest of the
world all interact in three different market arenas
 Goods-and-services market
 Labor market
 Money (financial) market

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Three Market Arenas
 Households and the government purchase goods and services
(demand) from firms in the goods-and services market, and
firms supply to the goods and services market.
 In the labor market, firms and government purchase (demand)
labor from households (supply).
 In the money market—sometimes called the financial market—
households purchase stocks and bonds from firms.
 Households supply funds to this market in the expectation of
earning income, and also demand (borrow) funds from this
market.
 Firms, government, and the rest of the world also engage in
borrowing and lending, coordinated by financial institutions.

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Circular Flow of Money-Three Sector

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Circular Flow of Money-Four Sector

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Macroeconomic Concerns

Three of the major concerns of macroeconomics are:

 Inflation
 Output growth
 Unemployment
Concepts of Macro Economics
 Stock and flow
 Partial and general equilibrium
 Growth and development

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Goals and Importance of Macro
Economics
 To achieve higher level of GDP
 To achieve higher level of employment
 Stability of prices
 Formulation of economic policies
 Achievement of economic development.

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School of Thoughts
 Classical school
 Neo-classical school
 New classical school
 Keynesian economics

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Post- Keynesian Developments in
Macroeconomics
 Monetarism
 Monetarists led by American economist Milton Friedman
criticised Keynes’ macroeconomics and developed a new
idea that monetary policy is the prime engine in causing
fluctuations in economic activity by bringing about change in
aggregate demand. He stressed that even the Great
Depression of 1930s was primarily caused by tight monetary
policy adopted at that time.
 Monetarists believe that inflation is always and everywhere a
monetary phenomenon. According to them, inflation is
caused by rapid expansion of money supply in the economy
and suggest a constant growth rate of money supply to
control inflation.
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Post- Keynesian Developments in
Macroeconomics
 Supply- side Economics
 The failure of Keynesians to deal with stagflation (high inflation
with high rate of unemployment) led supply- side economics.
 Supply- side economists pointed out that it was supply- shocks,
delivered among others by reduction in oil supplies and increase in
oil prices that caused the problem of stagflation. As a result of
contraction in supply due to the adverse supply shocks, given the
aggregate demand curve, price level and inflation rate could rise
on the one hand and aggregate output could fall giving rise to
more unemployment on the other.
 Supply- side economists suggest that for the expansion in
aggregate supply and thereby increase in employment
opportunities, incentives to work, save and invest more were
required to be promoted.
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Post- Keynesian Developments in
Macroeconomics
 Rational Expectations Theory.
 According to the new classical macroeconomic theory,
consumers, workers and producers behave rationally to
promote their interests and welfare. On the basis of their
rational expectations, based on all the available information,
they make quick adjustments in their behaviour.
 According to the new classical macroeconomists or the
profounder of rational expectation theory, involuntary
unemployment cannot prevail.
 In the Keynesian theory deficit in government budget leads to
increase in aggregate demand and will therefore promote
private investment. On the other hand, according to rational
expectations theory, budget deficit will cause rate of interest to
rise which will discourage private investment.
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Decoding the Basic Macro
Economics Equation

Y = C + I + G + (X-M)

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 Thank You

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