Post Graduate Diploma in

Management

Business Economics
Session: Macroeconomics
Course: Business Economics

Session: Macroeconomics

Instructor: Pallavi Gupta (PhD Development Economics)

An economic indicator

Any instrument that can be used by

analysts to indicate or predict overall
economic health/ growth/
investments.

1. Time of release? 2. Source?

- Leading indicators
- Coincident indicators
- Lagging indicators
GDP: The calculation encompasses all
private and public consumption,
government outlays, investments,
additions to private inventories, paid-in
construction costs, and the foreign
balance of trade.
Remember: Exports are added to the
value and imports are subtracted.

The concept of GDP was first proposed

in 1937 in a report to the U.S. Congress
in response to the Great Depression.

Conceived of and presented by an

economist at the National Bureau of
Economic Research, Simon Kuznets.

Prior to this, GNP was popularly used

system of measurement.
HOW TO CALCULATE
GDP?
1. Expenditure Approach/ Spending
Approach:

GDP = C + G + I + NX

2. Output Approach/ Production

Approach

The expenditure approach projects

forward from costs, the production
approach looks backward from the point
of a state of completed economic
activity.

3. Income Approach
https://www.visualcapitalist.com/80-trillion-world-economy-one-chart/

Q. Which country has the highest trade deficit & which has highest trade surplus?
Shortcomings of GDP...
- Ignores the informal sector of the economy
- Counts unproductive and even destructive
activities as gains
- More focused on material outputs and less on
overall wellbeing
- Geographically limited in scope
- Leaves out intermediate spending and
transactions between businesses
Is GDP a good measure?

“Economics” by Samuelson & Nordhaus

summarise the importance of GDP.

They say, “the ability of GDP to present an

overall picture of state of economy is
similar to that of a satellite in space that
surveys weather across the entire
continent.”
What are your views? Try identify one shortcoming of GDP. Let’s Discuss
Sources of GDP.. let’s look
https://data.worldbank.org/

https://www.worldbank.org/en/country/india

https://www.imf.org/en/Data

https://www.oecd-ilibrary.org/

https://www.oecd.org/india/

https://www.rbi.org.in/
 Macroeconomic Model#2

ISLM Model

(Investments, Savings, Liquidity

Preference, Money supply)

The model divides economy into :

- Market for Assets/ goods

market
- Market for Money/ financial.
market

And shows the short run equilibrium

between the two markets.
 Macroeconomic Model#1

AD – AS used in determining the

changes in

• Output
• Employment
• Inflation

AD IS THE TOTAL AGG. QUANTITY OR

OUTPUT THAT IS WILLINGLY BOUGHT
AT A GIVEN LEVEL OF PRICES

AS IS THE TOTAL SUPPLY OF GOODS

AND SERVICES PRODUCED IN AN
ECONOMY
AGGREGATE
DEMAND AND
AGGREGATE
SUPPLY - taken
together
Recession

Expansion

Expansionary or Contractionary Policy

Recession and Deflation : Fall in Aggregate Demand
Types of inflation

Demand Pull

Increase in Aggregate demand without

an adequate increase in supply.

When consumer demand outpaces the

available supply of many types of
consumer goods, demand-pull inflation
sets in, forcing an overall increase in
the cost of living.

When the aggregate demand in an

economy strongly outweighs the
aggregate supply, prices go up. This is
the most common cause of inflation.
Recession and Inflation: Decrease in Aggregate Supply
Types of inflation

Cost Push

Cost-push inflation occurs when overall

prices increase (inflation) due to
increases in the cost of wages and raw
materials.

Higher costs of production can

decrease the aggregate supply in the
economy. Since the demand for goods
hasn't changed, the price increases
from production are passed onto
consumers creating cost-push inflation.
Features: Demand falls, economic activity slows down, unsold
goods, low wages, low prices and rise in unemployment

Q1. Can you identify two years when recessions were deflationary?

Q2. Can you identify the main cause of a deflationary recession?

Q3. A recent example… ?

Features : Prices rises, increased costs, Wages rises, fall in
supply, unemployment rises; output falls and GDP falls
Q1. Can you identify a major cause of inflationary recession around
the world?
Q2.Which year was it?
Q3. What is another name for such inflation, esp with increased
unemployment?
INFLATION AND RECESSION OR DEFLATION AND RECESSION?
Can you think of the type of economic phase we are undergoing now ..?

Inflation along with Recession Deflation along with Recession

Prices rises, Unemployment rises; Output falls and GDP falls
Examples: rise in price of crude oil and energy worldwide.
(1974, 2008, 2012)
Can you respond to fall in output to counter inflation by
printing more money?
Demand falls, Economic activity slows down, Unsold goods,
Low wages, Low prices and Rise in unemployment rates.
Examples: Demand led recessions
(1929-32, 1981, 1991, 2000)
Can you guess a common cause for it in India?

What can we call this phase ….? What can we call this phase…?
Recession and fall in investment and aggregate demand
Recession and Unemployment: fall in aggregate output
Recession and Consumption Expenditure and Savings
Recession with Deflation & Recession with Inflation
 Clippings from the news..
1929 the Great Depression “Between 1930 and 1933, about 9,000 banks failed—4,000 in 1933 alone. By March 4, 1933,
the banks in every state were either temporarily closed or operating under restrictions…..” Among the other causes of the stock
market crash of 1929 were low wages, the proliferation of debt, a struggling agricultural sector and an excess of large bank
loans that could not be liquidated…”

1974 Recessions “The 1974-1975 Recession in the U.S. Policy makers in 1974 perceived inflation as a major problem. The
Federal Reserve pursued a tighter monetary policy which produced higher interest rates which reduced the level of
investment purchases…The pre-1974 recession level of 4.6% unemployment was not reached again until November 1997,
when the Federal Reserve deviated from its prior policy…”

1991 Recessions (UK) “The UK recession of 1991 was primarily caused by high-interest rates, falling house prices and an
overvalued exchange rate. The recession also came after the late 1980s economic boom – a period of high economic growth and
rising inflation… due to restrictive monetary policy enacted by central banks, primarily in response to inflation concerns,
the loss of consumer and business confidence as a result of the 1990 oil price shock..”

1991 Recessions (India) “The 1991 Indian economic crisis was an economic crisis in India that resulted from poor economic
policies, inefficient public sector units, and the resulting trade deficits leading to balance of payments crisis..caused mainly
by high fiscal deficits, the loss of confidence in the government, and mounting current account deficits…Singh worked to
bring the new economic policy in 1991. The main objectives of the policy were globalisation, building foreign reserves,
higher economic growth, economic stabilisation, and building the gap between public and private sectors..”
 Clippings from the news..
Early 2000 “The collapse of the dotcom bubble, the 9/11 attacks, and a series of accounting scandals at major U.S.
corporations contributed to this relatively mild contraction of the U.S. economy...decline in economic activity which
mainly occurred in developed countries..From 2000 to 2001, the Federal Reserve, In the wake of the 2001 recession
and the World Trade Center attacks of 9/11/2001, the U.S. Federal Reserve pushed interest rates to the lowest levels
seen up to that time in the post-Bretton Woods era in an attempt to maintain economic stability..

2008 The Great Recession “The Great Recession was the sharp decline in economic activity during the late 2000s. It
is considered the most significant downturn since the Great Depression...during which U.S. GDP declined by 0.3% in
2008 and 2.8% in 2009 and unemployment briefly reached 10%,. failure on the part of the government to regulate the
financial industry. This failure to regulate included the Fed’s inability to curb toxic mortgage lending. too many
financial firms taking on too much risk..The shadow banking system, which included investment firms, grew to rival
the depository banking system but was not under the same scrutiny or regulation. The Fed held low interest rates
through mid-2004. Combined with federal policy to encourage home ownership.. However, from 2004 through 2006, the
Federal Reserve steadily increased interest rates in an attempt to maintain stable rates of inflation in the
economy..When the shadow banking system failed. excessive borrowing..loans began to reset at much higher rates than
many borrowers expected or were led to expect. The result was the bursting of what was later widely recognized to be a
housing bubble..
 Clippings from the news..
2008 impact on India .. 2012-13 recessions “The initial impact on India was muted: GDP growth slowed from 9% in
2007-08 to 7.8% in April-September 2008, still a very high rate. ... In 1997, India's foreign exchange reserves were
strained, interest rates went sky-high, companies defaulted on loans and dragged down banks ..India's trade
collapsed alongside global trade, although its decline started earlier due to a concerted effort by the Reserve Bank of
India to cool the economy in 2008.

…In 2012 the Indian economy also lacked momentum in infrastructure investment and development. There was an
increased gap between supply and demand for electricity,some worrying trends include a slowdown in the
manufacturing and mining sectors, both of which are labour intensive sectors and crucial for the growth of other
sectors. Also worrying was a widening trade gap and poor investments.

….Persistent price rises, even during the period where commodity prices were down internationally, does not
leave much space for monetary easing. It is hoped that the government will carry out reforms including fiscal
consolidation and regaining investor confidence... However, next year’s budget is the last one for the present
government and they may revert to populist measures instead of taking strong economic measures. In that
case, any hopes for fiscal consolidation will be lost.“
Application of shift in
Demand & Supply curves
Exchange Rates
The rate at which Indians can
exchange foreign and domestic goods
depends on 2 things:
1. Price of the goods in local
currency
2. Exchange rates
Relative price of currencies of two
countries - NER
Relative price of goods of two
countries - RER
RER = NER x (Price of domestic goods/
Price of foreign goods)
If the domestic price rises (inflation),
the value of rupee falls and the RER will
fall. A low RER means that foreign
goods are relatively expensive,
domestic goods are relatively cheap.
Application of
Demand & Supply
curves in exchange
rates
Therefore, we see an inverse
relation between domestic
inflation and NER

percentage change in Nominal

Exchange Rate between INR & $

= percentage change in Real

Exchange Rate + Difference
between inflation
 Application of Demand &
Supply curves in exchange
rates

Demand for Foreign Exchange (US$)

Supply for Foreign Exchange (US$)

Equilibrium Exchange Rate

Application of shift in Demand &
Supply curves in exchange rates

Changes in the Equilibrium

Shifts in the Supply for

Foreign Exchange (US$)

Increase in supply of US$

lowers the value of US$ and
appreciates the rupee.

Rupee here is stronger at 60

per 1$ here
Application of shift in Demand &
Supply curves in exchange rates

Changes in the Equilibrium

Shifts in the Demand for Foreign

Exchange

Increase in demand for US$

appreciates the value of the US$
and depreciates the rupee.

The rupee is weaker at 63 per 1$

here
Q1. Look up the current rate of exchange

Q2. Name the currencies that are valued more than the US$?

Q3. What type of market is the foreign exchange market?

Economic stimulus

Economic stimulus is a conservative

approach to expansionary fiscal and
monetary policy that relies on
encouraging private sector spending to
make up for losses of aggregate
demand.

Economists still argue over the

usefulness of coordinated economic
stimulus, with some claiming that in the
long run, it can do more harm than
short-term good.
Monetary Policy
The actions undertaken by a nation's central
bank to control money supply and achieve
sustainable economic growth, keep
unemployment low, and maintain foreign
exchange (forex) and inflation rates in a
predictable range.

Monetary policy can be broadly classified as

either expansionary or contractionary.

RBI Tools: Open market operations, CRRs,

SLR, Direct lending to banks, Bank reserve
requirements, Unconventional emergency
lending programs, QE, and managing market
expectations.
Growth and Interest Rates.
Fiscal Policy
John Maynard Keynes argued that economic
recessions are due to a deficiency in the
consumption spending and business investment
components of aggregate demand.

Keynes believed that governments could

stabilize the business cycle and regulate
economic output by adjusting spending and tax
policies to make up for the shortfalls of the
private sector.

In Keynesian economics, aggregate demand or

spending is what drives the performance and
growth of the economy.
 Deficits or surplus?
• REMEMBER TO STABILIZE THE
ECONOMY, THE GOVERNMENT SHOULD
RUN LARGE BUDGET DEFICITS DURING
ECONOMIC DOWNTURNS AND

• THE GOVERNMENT SHOULD RUN

BUDGET SURPLUS DURING AN
ECONOMIC BOOM OR WHEN ECONOMY
IS GROWING.

https://www.worldatlas.com/articles/countries-
with-the-top-budget-surplus.html

https://data.oecd.org/gga/general-governmen
t-deficit.htm

https://datalab.usaspending.gov/americas-fin
ance-guide/deficit/trends/

https://www.statista.com/statistics/271318/bu
Let’s interpret The ET (26th March 2022)

1. Capex push to maximise multiplier effect,

says FM
Read more at:
https://economictimes.indiatimes.com/news/economy/finance/capex-push-to-
maximise-multiplier-effect-says-fm/articleshow/90452341.cms?utm_source=c
ontentofinterest&utm_medium=text&utm_campaign=cppst

2. RBI board reviews economic situation

Read more at:
https://economictimes.indiatimes.com/news/economy/policy/rbi-board-review
s-economic-situation/articleshow/87362336.cms?utm_source=contentofintere
st&utm_medium=text&utm_campaign=cppst

3. Labour market witnesses uneven recovery in

January
Read more at:
https://economictimes.indiatimes.com/news/economy/indicators/labour-marke
t-witnesses-uneven-recovery-in-january/articleshow/90450070.cms?utm_sou
rce=contentofinterest&utm_medium=text&utm_campaign=cppst

4. Goldman sees half-percentage point Fed hikes

in May & June
HOW DOES THE FISCAL MULTIPLIER WORK?
k = Y/J, where k is multiplier; Y is change in real GDP; J is change in injections made by the government
Economic Benchmark: Yield Curves
Why: To predict GROWTH & OUTPUT

Yield is the amount an investment earns

during a time period, usually reflected
as a percentage.

A yield curve is a line that plots yields

(interest rates) of bonds having equal
credit quality but differing maturity
dates. The slope of the yield curve gives
an idea of future interest rate changes
and economic activity.

There are three main shapes of yield

curve shapes:

normal (upward sloping curve), inverted

(downward sloping curve), and flat
(horizontal).
Keep learning…

Thank you!