Macro Economics

Concept
 CONTENTS

• Meaning of Economics

• Scope of Economics

• Macro Economics Concept

 Meaning of Economics

 Economics is a science that studies human

behavior which aims at allocation of
scarce/limited resources in such a way that :

 Consumer can maximize their satisfaction.

 Producers can maximize their profits.
 Society can maximize its social welfare.
 Scope of Economics

• Microeconomics
• Macroeconomics
 Micro Economics
•Micro comes from Greek word mikros, means
“Small”.

• Study of economic behavior of small economic

units:
- An individual consumer
- An individual organization
- An individual market in an economy

• Deals with the economic interactions of a specific

person, a single entity, or a company for buying and
selling goods in markets.
 Macro Economics
•Macro comes from Greek word makros, means
“Large”.

• Study of the performance, structure, behavior and

decision-making of an economy as a whole.
- Aggregate National Income
- Total Consumption
- Total Demand
- Total Saving and Investment
- Total employment

•Concerned with the problem of Unemployment,

Economic fluctuations, Inflation or deflation,
International Trade and Economic growth.
INFLATION
 Contents

• Concept
• Types of Inflation
• Causes of Inflation
• Measures to Control Inflation
 Course Objective

• Understand various types of inflation

• Analyse the reasons behind inflation

• Explore measures to curb it

Inflation means persistent rise
in general price level
 DEFINITIONS
▶ Samuelson, “By inflation we mean a time of
generally rising prices.”

▶ Shapiro, “ Inflation is
simply a persistent and
appreciable rise in general price level.”

▶ Gardner ackley, “ We
define inflation as rising prices and not
as high prices.”

▶ Coulbourn, “Inflation is the

stage of too much money
 Types of Inflation

 Degree of government control

 Basis of time
 Rate/Severity of Inflation
 Basis of Scope
 Types of Inflation
 Degree of government control
Open Inflation- No steps are taken to control
the rising prices.
▶ Market is allowed to function without government
interferences.
▶ In this, prices go up freely due to supply-demand
imbalances .

Suppressed Inflation- Rising prices are checked

by administrative measures like rationing, price
control, etc.
▶ Upward pressure on the prices is not allowed
to influence the managed price.
 Basis of time
1. War Time Inflation- Inflation during the course
of war.

2. Post War Inflation- Money supply with public

increases but production of good does not
increases in the same proportion.

3. Peace Time Inflation- Inflation caused by

deficit financing.
 Rate/Severity of Inflation
1. Creeping Inflation- Prices rise very slowly ie. 2% -
3%, considered good for a growing economy.

2. Walking/ Trotting Inflation- Price rises moderately

and inflation gains momentum ie.around 5%,
considered as a warning signal.

3. Running Inflation- Prices rise rapidly at a speed of

10%-20% per annum.

4. Galloping (Hyper Inflation/Hydra-headed Monster)-

Prices rise very fast at an unexpected rate ie. 20%-
100%. Example: The Hyper Inflation in Germany
after Ist World War
 Basis of Scope

1. Sectoral/Sporadic Inflation- Inflation affects

only particular part,sector or good of a country.
For example, rise in food prices due to bad
monsoon.
2. Comprehensive Inflation- Prices of all the
commodities rise in an economy and is not
confined to a particular part.
3. Wage Induced Inflation- Higher wages-higher
cost of production-higher prices.
4. Profit Induced/Mark-up Inflation- Adding
high rate of profit or mark up to the price of the
good leading to high prices.
 Stagflation
Stagflation characterizes a situation in which on
one hand prices rise but on the other hand there
is no increase in production and employment.

▶ Caused by inappropriate monetary

and/or fiscal policy.
▶ For example, a government might
increase taxes on businesses, sharply raise
the minimum wage.
 Causes of Inflation

• Demand-Pull Inflation

• Cost-Push Inflation
 Demand-Pull Inflation
The general price level rises because the demand for
goods and services exceeds the supply available at the
existing prices.
Shapiro, Edward

▶ Increase in Money Supply

▶ Increase in Disposable Income
▶ Deficit Financing
▶ Black Money
Cost-Push Inflation
The organized groups, both business and labour, establish
higher prices for their goods or services that would prevail
in a competitive market.
J.C Ranlert

▶ Wage Induced Inflation

▶ Profit-Push Inflation
▶ Material-Push Inflation
Measures to Control Inflation

• Monetary Measures
• Fiscal Measures
• Other Measures
 Monetary Measures
Monetary policy is the policy used by the government of a
country to control inflation or deflation in an economy, and the
policy is implemented by the central bank through the ministry of
finance through following measures and instruments:

Measures

Demonetization of Currency: In the year 2016, the government

of India announced the discontinuation of all ₹500 and ₹1,000
banknotes.
• Issue of New Currency: India has issued many new currencies in
recent times.
 Instruments

Cash Reserve Ratio: Certain minimum amount of deposit as

reserves. The percentage of cash required to be kept in reserves as
against the bank's total deposits.

Repo Rate : Whenever the banks have any shortage of funds they
can borrow it from RBI. Repo rate is the rate at which banks
borrow rupees from RBI.

Reverse Repo Rate: The rate at which the central bank of a

country borrows money from commercial banks within the
country.

Rationing of Credit: Method of controlling and regulating the

purpose for which credit is granted by commercial bank. It aims to
limit the total amount of loans and advances granted by
commercial banks.
 Fiscal Measures
• Increase in Taxes
▶ Personal, Corporate and Commodity Taxes are increased.
▶ The tax evaders are heavily Penalized.
• Reduces Personal Consumption Expenditure.

• Increase in Savings
▶ Reduce Disposable Income.
▶ Compulsory Savings or Deferred Payments.

• Reduction in Unnecessary Expenditure

▶ Reduce Expenditure on Non Development Activities like religious and
political activities.
 Other Measures

• Increase Production
• Rational Wage Policy
▶ Thank you