Macroeconomics

Macroeconomic Analysis and Policy

Session-1
SessionBiswa Swarup Misra
Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Learning Objectives
• What is Macroeconomics?
• Macroeconomics vs. Microeconomics
• Why Study Macroeconomics?
• Influential macroeconomic events
• Macro Economic Policy
• Key Macroeconomic Variables
Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Rules of the Class
• Either you speak or the instructor.
• No cell phones/laptops
• Attendance can be taken any time during the session.
• Do not enter the class room after the scheduled class time • You can leave the classroom in between a session but are not allowed to enter again in that session

Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Rules for Examinations
• Minimum Pass Marks - 30. <30 = F Grade
• There will Quizzes, Mid term and End term examinations and an Individual Assignment
• Quiz would be pre - announced
• No undue request for make up quiz

Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Grading Pattern (Tentative)
1. Quizzes

-

30

1. Mid Term

-

15

1. End Term

-

35

1. Assignments and Class Participation

Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

20

Biswa Swarup Misra

How to Understand Economics
Possible suggestions:
• A study in w Resource optimsation w Resource management w Resource Allocation
• More generic way- An exercise in Constrained
Optimisation.
• Why constrained opmisation not resource optimisation - Resources need not be the only constraint. Other constraints could be political economy constraints, governance constraints, ecological constraints etc.
Macroeconomic Analysis and Policy
Biswa Swarup Misra
PDF created with pdfFactory Pro trial version www.pdffactory.com

Implications of Unfair Practices
• Any body found adopting unfair means in any examination will get negative marks equivalent to the maximum marks allotted for that examination. • Suspicion of adopting unfair means is enough.
• You will follow the written guidelines in examination Question paper and Answer sheet
(need not be announced during the examination) • Assignments will be subject to plagiarism test.
Tolerance limit 5per cent
Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

What is Macroeconomics?
• Macroeconomics Deals with the economy as a whole.
• Macroeconomics focuses on the determinants of national income, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices.
• Macroeconomics may be defined as that branch of economic analysis which studies the behaviour of not one particular unit, but of all the units combined together. • The following are the fields covered by macroeconomics: Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Fields of Macroeconomics
• Theory of Income, Output and Employment with its three constituents, namely,
§ the theory of consumption function,
§ the theory of investment function and
§ the theory of business cycles or economic fluctuations.

• Theory of Prices with its constituents of the theories of inflation and deflation.
• Theory of Economic Growth dealing with the long-run growth of income, output and employment.
• Macro Theory of Distribution dealing with the relative shares of wages and profits in the total national income.

Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Macroeconomists...
• Try to figure out why overall economic activity rises and falls
• Try to understand what determines the level and rate of change of overall prices
• Study other variables that play a major role in determining the overall levels of production, income, employment, and prices

Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Macroeconomists...
• The words Micro and Macro have Greek origins
Mikros and Makros.
• Mikros implies small and Makros large.
• Microeconomics is concerned with the most
‘Elemental’ economic units, like consumer, firm, input, market and industry.

Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Microeconomics vs. Macroeconomic
• The micro-macro distinction in economics is not based solely on size.
• Ex: Studying pricing policy of GE- Realm of microeconomics • Studying inflation in a small country like Rwanada or
Burundi - Realm of Macroeconomics
• Microeconomics focuses on decisions of individual units however large they may be; Macroeconomics concentrates on behaviour of entire economies, no matter how small.
• Macroeconomics study the overall price level, unemployment rate and other things that we call economic aggregates. Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Economic aggregates
• Economic aggregates is an abstraction that people use to describe some salient features of the economic life.
• Although we observe prices of individual products, we never see the price level.
• Domestic product/national output is also an abstract notion, though it represents the total production in an economy, it is unobservable. • The process by which real objects such as computers, wheat, wine are combined into an abstraction called total domestic product is aggregation
Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Limitations of Aggregation
• Ignores distinction amongst the different products.
• Although composition of demand and supply in different markets matters, it may be of little consequence for the economy wide issues such as growth, inflation, unemployment etc. - the issues that concern macroeconomics
• During economic fluctuations, markets for different products tend to move up or down together.
Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Macroeconomics vs. Microeconomics
Let’s look more carefully at the difference between microeconomic and macroeconomic questions.
MICROECONOMIC QUESTIONS
Go to business school or take a job? What determines the salary offered by Citibank to Cherie
Camajo, a new Columbia MBA?

Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

MACROECONOMIC
QUESTIONS
How many people are employed in the economy as a whole? What determines the share workers in the total income in a given year?

Biswa Swarup Misra

Macroeconomics vs. Microeconomics
MICROECONOMIC QUESTIONS
What determines the cost to a university or college of offering a new course?
What government policies should be adopted to make it easier for low-income students to attend college?
What determines whether
Citibank opens a new office in
Shanghai?

Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

MACROECONOMIC
QUESTIONS
What determines the overall level of prices in the economy as a whole?
What government policies should be adopted to promote full employment and growth in the economy as a whole?
What determines the overall trade in goods, services and financial assets between the
U.S. and the rest of the world?
Biswa Swarup Misra

Macroeconomics vs. Microeconomics
• In macroeconomics, the behavior of the whole macroeconomy is, indeed, greater than the sum of individual actions and market outcomes.
• Example: Paradox of thrift: when families and businesses are worried about the possibility of economic hard times, they prepare by cutting their spending.
• This reduction in spending depresses the economy as consumers spend less and businesses react by laying off workers. • As a result, families and businesses may end up worse off than if they hadn’t tried to act responsibly by cutting their spending. Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Why Macroeconomics Matters
• Cultural Literacy wability to follow and participate in public debates and discussions wability to understand news reports on changes in the economy
Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Why Macroeconomics Matters
• Self-Interest weffects of the macroeconomy on our daily lives wunderstanding of changing opportunities as the economy fluctuates Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Why Macroeconomics Matters
• Civic Responsibility wmore informed voting wmore responsible macroeconomic policy Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Influential Macroeconomic Events
• The first and most important macroeconomic event was the Great Depression of the 1930s. w Between 1929 and 1933, a $1,000 investment in the stock market fell to a value of $150. w Massive bank failures and unemployment rates approaching 25% devastated the American economy, with similar downturns spreading all over the world. w Business investment dropped from nearly 18% of gross domestic product in 1929 to under 4% in
1933.
Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

The Effect of the Depression
• Before the Depression, it was assumed that labor, capital, and output markets would keep the economy near full employment, with small fluctuations in wages, prices, and interest rates helping the economy to adjust to disruptions. w The Depression forced economists to reconsider this view of capitalist economies.

• British economist John Maynard Keynes led the profession in providing an explanation for periods of prolonged unemployment.

Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Depression Puzzle
• Herbert Hoover(1930) The fundamental assets of the nation has been unimpaired….The gigantic equipment and unparalled organisation for production and distribution are in many parts even stronger than two years ago”
• Franklin Roosevelt( 1933) Our distress comes from no failure of substance. We are stricken by no plague of locusts, Plenty is at our doorsteps but a generous use of it languishes in the very sight of the supply. Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Keynesian Diagnosis
• Keynes - Failure in the immaterial devices of the mind - Psychology and expectations w For some reason people had got it into their heads that the economy is in trouble and they need to save to prepare for the future.

• Actual output remained short of potential because of shortfall in demand.
• It is the governments’ responsibility to manage demand through monetary and fiscal policy
Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra

Response to Depression
• Enactment of the Glass Steagall Act in 1933.
• Enactment of FDIC Act. Concept of Deposit
Insurance was introduced.
• Repealing of Glass Steagall Act by the Gramm–
Leach–Bliley Act (GLB), also known as the Financial
Services Modernization Act of 1999.
• The GLB Act of 1999 allowed commercial banks, investment banks, securities firms, and insurance companies were allowed to consolidate.
• Many think repealing of the Glass Steagall Act was responsible for great Financial Crisis of 2007.
Macroeconomic Analysis and Policy
PDF created with pdfFactory Pro trial version www.pdffactory.com

Biswa Swarup Misra