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Macroeconomics Ganesh Kumar N
Macroeconomics Ganesh Kumar N
Loans to get costlier, RBI hikes key lending rates, PTI, Mumbai, September 16, 2011 Concerned over high inflation, the Reserve Bank on Friday raised key interest rates by 25 basis points, its 12th such hike since March, 2010. Bankers want RBI to halt policy rate hike, 4 Oct, 2011, IST, PTI Fearing a deterioration in asset quality and to fire up credit demand, some of the top bankers today urged the Reserve Bank to pause on its interest rate hike cycle.
Manufacturing growth lowest in 30 months BS Reporter / New Delhi October 4, 2011. Fears of sub-8% economic growth for the third quarter in a row Current account deficit at 3.1% of GDP in Q1, BS Reporter / Mumbai October 1, 2011 Indias current account deficit hit 3.1 per cent of gross domestic product (GDP) at Juneend, conclusion of the first quarter. US Federal Reserve ramps up aid to economy with $400 billion stimulus Sept. 22, 2011, Reuters
Agenda
Course administration Overview of recent macroeconomic data/events Scope of macroeconomics Observed facts of economies Long run, short run, medium run models Business cycles
Course Evaluation
Component %age
20 35
35 10
20 07
10 12 0 2 4 6 8
-2
Ja n Ap r Ju l
O ct 20 08 Ja n Ap r Ju l O ct 20 09 Ja n Ap r Ju l O ct 20 10 Ja n Ap r Ju l
Scope of Macroeconomics
Over long periods of time economy grows at steady rates Long run behaviour of the economy In some periods inflation rates are much higher 1970s; Medium run behaviour of the economy. In bad year unemployment rate rises short run behaviour year to year fluctuations Macroeconomcs help us undertsand the reasons for these observed facts
1960
1970
1980
1990
Long run
Aggregate supply: amount of output an economy can produce given resources and technology Aggregate demand: Total demand for goods & services Economy with fixed productive capacity Output is determined by productive capacity, price level is determined by demand relative to the output
AS
Level of output is determined by productive capacity Inflation (price rise) is generally due outcome due to changes in AD
Output, Y
AD
Y0
Time
Output, Y
Short run
Fluctuations in output around the potential output Flat AS: Any level of output can be produced at a given price Underlying assumption is output does not affect prices in the short run Fluctuations in output are due to fluctuations in AD
Short run
P
AS
AD
Y0
Output, Y
Medium run
P
Positively sloping AS: When AD demand pushes output beyond sustainable level as per the long run model, firms start raising prices
Output, Y
AS
AD
Y0
Business cycles
Inflation, growth and output are related through business cycles It is a regular pattern of expansion (recovery) and contraction (recession) in economic activity around the path of trend growth
Business Cycles
Peak
Recession Recovery
Trough
1975 1976 1977 1978 1979 1980 1981 1982
A recession is a decline in output that persists for more than two consecutive quarters in a year.
Inflation & its measurement WPI, CPI, GDP deflator Nominal & real variables Data sources
Consumption Exp.
Goods and Services Household Sector
FIRMS
Govt
Capital Mkt Saving
Tax
Consumption Exp.
Goods and Services Household Sector
FIRMS
1. Product approach
2. Income approach 3. Expenditure approach
Quantity
Market Value
10,000 5,000
2010
Items
Oranges Apples Total
Price (Rs.)
30 45
Quantity
20,000 10,000
Market Value
Oranges
Apples Total
20
30
20,000
10,000
4,00,000
3,00,000 7,00,000
4162509
4493743
4879232
06-07 07-08 08-09 09-10 10-11 ---------------------------------------------------16.3 16.1 12.0 17.3 20.3 9.3 6.8 8.0 8.6
We look at different purposes for which domestically produced goods and services is demanded. Aggregate demand is the total demand for goods and services in the economy. AD= Consumption (C), Investment (I), Govt. expenditure (G), and net exports (NX). AD= C+I+G+NX Consumption Consumption is spending by household on food, clothing, education etc.
GDP deflator
GDP deflator: Measure of price index (Nominal GDP/Real GDP)*100 Our example: (10,50,000/7,00,000)*100 = 150 This means that prices have risen by 50% on an average over 2000-10.
4162509
4493743
4879232
Housing:
Clothing and foot wear: Misc. (Education, healthcare etc.):
16.41%
7.03% 23.95%
Y=C+I+G+NX
Y here is GDP at MP, C, Y, G, NX are all at market prices All taxes direct, indirect, corporate taxes etc. will reduce the income at the hands of the consumer and hence will reduce his consumption. But taxes collected will be spent by govt. which creates demand. Disposable income = GDP MP IDT-Corporate taxes Personal income tax (see last two slides, by repeated substitution we can get this. TA can be interpretted as all taxes.
1992 269 30 U.S TRADE AND BUDGET DEFICITS 1993 223 65 Budget Deficit 300
Billions of Dollars
Trade Deficit
Year
Other NI concepts
Gross National Product (GNP) (Market Prices)
Sources of Data
Government of India, Ministry of Statistics and programme Implementation Web site: http://mospi.gov.in/ CSO:The Central Statistical Organisation is responsible for coordination of statistical activities in the country, and evolving and maintaining statistical standards. Data: National accounts, CPI, WPI etc.f NSSO The National Sample Survey (NSS), initiated in the year 1950, is a nation-wide, large-scale, continuous survey operation conducted in the form of successive rounds. Surveys on consumption, employment.