Course: Introduction to Macroeconomics (802)

Level: MSc. Economics

Semester: Autumn,2020

Assignment No. 2

Q.1 Discuss the different between micro analysis of consumer behavior.

Micro Marketing

Micro marketing is a strategy where small groups of individuals having specified needs for products
within a market are targeted. The advertising campaigns that are part of the micro marketing strategy
are targeted towards an extremely specific group of customers. It should be the responsibility of a
business to identify the unique features that define the target group. Subsequently, it should adapt its
marketing campaign according to this pre-defined group of customers.

In micro marketing, the focus is on the activities carried out by individual firms, i.e. identifying the
requirements of consumers and providing their products to those consumers so as to fulfill their
requirements. Micro marketing concentrates to a large extent on performing research to comprehend
the fundamental needs of customers. These needs can be fulfilled by taking into account the four Ps –
product, price, place and promotion.

The field of micro marketing has undergone tremendous growth to turn into a robust tool that can be
used by business of various sizes to attract customers according to their products. The ultimate
objective of these businesses is to convert these customers into loyal and recurring customers.

Macro marketing

The Macro marketing strategy is one that views the marketing process as a whole. It is relevant for all
aspects of a business, including the link between the production process and the customer as well as the
global purchase behavior. The scope of macro marketing is always wide, i.e., it concentrates on those
aspects that extend much further than the scope of micro marketing. The macro marketing strategy is
concerned with problems central to the market and society. It is generally considered by the marketers
as a method through which they can evaluate the opportunities and limitations of marketing.

Macro marketing functions essentially involve eight activities – buying, selling, storing, transporting,
financing, standardizing and ranking, taking risks and sharing market information. These activities are
carried out to offer the goods and services required by the society.

Macro marketing is different from micro marketing in various aspects. These differences are described
in the following section.

Macro marketing is different from micro marketing in various aspects. These differences are described
in the following section.

Differences between micro marketing and macro marketing

The main points of difference between micro marketing and macro marketing are given below:
 1. Meaning

Micro refers to anything that is small in scale or scope, whereas macro refers to large in scale or scope.
Hence, micro marketing is focused on individual steps that are part of an overall process, whereas macro
marketing considers this same process in a holistic manner.

2. Scope

Micro marketing is related to anything, ranging from a particular production process to the overall
operations of an organization. On the other hand, macro marketing is related to the way the production
process is linked to the consumer and to purchase behavior on a global level.

3. Concerns

Micro marketing is concerned with individual consumer behavior, pricing techniques and decisions,
distribution channels, the way firms make decisions regarding the products to create and market,
decisions related to packaging and promotion and finally, brand image management. Macro marketing,
in contrast, is concerned with the laws regulating marketing activities, social responsibility, advertising
strategies that are socially a cceptable, efficiency of marketing mechanisms and the consumer behavior
patterns on the whole.

4. Purchasing target

In micro marketing, the purchasing target is the individual, with the focus being on identifying the likes
and requirements of individuals. The purchase target of macro marketing, however, is the highest
possible customer base. It is concerned about identifying the segments of society that make up the
target audience of its product, and how this product is offered to that target market.

5. Relationships and networks

The aim of micro marketing is to develop lasting and solid relationships with consumers. This process
seeks to generate repetitive sales by giving rise to brand loyalty at the individual level. On the other
hand, the objective of macro marketing is to ensure that resources are used most effectively at the
community level. The macro marketing strategy does not concentrate on generating an individualized
network; rather, it aims to develop a network of communities. This enables the brand to concentrate on
selling and distributing products to a large number of people, without focusing on developing long-term
relationships.

Micro marketing vs macro marketing – tabular comparison

MICRO MARKETING vs MACRO MARKETING

Micro Marketing Macro Marketing

Focuses on individual steps of the
process.
Related to production process and
overall operations of a company.
Focuses on the process as a whole.
Related to how the production
process is linked to the consumer
and the global purchase pattern
 Concerned with the individual conser
behavior and the four Ps – product,
price, promotion and place.
The insividual
Generate repetitive sales and brand
loyalty at the individual level
Concerned with laws regulating
marketing, social responsibility,
efficiency of marketing campaigns
and the overall consumer behavior
patterns
The maximum possible consumer
base
Effective use of resources at the
community level; developing a
network of communities

Conclusion – micro marketing vs macro marketing

Both micro and macro marketing are extremely important, and their use depends on what the focus of
the business is. Therefore, it is critical to obtain an understanding of these two concepts of marketing.
These strategies perform an important role in facilitating businesses to generate an effective marketing
strategy. An effective marketing strategy allows business to shift to an entirely new level and ensures
that it gains maximum success in terms of revenues and profits.

Q.2 Differentiate between gross investment and net investment. Can gross investment be positive
when net investment is nagative?

Gross investment refers to the total expenditure on buying capital goods over a specific period of time
without considering depreciation. On the other hand, Net investment considers depreciations and is
calculated by subtracting depreciation from gross investment. Investment refers to the amount invested
in purchasing financial assets. Investment is done in order to obtain a good target return over a specified
period of term. The target returns may be in any of the forms like an increase in the value of assets or
securities. It may also refer to a regular income obtained from securities or assets. There are different
types of investments like autonomous, induces, financial, real, planned, unplanned, gross and net. Gross
investment refers to the amount invested in purchase or construction of new capital goods. Net
investment is also related to gross investment. It is basically gross investment minus the depreciation on
existing capital. This depreciation is related to some investment which needs to be made in order to
replace obsoleted or worn out assets like plants and machineries. Or we can say that, Net investment =
gross investment – depreciation If gross investment is greater than depreciation over any period of time
then it directly refers that the net investment is positive which further implies that the capital stock has
increased. Similarly, if gross investment is less that depreciation, then in that case the net investment
tends to be negative and the capital stock declines. To understand the difference, one one can consider
this example, a factory starts the year with 20 machines. It buys 5 machines. 10 machines are worn out.
Now, the gross investment refers to the purchase of new machines which is 5, whereas at the end of the
year the total number of working machines = 20+5-4 = 21. This leads to actual gain of 21-20 = 1 machine,
which reflects the net investment. Thus, gross investment is the total amount spent on goods in order to
produce other goods and services, whereas net investment is the increase in productive stock.
Comparison between Net Investment:

It is estimated by subtracting capital depreciation from gross investment. The total amount spent on
purchasing new assets Net investment = gross investment – depreciation Gross Investment = a total
purchase or construction of new capital goods It helps in providing a sense that how much money is
being spent on capital items taking into considerations the losses like maintenance, wear and tear, etc.
Thus, it helps in expanding operations and improving efficiency. On neglecting the depreciations one
may have to face ad-hoc situations related to obsolete or worn out devices. Helps in determining the
total expenditure on capital goods The changes to the capital stock All new investment –The amount
spent by a company or an economy on capital assets, or gross investment, less depreciation. Net
investment helps give a sense of how much money a company is spending on capital items (such as
property, plants and equipment), which are used for operations. Subtracting depreciation from this
amount, or capital expenditure (since capital assets lose value over their life because of wear and tear,
obsolescence, etc.), provides a more accurate picture of the investment’s actual value.

Capital assets include property, plants, technology, equipment and any other assets that can improve
the productive capacity of an enterprise. INVESTOPEDIA EXPLAINS ‘Net Investment’ If gross investment
is consistently higher than depreciation, net investment will be positive, indicating that productive
capacity is increasing. Conversely, if gross investment is consistently lower than depreciation, net
investment will be negative, indicating that productive capacity is decreasing, which can be a potential
problem down the road. This is true for all entities, from the smallest companies to the largest
economies. Net investment is therefore a better indicator than gross investment of how much an
enterprise is investing in its business, since it takes depreciation into account. Investing an amount equal
to the total depreciation in a year is the minimum required to keep the asset base from shrinking. While
this may not be a problem for a year or two, net investment that is negative for a prolonged time period
will render the enterprise uncompetitive at some point.

A simple example will show how net investment is calculated. Suppose a company spends $1 million on
a new machine that has an expected life of 30 years and has a residual value of $100,000. Based on the
straight-line method of depreciation, annual depreciation would be $30,000 (i.e. {$1,000,000 -
$100,000} / 30). Therefore, the amount of net investment at the end of the first year would be
$970,000. Continued investment in capital assets is critical to an enterprise’s ongoing success. The net
investment amount required for a company depends on the sector it operates in, since all sectors are
not equally capital intensive. Sectors such as industrial products, goods producers, utilities and
telecommunications are more capital-intensive than sectors such as technology and consumer products.
Therefore, comparing net investment for different companies is most relevant when they are in the
same sector.Investment is time, energy, or matter spent in the hope of future benefits actualized within
a specified date or time frame.

Investment has different meanings in economics and finance. In economics, investment is the
accumulation of newly produced physical entities, such as factories, machinery, houses, and goods
inventories. In finance, investment is putting money into an asset with the expectation of capital
appreciation, dividends, and/or interest earnings. This may or may not be backed by research and
analysis. Most or all forms of investment involve some form of risk, such as investment in equities,
property, and even fixed interest securities which are subject, among other things, to inflation risk. It is
indispensable for project investors to identify and manage the risks related to the investment. In
macroeconomics, non-residential fixed investment is the amount purchased per unit time of goods
which are not consumed but are to be used for future production (i.e. capital). Examples include railroad
or factory construction. Investment in human capital includes costs of additional schooling or on-the-job
training.
Inventory investment is the accumulation of goods inventories; it can be positive or negative, and it can
be intended or unintended. In measures of national income and output, “gross investment”
(represented by the variable I ) is a component of gross domestic product (GDP), given in the formula
GDP = C + I + G + NX, where C is consumption, G is government spending, and NX is net exports, given by
the difference between the exports and imports, X – M. Thus investment is everything that remains of
total expenditure after consumption, government spending, and net exports are subtracted (i.e. I = GDP
– C – G – NX ). Non-residential fixed investment (such as new factories) and residential investment (new
houses) combine with inventory investment to make up I. “Net investment” deducts depreciation from
gross investment. Net fixed investment is the value of the net increase in the capital stock per year.
Fixed investment, as expenditure over a period of time (e.g., “per year”), is not capital but rather leads
to changes in the amount of capital.

The time dimension of investment makes it a flow. By contrast, capital is a stock—that is, accumulated
net investment to a point in time (such as December 31). Investment is often modeled as a function of
income and interest rates, given by the relation I =  f (Y, r). An increase in income encourages higher
investment, whereas a higher interest rate may discourage investment as it becomes more costly to
borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents
an opportunity cost of investing those funds rather than lending out that amount of money for interest.
In finance, investment is the purchase of an asset or item with the hope that it will generate income or
appreciate in the future and be sold at the higher price. It generally does not include deposits with a
bank or similar institution. The term investment is usually used when referring to a long-term outlook.
This is the opposite of trading or speculation, which are short-term practices involving a much higher
degree of risk.

Financial assets take many forms and can range from the ultra safe low return government bonds to
much higher risk higher reward international stocks. A good investment strategy will diversify the
portfolio according to the specified needs. The most famous and successful investor of all time is Warren
Buffett. In March 2013 Forbes magazine had Warren Buffett ranked as number 2 in their Forbes 400 list.
Buffett has advised in numerous articles and interviews that a good investment strategy is long term and
choosing the right assets to invest in requires due diligence. Edward O. Thorp was a very successful
hedge fund manager in the 1970s and 1980s that spoke of a similar approach. Another thing they both
have in common is a similar approach to managing investment money. No matter how successful the
fundamental pick is, without a proper money management strategy, full potential of the asset cannot be
reached. Both investors have been shown to use principles from the Kelly criterion for money
management.

Numerous interactive calculators which use the Kelly criterion can be found on-line. In contrast, dollar
(or pound etc.) cost averaging and market timing are phrases often used in marketing of collective
investments and can be said to be associated with speculation. Investments are often made indirectly
through intermediaries, such as pension funds, banks, brokers, and insurance companies. These
institutions may pool money received from a large number of individuals into funds such as investment
trusts, unit trusts, SICAVs etc. to make large scale investments. Each individual investor then has an
indirect or direct claim on the assets purchased, subject to charges levied by the intermediary, which
may be large and varied. It generally, does not include deposits with a bank or similar institution.
Investment usually involves diversification of assets in order to avoid unnecessary and unproductive risk.
The Code of Hammurabi (around 1700 BC) provided a legal framework for investment, establishing a
means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land.

Q.3 According to the solow model of economic growth, how would effect of an increase in
population growth rate have on long-run living standard’s?

Answer:-
The solow Growth Model is an exogenous model of economic growth that analyzes change in the level
of output in an economy over time as a result of changes in the population growth rate, the savings rate,
and the rate of technological progress.

As we develop the environment for the economic model, we will have to make assumptions regarding
how the environment will behave. As solow himself said, “all theory depends on assumptions which are
not quite true.” That is what makes it theory (solow 65). This dynamic economic model covers many
periods of time; but, “we will analyze the economy in terms of the 'current' and ‘future’ periods”. The
solow model begins by describing the consumers who live in our model environment, and the
production technology used by the representative firm. Our analysis will be derived through the
interaction between the consumers, the representative firm, and the production technology present in
our model environment. To make matters easier, our model will not possess a government sector or
taxes. In describing our consumers, there is a growing population of consumers, with N denoting the
population in the current period. Our model does not allow for any unemployment among consumers,
so each consumer is part of the labor force employed by the representative firm in Economics, a
competitive equilibrium occurs when the behavior of consumers and firms result in a market scenario
where the output supplied by the firm equals the amount of product demanded by consumers. This, it is
labeled as equilibrium because the market “clears” consumers have maximized their scarce resources
and firms have produced the maximum amount of output they can without any excess in the current
market. With the behavior of consumers and the representative firm being described in the prior
sections of this work, the focus turns to how these two side reach a competitive equilibrium in the solow
model. The solow model possesses two markets, the labor market and capital market, which must clear
in the current period. In the labor market, consumers trade their labor in exchange for current
consumption goods ( our model does not deal with currency, such as dollar bills). This equilibrium is
explained geometrically. In the capital market, consumers trade current consumption goods for capital.
“That is, capital is the asset in this model, and consumer’s save by accumulating it” (Williaamson 239).
For the capitalarket to be in equilibrium, the amount of saving by consumers must equal the amount of
investment, that is S = I. Therefore, capital market equilibrium is when aggregate consumption plus
aggregate equals current output: Y = c + . (7) Equation (6) can be arranged to I = K’ – (1 – d). By using this
and equation (2) to substitute for C and I in equation (7), it is found that Equation (8) can be written as:

K’=sY + (1 – d).(9) This states that future capital stock (K) is equal to the aggregate savings in the Current
period, plus the capital stock from the current period net of depreciation [(1 - d)K]. Now, by substituting
for Y in equation (9) with the production function from equation(3), the function K’ = az(K,N) +(1 – d)K
(10) is derived. This equation “states that the stock of capital in the future period is equal to the quantity
of savings in the current period (identical to the quantity of investment) plus the quantity of capital that
remains in the future after depreciation” ( Williamson 240). To state equation (10) in per-worker terms,
both sides are divided by the number of workers, N, to get K’ N= az(K, N) N + (1 – d) K N. (11) After
multiplying the left-hand side of equation (11) by 1 = N’ N’ , we get K’ N N’ N’ = az F(K,N) N + (1 – d) K N.
(12) For simplicity, Equation 12 can be rewritten as K’ (1 – n) = az( K) + (1 – d) k. (13) In (13), k’ = K’,
which is future capital per-worker, (1 – n) = N’ N; and, the first term on the right-hand side of the
equation is as such because F ( K,N) N = F ( K N, 1) = f(k). Now, to get K’ by itself on the left-hand-side,
both sides of equation (13) are divided by (1 + n): K’ = sz(k) 1 + n+ (1 – d)K 1+n. (14)

Equation (14) “is a key equation that summarizes most of what we need to know about competitive
equilibrium in the solow Growth model, and we use this equation to derive the important implications
of the model” ( Williamson 240). The equation determines future capital stock per-worker as a function
of current capital stock per worker. Equation (14) is graphed for geometric interpretation. As in Figure
(2) , the curve in figure (3) has a decreasing slope due to the decreasing marginal product of capital
(MPk). The 45° line pictured is the line along which K’ = k. The “steady state” of the economy is indicated
by the intersection of the 45° line and the curve. In economics, a steady state is when the economy is in
a long-run equilibrium. In the long-run equilibrium, the economy is operating at its maximum attainable
capacity, given current knowledge and technology. Figure (3) illustrates that “once the economy reaches
the steady state,where current capital per worker k = k*, then future capital per worker K’ = k*, and the
economy has k* units of capital forever after” ( William 241). Again, the significance is an attainable unit
of long-run equilibrium. So, if our model economy were to be played out in real life, the economy would
never produce less in the long-run than the steady state. Only catastrophic events, such as a natural
disasters, civil war ( i.e. the current syria conflict could lead to a decrease in the steady state value.
Geetrically speaking, from figure (3) it is illustrated that if the current period capital per worker, k, is less
then the steady state value (k< k*), then future period capital stock will increase ( K’ > k/ so the steady
state is maintained. For our analysis on increasing standard’s of living ( y * in our model), there must be
a variable in the Solow model that steady state to continually increase over time. Since the Solow model
predicts that capital per worker, k *, converges to a constant, it also predicts that output per worker, y *
, converges to a constant.

Q.4 Differentiate between economic growth and economic development by providing examples of
each concept.

Economic growth in the UK

Economic growth measures an increase in Real GDP (real output). GDP is a measure of the national
income / national output and national expenditure. It basically measures the total volume of goods and
services produced in an economy.

Economic development

Development looks at a wider range of statistics than just GDP per capita. Development is concerned
with how people are actually affected. It looks at their actual living standards and the freedom they have
to enjoy a good standard of living.

 Measures of economic development will look at:

 Real income per head – GDP per capita
 Levels of literacy and education standards
 Levels of healthcare e.g. number of doctors per 1000 population
 Quality and availability of housing
  Levels of environmental standards
 Life expectancy.

Absolute Poverty. Do people have sufficient resources to maintain a healthy diet and basics of life such
as shelter? Economic growth may be essential to enable higher incomes for people to be able to buy
more food. However, economic growth doesn’t necessarily improve everyone’s living standards.
Economic growth could bypass the poorest sections of society because they don’t have the ability to
take part. A key issue is whether the benefits of economic growth are equitably distributed amongst
different groups of society.

Education standards. E.g. literacy rates. Economic growth may enable more money to be spent on
education. However, there is no guarantee that the proceeds of growth will be used to improve
education standards. There is often a weak correlation between GDP and literacy rates.

Environmental standards. Economic growth can actually harm the environment and people’s living
standards. For example, higher output could cause more pollution. If higher growth involves cutting
down forests – this could have adverse environmental consequences in long-term.

Transport / Infrastructure Economic development would require improvements in infrastructure and

transport. This may be important for regions which may be cut off from the main areas of economic
growth.

Measures of economic development

Measuring economic development is not as precise as measuring GDP because it depends on what
factors are included in the measure.

There are several different measures of economic development, such as the Human development index
(HDI)

Human development index (HDI)

The HDI combines:

1. Life Expectancy Index. Average life expectancy compared to a global expected life expectancy.
2. Education Index
1. Mean years of schooling
2. Expected years of schooling
3. Income Index (GNI at PPP)

More on Human development index (HDI)

Factors affecting economic growth in developing countries

 Levels of infrastructure – e.g. transport and communication

 Levels of corruption, e.g what percentage of tax rates are actually collected and spent on public
services.
 Educational standards and labour productivity. Basic levels of literacy and education can
determine the productivity of the workforce.
 Levels of inward investment. For example, China has invested in many African countries to help
export raw materials, that its economy needs.
 Labour mobility. Is labour able to move from relatively unproductive agriculture to more
productive manufacturing?
 The flow of foreign aid and investment. Targeted aid, can help improve infrastructure and living
standards.
 Level of savings and investment. Higher savings can fund more investment, helping economic
growth.

Economic growth without development

It is possible to have economic growth without development. i.e. an increase in GDP, but most people
don’t see any actual improvements in living standards. This could occur due to:

1. Economic growth may only benefit a small % of the population. For example, if a country
produces more oil, it will see an increase in GDP. However, it is possible, that this oil is only
owned by one firm, and therefore, the average worker doesn’t really benefit.
2. Corruption. A country may see higher GDP, but the benefits of growth may be syphoned into the
bank accounts of politicians
3. Environmental problems. Producing toxic chemicals will lead to an increase in real GDP.
However, without proper regulation, it can also lead to environmental and health problems. This
is an example of where growth leads to a decline in living standards for many.
4. Congestion. Economic growth can cause an increase in congestion. This means people will spend
longer in traffic jams. GDP may increase but they have lower living standards because they
spend more time in traffic jams.
5. Production not consumed. If a state-owned industry increases output, this is reflected in an
increase in GDP. However, if the output is not used by anyone then it causes no actual increase
in living standards.
 6. Military spending. A country may increase GDP by spending more on military goods. However, if
this is at the expense of health care and education it can lead to lower living standards.

Evaluation

It depends on the nature of economic growth.

 Are the proceeds of growth used to improve living standards?

 Does everyone benefit from the higher GDP or are the proceeds kept by a small %?
 Might be useful to use statistics like the Human Development Index which look at real GDP, but
also education and health care indexes.

Q.5. Discuss in detail how you can measure inflation?

Answer:-

A price index is a measure or function which summarizes the change in the prices of many commodities
from one situation 0 (a time period or place ) to another situation 1. More specific Cally, for most
practical purposes, a price index can be regarded as a weighted mean of the change in the relative prices
of the commodities under consideration in the two situations.” ( Diewert, 2004, p. 264). One of the most
common price indices is the consumer price index, which measures the price changes in expenditures
for private consumption. However, further price indices can be considered when measuring aggregate
price changes, such as of government final consumption and investment or the gross domestic product.
The problem for these aggregate measurements of prices is that these indices are either not available or
not published soon enough to be of use at any given moment

This the consumer price index is most frequently used as a handy indication of inflation. Inflation is
measured by determining changes in prices that reflect price trends,and most of the theoretical
literature on indices addresses whichethods are most suitable for that purpose. Due to the extent of
modern business, no overview and complete information can be obtained without great effort.
Estimates are therefore necessary for the measurement, which is where indices come in. A basic aspect
of index calculation is how the extensive information should be compiled in order to reflect price
changes as accurately as possible.

A distinction is drawn between the calculating methods for the aggregate index and for the elementary
aggregate, which is the index’s lowest level. The aggregate index is calculated by adding up the basic
headings, which are the lowest level with expenditure weights in elementary index compilations.
Generally only actual price information is used for calculations below that level. When quantity
information is also available for figuring the base, either fixed base indices or superlative indices are
used in the calculations. The objective of this chapter is to give an account of the theoretical
perspectives on which the selection of methods for computing the consumer price index is grounded,
above all of the methods used for the index base. The chapter focuses more particularly on the
theoretical aspects of choosing calculation methods and formulas. It explains fixed base indices and cost
of living indices as well as their difference, then deals with superlative indices which use symmetric
information from two periods and touches on problems of chaining. Finally, the chapter discusses the
test approach, followed by the indices applied in calculating elementary indices if only price information
is available.

The cost of living index relates economically to theories on the true cost of living (Linus, 1924), according
to which consumers maximize their utility and minimize their associated cost. Ordinarily it is presumed
that quantity and price are negatively related, so that individuals, in order to maximize their utility, will
modify their consumption accordingly if prices go up, purchasing cheaper products or products whose
prices rise less than others. When bias is discussed in a cost of living index, an index value is being
compared to the value obtained by this theoretically correct cost of living index for two periods. The
upper limit of the true value obtained by this theoretically correct cost of living index for two periods.
The upper limit of the true cost of living index for the earlier period is a Laspeyres cost of living index,
usually lower than a corresponding Laspeyres fixed base index, which is therefore said to be biased
upwards. The lower limit of the true cost of living index for the second period, in contrast, Isa paasche
cost of living index, which is usually higher than a comparable paasche fixed base index, so that the
latter is said to be biased downwards.