Macroeconomics
The Goods Market
Rayees Ahmad Sheikh
29/09/2023
Measuring Economy
GDP Measurement
• Sunny spends INR 3000 to buy his Smiley a Dinner at
a restaurant in Vijaynagar.
• Unni Ji spends INR 2 lac on a new laptop for PGP
Office. The laptop was made in China.
• Tata Motors builds 100 Cars worth 1 billion INR,
but sold only 3/4th of them.
2
Measuring Economy
GDP Measurement
•Patidar Farms
> Wages paid to employees = Rs. 15,000
> Taxes paid to government = Rs. 5,000
>Revenue received from sale = Rs. 35,000
>Potatoes sold to public = Rs. 10,000
> Potatoes sold to Balaji Wafers = Rs. 25,000
• Balaji Wafers
Wages paid to employees = Rs. 10,000
Taxes paid = Rs. 2,000
Potatoes purchased from Patidar Farms = Rs. 25,000
Revenue received from sale = Rs. 40,000
3
Measuring Economy
GDP Measurement
Production Method:
Value added
= (Sales – Intermediate goods)pf + (Sales – Intermediate
goods)balaji
= Rs. 35,000 + Rs. (40,000 – 25,000)
= Rs. 50,000
Income Method:
Cost
= (Wages + Profits + Taxes)pf + (Wages + Profits + Taxes)balaji
= Rs. (15,000 + 15,000 + 5,000) + Rs. (10,000 + 2,000 + 3,000)
= Rs. 50,000
4
Measuring Economy
GDP Measurement
Expenditure Method:
Y = C + I + G + (X – M)
= C1 + C2
= Rs. 10,000 + Rs. 40,000
= Rs. 50,000
5
Measuring Economy
Saving and Income Identity
Closed economy with no Government & external sector
Y CI
Only two things can do with income: consume and save
Y CS
I Y C
C S
demand income
I Y C S
6
Measuring Economy
Adding G and NX
• Add government and the foreign sector
Y C I G NX
• Disposable (after-tax) income, YD, is what consumers split
between C and S
YD Y (TA TR )
YD C S
YD (TA TR) C I G NX
C S TR TA C I G NX
S I (G (TA TR )) NX
7
Measuring Economy
Some Identities: Adding G and NX
S I (G TR TA ) NX
TradeSurplus
BudgetDeficit
• Excess of savings over investment (S > I) in the private
sector is equal to the government budget deficit plus the trade
surplus
• Any sector that spends more than it receives in income has to
borrow to pay for the excess spending
Private sector can dispose of savings in three ways:
1. Make loans to the government
2. Private sector can lend to foreigners
3. Private sector can lend to firms who use the funds for I 8
Measuring Economy
Problems of GDP Measurement
• [Link]
9
Measuring Economy
Problems of GDP Measurement
• There are major criticisms of the GDP measure:
•Omits non-market goods and services
•Ex. Work of stay-at-home mothers and fathers not
included in GDP
•No accounting for “bads” such as crime and pollution
•Ex. Crime is a detriment to society, but there is no
subtraction from GDP to account for it
•Despite these drawbacks, GDP is still considered one of
the best economic indicators for estimating growth in an
economy
10
Measuring Economy
Inflation and Prices
• Price Indexes measure the cost of a fixed ‘basket’ of goods over time
• Inflation rate = % change in P, where P is the general price level
Inflation = [P(t+1) - P(t)] / P(t)
• GDP Deflator (one prominent price index):
• Value of Current Output at Current Prices / Value of Current Output at
Base Year Prices
• CPI (consumer price index) and WPI (Wholesale Price Index)
11
Measuring Economy
Measures of Inflation
• GDP Deflator is the only measure of inflation that
takes into account the inflation in all the good and
services produced in the economy.
• Consumer Price Index is a weighted sum of prices of a
standard basket of goods and services consumed by a
typical domestic consumer.
• Wholesale Price Index is a price index of goods and
services that are sold by producers.
12
Measuring Economy
CPI vs. WPI
Wholesale Price Index Consumer Price Index
Index available on weekly basis with short Index constructed on a monthly basis
time lag of 2 weeks with lag of 1 month
Base year is 2012; earlier 04-05 Base year is 2012; 2016
Primary Products 22.02 Food 46.19
Food Articles 15.40 Pan, Supari, Tobacco
Minerals 0.49 & Intoxicants 2.27
Fuel Group 14.23 Fuel & light 6.43
Coal Mining 1.75
Electricity 5.48
Manufactured Products 63.75 Housing 15.27
Food Products 11.54 Clothing, Bedding &
Textiles 9.80 footwear 6.58
Chemicals 11.93 Miscellaneous 23.26
Basic Metals 8.34
Machinery & machine tools 8.36 13
Measuring Economy
Unemployment
• Frictional Unemployment
• Structural Unemployment
• Cyclical Unemployment
• Seasonal Unemployment
14
Data Sources in India
• Government of India, Ministry of Statistics and
programme Implementation Web site: [Link]
•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
•RBI - [Link]
15
The Goods Market
Agenda
• Understand National Income Determination
• Consumption and Investment Equivalence
•
16
The Goods Market
Introduction
Source: [Link] 17
The Goods Market
Introduction
• Output fluctuates around the potential level
• Business cycles- periods of boom and recession
• the crux is the relationship between output and spending
•Spending determines output and income
•Output & Income determine Spending
18
The Goods Market
Introduction
• We assume that prices are constant
• Firms are willing to sell anything at given price levels
• So how will the aggregate supply curve look like?
• Aggregate Demand Schedule
19
The Goods Market
Aggregate Demand and Equilibrium Output
• Aggregate Demand – “total amount of goods and
services demanded in economy”
• AD = C + I + G + NX
• At equilibrium level
•Y = AD = C + I + G + NX
• When there is difference between Y and AD ….What
happens? 20
The Goods Market
Consumption Function
• cf is…..“relationship between consumption and income”
Share of Consumption Demand in GDP?
• higher the income higher is the consumption
• C = + cY
•Where > 0 and 0 < c < 1
21
The Goods Market
Consumption Function
• is Consumption when income is “zero”
• c is the change in consumption with increase in
income
• c is popularly known as?
• Marginal Propensity Consume
22
The Goods Market
Consumption and Savings
• What happens to portion of income remaining after
consumption?
• S = Y – C (Budget Constraint)
• S = Y – C = Y – ( + cY) = - + (1-c)Y
23
The Goods Market
Consumption, AD and Autonomous Spending
• YD = Y – TA + TR
• C = + cYD = + c (Y + TR –TA)
• AD = C + I + G + NX
= + c (Y + TA –TR) + + +
= [ + c ( – ) + + + ] + cY
= + cY
24
The Goods Market
Equilibrium Income and Output
• Y = AD
• Y = + cY
• ∆Y
25
Thank You
Rayees Ahmad Sheikh
rayeess@[Link]
