Macroeconomic Analysis and Policy

Introduction to Macroeconomics
Session 1

Ranjan Kumar Mohanty

Learning Objectives
• What Macroeconomics is all about?
• What is the difference between microeconomics and
macroeconomics?
• What are the Key Objectives of Macroeconomics?
• Fundamental Concepts
• Why Macroeconomists Disagree?
• What are the principles of how people make decisions,
how people interact, and how the economy as a whole
works?
 Course Name Macroeconomic Analysis and Policy (MEAP)
Programme MBA-BM
Batch 2022-24
Term II
Credits Three
Course Instructor Ranjan Kumar Mohanty

Broad Course Content

➢ National Income Accounting
➢ Measuring the Price pressure in an Economy
➢ Understanding the Unemployment, Consumption etc.
➢ Understanding Short run economic fluctuations
➢ Open Economy Macroeconomics
➢ Public policy for Stabilization
3
 Grading Pattern (tentative)
Component The weightage (%)
Quizzes (Total 7 & best of five will be 40%
considered for the final evaluation)
Group Assignment & Presentation 10%
Discussion Forum 5%
Classroom Participation 5%
End-Term 40%

Rules for Examinations

➢ Minimum Pass Marks - 30. <30 = F Grade
➢ Quiz would be pre-announced.
➢ No undue request for make up quiz.
➢ If you appear less than 5 quizzes, a penalty of 3 marks/quiz will be deducted from the average
quiz marks.
➢ No mid term exam
➢ Group presentation/ assignment on/before deadline. (Assignments will be subject to plagiarism
test. Tolerance limit 5 per cent). 4
 Microeconomics and Macroeconomics
• The words Micro and Macro have Greek origins Mikros and Makros. Mikros
implies “small” and Makros meaning “large”.
• Microeconomics is the study of how individuals, households and firms
make economic decisions and how they interact in markets. It is concerned
with the most ‘Elemental’ economic units, like consumer, firm, input,
market and industry.
• Macroeconomics deals with variables that indicate how the economy as a
whole is performing. Examples: total production, total consumption, total
savings, total investment, aggregate demand, aggregate supply etc.
• It may be defined as that branch of economic analysis which studies the
behavior of not one particular unit, but of all the units combined together.
• Macroeconomics is a study of economic aggregates.
 What is Macroeconomics?
• Kenneth E Boulding “Macroeconomics is the study of the nature,
relationships and behavior of aggregates of economic quantities..
..Macroeconomics deals not with individual quantities as such, but with
aggregates of these quantities….not with individual incomes, but with
the national income, not with individual prices, but with the price levels,
not with individual output, but with the national output”.
• Goods Market Macro-variables
• Gross Domestic Product (GDP)
• Money Market Macro-variables
• Aggregate money supply
• Aggregate consumption expenditure
• Aggregate money demand
• Aggregate savings
• Transaction demand for money
• Aggregate investment • Speculative demand for money
• Total government expenditure • Interest rate
• Total exports • Exchange rate
• Total imports • Balance of payments

• Employment
 What Macroeconomics Is About?
• Issues addressed by 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.
• Long-run economic growth
• Business cycles
• Unemployment
• Inflation (what determines the level and rate of change)
• The international economy (open vs close economy, trade imbalance)
• Macroeconomic policy (fiscal and monetary policy)
 Microeconomics vs. Macroeconomics
MICROECONOMIC QUESTIONS MACROECONOMIC QUESTIONS
How much do you spend per what is the total saving of the economy?
month and how much do you How would the policy maker enable
save per month? consumers to spend more?
How would allocate your money How would government allocate the
between food and travel or spending between defense, tourism
education? development and education?
Go to business school or take a How many people are employed in the
job? economy as a whole?
Do you like your company’s How do the monetary and fiscal policies
incentive policy? of the government affect the economic
environment of the country?
 Microeconomics vs. Macroeconomics
MICROECONOMIC QUESTIONS MACROECONOMIC QUESTIONS
What determines the cost to a
university or college of offering What determines the overall level of
a new course? prices in the economy as a whole?
What government policies should be
adopted to promote full employment
Will you change your job if and growth in the economy as a
paid more? whole?
What determines whether What determines the international
McDonald opens a new outlet trade between the India and the rest
in India? of the world?
 Key Objectives of Macroeconomics
• Broadly speaking, there are three objectives;
• Increasing the level of Economic activity:
• Public policy maker need to work towards increasing the level of
economic activities so that citizens standard of living increases over time.
• High level of employment:
• The public policy makers need to ensure that everybody who is interested
in working finds a job to his/her skillsets
• Stable price level:
• Higher inflation eats out the individual’s ability to spend and save, hence
the standard of living.
➢At the highest level, the objective of macroeconomics is to reduce
the volatility of economic activities.
 Fundamental Concepts
Stocks vs. Flows Flow Stock

The stock variables refer to the

quantity or value of certain
economic variables given at a
point of time, e.g., 31st of March
or 31st December of the year.
E.g., “The U.S. capital stock was
$26 trillion on January 1, 2006.”

The flow variables are the variables that are expressed per
unit of time, e.g. per hour, per week, per month, or per year.
E.g., “U.S. investment was $2.5 trillion during 2006.”
Fundamental Concepts
Stock Flow
a person’s wealth a person’s annual saving
# of people withcollege degrees # of new college graduates this
year
the govt debt fiscal deficit
Supply of Money Consumption Expenditure

Try these variables

Savings, Investment ,
Total Employment, Government Revenue,
Accumulated Savings, Exports and Imports ,
Stock of Capital, Government Expenditure
 Equilibrium and Disequilibrium

Equilibrium Disequilibrium
• The word equilibrium has been
formed by combining two Latin word- • Disequilibrium refers to the state of
equi meaning ‘equal’ and libra economy in which the opposite forces
meaning balance. Thus, equilibrium (e.g., demand and supply) are not in
means equal balance. balance.

• In economic sense, equilibrium refers • The factors causing disequilibrium

to a state or situation in which arise out of the working process of the
opposite economic forces e.g., economy.
demand and supply, cost and benefit,
etc are in balance and there is no in-
built tendency to deviate from this
position.
 Fundamental Concepts
• Endogenous versus Exogeneous Variables
• Endogenous variables are determined by and within the macro economy
• Exogenous variables are determined independently outside the model.aes in
tax rate and
The policies that influence the endogenous variables are deliberately implemented and directly controlled
by policy makers.

Exogeneous Variables: Examples

Changes in income Changes in Money Supply Wars, Weather,
tax rate and and in shortterm interest Oilshocks
Government rates Terrorism
spending
Government Controlled byNation’s Shocks
Controlled Central Bank
 Why Macroeconomists Disagree?
• Classicals vs. Keynesians
• The Classical approach
• The economy works well on its own
• The “invisible hand”: the idea that if there are free markets and
individuals conduct their economic affairs in their own best interests, the
overall economy will work well
• Wages and prices adjust rapidly to get to equilibrium
• Changes in wages and prices are signals that coordinate people’s
actions
• Result: Government should have only a limited role in the economy
• The Keynesian approach
• The Great Depression: Classical theory failed because high unemployment
was persistent
• Keynes: Persistent unemployment occurs because wages and prices adjust
slowly, so markets remain out of equilibrium for long periods
• Conclusion: Government should intervene to restore full employment
 Why Macroeconomists Disagree
• Classicals vs. Keynesians
• The evolution of the classical-Keynesian debate
• Keynesians dominated from WWII to 1970
• Stagflation led to a classical comeback in the 1970s
• Last 30 years: excellent research with both approaches

• A unified approach to macroeconomics

• Textbook uses a single model to present both classical and Keynesian ideas
• Three markets: goods, assets, labor
• Long run: wages and prices are perfectly flexible
• Short run: Classical case—flexible wages and prices; Keynesian case—wages
and prices are slow to adjust
Thank You