Introduction to Economic Analysis:

Dr. Aruna Kumar Dash

IBS Hyderabad, IFHE University
 Micro VS. Macro Economics

Micro Economics
1. Micro Economics is the study of Macro Economics
particular individual households, 1. Macro economics studies the
firm/industries, individual wage economy as a whole.
rates, and income. 2. It is the theory of country's
2. In microeconomics, we study income, employment,
various constituents or parts of the aggregate price and output.
economy and not the economy as 3. It studies the behaviour of not a
a whole. particular unit but all the units
3. Microeconomics deals with taken together.
consumer behavior, theory of 4. Macro Economics deals with
demand and supply, theory of firm, not the individual output but
pricing to market and theory of national output/GDP, not
distribution individual income but the
4. In Micro Economics, we study the aggregate income, not the
behaviour of particular consumer individual price but the general
or producer and how he/she price levels/Inflation.
attains equilibrium.
Micro Vs. Macro Economics Continues….
 Macro economic variables are GDP, Inflation, Aggregate Demand,
Aggregate Supply, Exchange rate, Unemployment rate, Balance of
payments, etc
 Macroeconomics is the study of forces that affect firms, consumers,
and workers in the aggregate sense.
 The overall objective of macroeconomics is to test theories about how
the overall economy works.
 Macroeconomics is the study of income, employment, output, and
aggregate price level. During the great depression of 1930, in the US
there is a collapse of output, employment, and prices

 The macroeconomics issues are becoming more important in the

presence of globalization and openness of the economy.
 Due to the openness of the economy, a shock to one economy is
transmitted to another economy through the spillover effect.
Micro Vs. Macro Economics Continues….

Macro economics

Micro
Micro
Economics
Economics

Few important Macroeconomic variables are GDP(output), Inflation, Aggregate

Demand, Aggregate Supply, Exchange rate, employment, Unemployment rate,
exports, imports etc.
 What matters for policy makers….
Generally, policymakers are more interested in single-
averaged outcomes rather than case-to-case
information.
Having said this, policymakers can’t ignore the
microeconomic variables
Both are important for the formulation of economic
policies.
However, macroeconomic variables are more
important as compared to microeconomic variables.
 Objectives of Macro Economics

The following are the objectives of the macro economic

policy

Promoting economic growth

 To maintain low and stable inflation rate(Price stability)
Financial market stability
Redistribution of income
 Full employment (Promoting employment)
 Macroeconomic instability has generally been associated with
Objectives of Macro Economics Continues….

poor performance of the economy.

Promoting economic growth

Macroeconomic stability is necessary for promoting economic

growth.
In the presence of macroeconomic instability, domestic and
foreign investors will stay away from investment and
resources will be diverted elsewhere.
Macroeconomic instability arises due to internal and external
factors. Internal factors are confined within the economy and
external factors which is beyond the control of the economy.
International factors are associated with domestic policies and
external factors are associated with other countries policy.
Objectives of Macro Economics Continues….

Internal factors of India might be LPG policy, GST,

Demonetization, COVID-19 lockdown
External factors might be the outbreak of covid 19 in China
which spread across the globe, and the Russia-Ukraine war
which created global uncertainty.
Economic growth is measured through performance of
the economy(Expansion of output is treated as economic
growth)
Note: when we are talking about macroeconomic instability,
economists talk about high inflation, the low performance of
the economy, Foreign direct investment being low, Foreign
portfolio investors are taking their money back and investing
elsewhere, the exchange rate being volatile, foreign exchange
reserve is low, unemployment is very high etc…
Objectives of Macro Economics Continues….
Suppose your economy is not performing well, what will
happen to consumers, producers……
Consumer confidence index
Producer confidence index
Employment-
Unemployment-
Poverty-
Capital inflows(FDI and FII)
Capital outflows
Government Tax revenue-
Government expenditure
Country’s ratings-
Country image in the international market
Objectives of Macro Economics Continues….
Price stability- Price stability is one of the dominant objectives of
macroeconomic policy. In most of the developing and underdeveloped
countries in the world, the policymakers want to maintain price stability.
Price stability does not mean complete year-on-year (YoY) price will be
stable/constant which is very difficult to attend.
Price stability involves the avoidance of inflationary and deflationary
pressure on the price.
Inflationary pressure means an increase in the price level and
deflationary pressure means a decrease in the price level.
 Price stability means the price will change marginally (change means
the price will increase or decrease marginally)
If prices are stable, as an exporter, you have an idea of how much
money you are going to receive and as an importer, you have an idea of
how much money you need to pay
Stable prices mean average prices rise by only a small amount.
Objectives of Macro Economics Continues….
Note, if prices are stable, inflation is under control.
Note: Price stability does not mean there is no change in
price. It means prices will change marginally.

Why do Policymakers care about price stability?

1. It is a prerequisite for economic growth
2. Price stability reduces the gap between rich and poor
3. Because of price stability exporters know how much
money exporters will receive and the importer knows
how much money they need to pay
4. If there is price stability it means inflation is under
control(Good inflation). People trust on value of
money
5. Price stability promotes international trade
Objectives of Macro Economics Continues….
Financial Market stability: Here we are basically talking about
banks and stock market stability.
This is added as an objective of macroeconomic objectives since
the 2007-08 global financial crisis.
You know that banks are the backbone of any economy
irrespective of developed, developing, and emerging countries.
Once the banking sector collapses the whole economy will
collapse which we have already experienced in 2007-08 when the
Layman brothers collapsed. It was the 3rd largest investment
bank in the world during 2007-08. 150 years bank is no more
now. In order to smooth the functioning of the banks, we have
Basel 3 norms. If you will recollect a few years back there was
news based on ICICI Bank and 3 years before Yes Bank news.
Hence, financial sector stability is required.
Coming to stock market investors can’t withdraw their entire
money in a single day.
Objectives of Macro Economics Continues….
Redistribution of income
 An equitable distribution of income means that the gap between rich and poor
is not excessive, but still enough to create incentives to work.
 the redistribution of income might achieve not only greater equality but also
faster growth and, for developing economies, faster poverty reduction.
 In countries where growth is satisfactory but benefits the poor much less than
the non-poor, there obviously is a strong case for shifting resources from those
at the top of the income scale to those at the bottom. Giving poor children
access to better education and paying for it by taxing the affluent is one way to
reduce inequality while also fostering future growth and poverty reduction.
Redistributive policies could also help narrow the gap between rich and poor in
countries with high inequality, where social and political tensions or the rise of
populist regimes might prove bad for growth in the long run
 Taxation and income transfers to the poorest segment of society are the most
direct way to keep inequality in check and reduce poverty in the short term
 But most of the time they are too small to really make a difference
Objectives of Macro Economics Continues….

Full employment
Full employment occurs when the labor force and
resources are fully employed in productive work. There is
no wastage of resources. But, in reality, reaching full
employment is a myth but the economy should work to
full utilization of resources to meet the macroeconomic
objectives.
 What GDP is and why is it such an important number?
What is GDP
Gross Domestic Product (GDP) is the monetary value of all the finished
goods and services produced in a country's boundary in a given period of
time (say a quarter or a year).
It counts all of the goods and services (output) generated within the
borders of a country. The output can be produced by the country's citizens
and foreigners within its borders.
 Why is GDP such an important number?

 GDP is important because it gives information about the size of the

economy
 GDP is important because it tells how an economy is relative to other
economies around the world.
 GDP tracks the health of a country's economy.
 It measures the economic growth of a country.
 If the GDP is rising, it signifies the economy is producing more
output then the economy will generate more income
Top 5 Countries in the World in terms of GDP(Trillions US
Dollar)
1 trillion = 1000 billions
Ger-
many
, 4.1 India, 3.4

Japan, 4.2
USA, 25.5

China, 18

Source: Complied by the author by using World Development Indicators database,

World Development Indicators database, World Bank, 1 July 2023
Why GDP Matters. Why Should Policymakers,
Economists Care About GDP?

GDP enables policymakers, Government and Central

Banks to judge whether the economy is contracting or
expanding
 When compared with prior periods, GDP tells us whether
the economy is expanding by producing more goods and
services or contracting by producing fewer goods and
services.
It also tells us how one economy is performing relative to
other economies around the world.
 Why GDP Matters. Why Should Policymakers Care
About GDP?
Policymakers look to GDP when contemplating
decisions on interest rates, tax and trade policies.
State and local governments rely on state GDP and
similar statistics to help shape policy or decide how much
public spending is affordable.
Economists: Economists look at positive GDP growth
between different time periods (usually year-to-year) to
make an assessment of how much an economy is
flourishing. Conversely, if there is negative GDP growth,
it may be an indicator that an economy is in a recession, or
approaching a recession or an economic downturn.
 Economists can use GDP to determine whether an
economy is growing or experiencing a recession.
Why GDP Matters. Why Should Policymakers Care
About GDP continues……..
Investors: Investors pay attention to the GDP because a
significant percentage change in the GDP–either up or
down–can have a significant impact on the stock market.
In general, a bad economy usually means lower earnings
for companies. And this can translate into lower stock
prices. Investors can use GDP to make investment
decisions—a bad economy means lower earnings and
lower stock performance
Why does the Government track GDP?

Tracking GDP allows policy makers and researchers to

understand how quickly the economy is growing or shrinking.
It is used across government entities for planning purposes,
including preparing budgets, setting monetary policy, and
guiding economic research. For example, the White House
uses GDP growth to generate tax revenue projections.
 How do we know when a recession occurs?

 When GDP shrinks for two to three consecutive quarters it is called

as a recession. The US economy has experienced eleven recessions
since 1947.

Features of Recession
• Output falls
• Producer confidence index falls
• Factories are idle
• Unemployment increases
• Consumer confidence index falls
• As risk increases banks gives less loans(credit tightened)
 Stock market crash
 The country’s ratings fall
 Tools of Macroeconomic Policy

 The twin tools of macroeconomic policy are Monetary policy and Fiscal
policy
 The main instruments of macroeconomic policy are Monetary and Fiscal
policy
 The Monetary policy is decided by the Reserve Bank of India(RBI)
whereas, the Fiscal policy is decided by the Government.
 Monetary policy is a macroeconomic policy laid down by the Central Bank
of a country to control the money supply, regulate credit, and control
inflation in a country. The main instrument of monetary policy is the
interest rate.
 Fiscal policy is also known as the income and expenditure policy of a
country. The government gets income through taxes and nontaxes. The tax
and expenditure policy of the government is known as fiscal policy
 The question arises whether Monetary policy is more effective than Fiscal
policy or vice versa
 The question arises when Monetary and Fiscal policy both will be effective
Stagflation

‘Stagflation’ is the phenomenon of combination of slow

economic growth with rising inflation.

We will discuss in detail after Monetary and Fiscal policy.

Only defn. you need to remember now.
Stock Vs. Flow Variable

There are two types of economic variables used in our analysis named as stock and flow
variable. The basis of distinction is measurability at a point of time or period of time.
Stock Variable: Stock variable is measured at a particular point of time(one specific
time) .
 Stock variable has no time dimensions
 On a particular date, a country owns and commands stock of machines, tanks,
missiles etc
 Like a balance-sheet, a stock has a reference to a particular date on which it shows
stock position. Clearly, a stock has no time dimension (length of time) as against a
flow which has time dimension.
 Wealth (an accumulation of Savings over time). Wealth is a stock since it can be
measured at a point of time
 Debt (an accumulation of borrowing over time)
 Capital Stock (Factories, Machinery, Inventory, Infrastructure)

 Bank balance as on Oct 16, 2020 is a stock variable

 Any Balance Sheet measures (Assets, Liabilities, Owner's Equity)
 Eg. Sept 11 2001 WTC attack, wealth, population of a country, Money supply, foreign
debt, the amount of Foreign Direct Investment at the moment in a specific country
Flow Variable

Flow variable is measured with reference to a period of time

Flows are defined with reference to a specific period (length of
time), e.g., hours, days, weeks, months or years.

It has time dimension.

Income of a person, country's income. Income of a person is a flow
which is earned during a week or a month or any other period.
It describes and measures flow of goods and services which become
available to a country during a year (Exports and imports)
Likewise, investment (i.e., addition to the stock of capital) is a flow
as it pertains to a period of time.
Other examples of flows are saving, investment expenditure,
depreciation
 Green Economy
 In October 2008, United nation environmental policy (UNEP) launched a Green
Economy initiative
 The concept of green growth is an extension of economic growth.

 Green economic growth is a new concept proposed by the United Nations in its
“Rio+20” conference on “sustainable development”.
 Green growth means an increase in economic activities such as the gross domestic
product (GDP) in the short run as well as in the long run without sacrificing
natural resources.
 Jacobs (2013) defines green growth as increased GDP with significant
environmental protection.

 According to the Organization for Economic Cooperation and Development,

green growth means higher economic growth and development without sacrificing
the natural assets on which human well-being depends.

 World Bank (2012) defines green growth as growth that is efficient in its
utilization of natural resources and minimizes pollution.
Green Economy Continues…
 Therefore, green economic growth consists of a combination of low carbon
emissions, macroeconomic growth, environmental protection, and social
inclusion, which contextualize the concept of green growth within a
framework of sustainable development goals (SDGs).
 Most of the SDGs are linked to the achievement of green growth
Objectives of Green economy
The objective is to motivate policymakers to support
increased investments in environmentally significant
sectors such as renewable energy, clean technologies,
energy-efficient buildings, public transport, waste
management and recycling, and sustainable
management of land, water, forests, fisheries and eco-
tourism.
To achieve this objective, the initiative focuses on
demonstrating the contributions that green investments
can make to the growth of income and jobs, and to
improved access by the poor to clean energy, safe water
and sanitation, apart from reducing environmental
pressure.
Indicators of green economy

• Green economy indicators are useful tools for

informing policy decisions. They also provide a mirror
on the journey to an environmentally stable,
economically sound and equitable society.
How is a Green Economy Measured?

A wide range of indicators can help measure the transition

towards a green economy

– Economic indicators: e.g. share of investments or the

share of output and employment in green sectors.
Environmental indicators reflect the critical issues that
must be addressed as well as help identify key areas where
policy interventions are needed to achieve low carbon,
resource efficient, inclusive development.
– Aggregate indicators of progress and well-being: e.g.
macroeconomic indicators to reflect natural capital
depreciation, including integrated environmental and
economic accounting, or broader interpretations of well
being beyond narrow definition of per capita GDP.
How does a Green Economy Support Employment?

A green economy creates jobs in a wide range of

sectors of the economy as new markets emerge and
grow, such as in organic agriculture, renewable energy,
building retrofits for energy efficiency, public
transportation, reclamation of brown-field sites, and
recycling, among others.
Decent jobs, with high labour productivity as well as
high eco-efficiency and low emissions, hold the
promise to provide rising incomes, spur growth and
help to protect the climate and the environment. Such
green jobs already exist and some have seen high
growth, for example, as a result of investment in
energy efficiency.
Thank you