MACROECONOMICS

PRESENTATION AMITOSH KUMAR

20/262
SEM III
How are Macroeconomic policies made?

A Macroeconomic policy
is formed after a lot of brainstorming, testing and authorization on

The Macroeconomic research

which is a result of very well planned and organized

Macroeconomic forecasting
i.e. assumptions with adequate probablities
The Major Macroeconomic Issues
that every society needs to solve

Employment and Unemployment

Unemployment refers to involuntary idleness of resources

including manpower. If this problem exists, society’s actual
output (or GNP) will be less than its potential output.
So one of the objectives of Government policy is to ensure
full employment which implies absence of involuntary
unemployment of any type.

Inflation

It refers to a situation of constantly rising prices of commodities

and factors of production. The opposite situation is known as
deflation. During inflation some people gain and most people lose.
So there is a change in the pattern of income distribution.
Therefore, one of the objectives of government policy is to ensure
price level stability which implies the absence of
inflation and deflation.
Seems like we got more issues :(
we have actually got an opportunity to learn!

The Trade Cycle

It refers to periodic fluctuations in the levels of economic or

business activities, i.e., the tendency for output (GNP) and
employment to fluctuate over time in a recurring sequence
of ups and downs. The periods of good trade alternate with
periods of bad trade, or, boom periods of high output and high
employment alternate with slump periods of low output and
low employment.

Stagflation

Most modern mixed economics suffer from the disease of

stagflation which implies the co-existence of inflation and
unemployment in a stagnant economy. The trade-off between
inflation and unemployment is perhaps the most complex
macroeconomic issue of the day. Every country in the world is
now struggling hard to fight the disease of stagflation.
Seems like we got even more issues :(
we got another opportunity to learn!

Economic Growth

In spite of short-term fluctuations of output that are associated

with the trade cycle, the long-term trend of total output has
been upward in most industrially advanced country.
The trend in the nation’s total output over the long period is
known as economic growth. Expansion of society’s production
capacity such as bringing new land under cultivation or setting
up new factories. Growth is measured by the annual rate of
increase of per capita income and is illustrated by a rightward
shift of the production possibility curve.

The Exchange Rate and the Balance of Payments

The balance of payments is a systematic record of all economic

transactions between the members of the home country and the
rest of the world in an accounting year. These transactions are
largely, if not entirely, influenced by the exchange rate. It is the
rate at which a country’s economy is exchanged for another
currency (or gold).
Why do the macroeconomists
disagree?

Even when the econometric models do give clear answers, those answers are often
ignored in the public debate over these issues. This is due, in large part, to econo-
mists who are willing to ignore clear empirical evidence in order to sow
confusion and promote ideological goals.

Microeconomists disagree at times when their thesis and models are not being fol-
lowed, they also disagree on the different possible outcomes and relative changes
possible from their competitor’s theories. Another core reason of the disagree-
mensts in account is their principles of judgement of a certain scrnario and predict-
ing likewise.
John Maynard Keynes
John Keynes is considered as the father of
modern economics. The brit was the one
who introduced this world to the concept of
keynesian economic theory.

The central tenet of his school of thought is

that government intervention can stabilize
the economy.

Radom Fact: John was a student of Sir Alfred

Marshall at Elton and Cambridgeshire.
How did Keynes change economics?
and change the history of the world allogether

During the Great Depression of the 1930s, existing economic

theory was unable either to explain the causes of the severe
worldwide economic collapse or to provide an adequate public
policy solution to jump-start production and employment.

British economist John Maynard Keynes spearheaded a revolu-

tion in economic thinking that overturned the thenprevailing
idea that free markets would automatically provide full employ-
ment—that is, that everyone who wanted a job would have one
as long as workers were flexible in their wage demands (see
box). The main plank of Keynes’s theory, which has come to
bear his name, is the assertion that aggregate demand—mea-
sured as the sum of spending by households, businesses, and
the government—is the most important driving force in an
economy. Keynes further asserted that free markets have no
self-balancing mechanisms that lead to full employment.
Keynesian economists justify government intervention through
public policies that aim to achieve full employment and price
stability.
 ThyClassic Economists
From Feudalismto the Industrial Revolution and the Consumer Society

David Hume Frederic Bastiat David Ricardo AdamSmith

The Classic Economic Theory
Classical growth theory was developed alongside the Industrial Revolution in
Great Britain. Analysis of the process of economic growth was a central focus of
these classical economists. Classical economists sought to provide an account of
the broad forces that influenced economic growth and of the mechanisms un-
derlying the growth process.

The division of labor, the gains from trade, and the accumulation of capital were
seen as the main driving forces of economic growth. Productive investment and
the reinvestment of profits were the mechanisms that produced continuous eco-
nomic growth, so changes in the rate of profit were a decisive reference point for
an analysis of the long-term evolution of the economy.

They argued that individual initiative, under freely competitive conditions to pro-
mote individual ends, would produce beneficial results to society as a whole.
Their conclusions supported the adoption of free trade, respect for private prop-
erty, and individual free enterprise. Meanwhile, conflicting economic interests
could be reconciled by the operation of competitive market forces and the limit-
ed activity of responsible government.
Some Classical Economic concepts

Laissez-faire
Laissez-faire is an economic philosophy of free-market capitalism that
opposes government intervention. The theory of laissez-faire was devel-
oped by the French Physiocrats during the 18th century and believes that
economic success is more likely the less governments are involved in
business.

Invisible Hand
The invisible hand is a metaphor for the unseen forces that move the free
market economy. Through individual self-interest and freedom of produc-
tion as well as consumption, the best interest of society, as a whole, are ful-
filled. The constant interplay of individual pressures on market supply and
demand causes the natural movement of prices and the flow of trade.
The invisible hand is part of laissez-faire, meaning "let do/let go," approach
to the market. In other words, the approach holds that the market will find
its equilibrium without government or other interventions forcing it into un-
natural patterns.
Calculating National Income

The expenditures approach says GDP = consumption + investment + government

expenditure + exports – imports.
The total spending on all final goods and services (Consumption goods and ser-
vices (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) – Im-
ports (M)) GDP = C + I + G + (X-M).

The income approach sums the factor incomes to the factors of production.
GDP based on the income approach is calculated by adding up the factor incomes
to the factors of production in the society.

The output approach is also called the “net product” or “value added” approach.
GDP is calculated using the output approach by summing the value of sales of
goods and adjusting (subtracting) for the purchase of intermediate goods to pro-
duce the goods sold.
Why do these methods reconcile?
There are method of measuring National Income because First National
Income is generated through Production (Value addition) and Total
value addition in the economy is national income. To produce goods and
services Producer needs raw material, labor, capital and land. Producer
pays them their factors price which is income of factor owners and total
income of people in economy is national income.Now Income can be
spent on consumption, investment and exports. Government also
spends money. So National Income in economy will be equal to
NY=C+I+G(X-M)

These three methods of measuring national income are interrelated.

SOURCES AND CITATIONS USED
THANK YOU
HOPE YOU LEAVE THIS PRESENTATION WITH SOME
VALUABLE GAINS IN TERMS OF KNOWLEDGE