`
What is Economics ?
HH Wants Choice Firms
Unlimited Resources
Limited
Opportunity Cost
Knowledge of Economics, helps to allocate scarce
resources most efficiently to minimize the cost.
Micro Vs Macro
Micro Vs Macro Most Relevant Micro
Concepts
Demand; Supply; Shift
Decision making in the curve and
of individuals movement along the
(family) curve
Micro Time periods;
Decision making Endogenous and
of Business exogenous variables
(firms)
•Economy as a whole
•It is about the people care about the most
Macro - Employment
- Inflation
- Interest rates
- Fiscal position
- currency value etc.
What are the main issues/problems of a
firm and an economy?
Economy’s Perspective Firm’s Perspective
What to produce? The product decision.
(allocation of resources)
How to produce? The hiring, staffing,
(selection of technology) procurement, and capital
budgeting decisions.
For whom to produce?
The market segmentation
(distribution of output)
decision.
There are essentially three ways a country can answer
these questions.
This has led to the emergency of different types of
economy.
Types of Economy
Economy classification is based on the systems by
which nations allocate their resources to solve the
problems of an economy.
Command Economy (central planning) (Eg. North
Korea , Cuba)
- It has strong government control.
-government decide how the country's
resources would best allocated.
Market Economy (Capitalism)
- Very little government control (regulation).
- “Invisible hand", determines how resources should
be allocated.
- Prices are set by market mechanism.
- Consumer sovereignty reigns.
Mixed Economy: Both Capitalism and Socialism. An
economy that contains both privately and state owned
enterprises and the price system is not entirely free but
under some government control.
Laissez-faire: No state intervention on economic issues,
which implies free markets, private ownership of property,
and minimal taxes. Government to provide protection
from coercion and theft and maintaining peace, and
property rights.
How to assess an economy’s
performance?
How to assess an economy’s performance?
Perhaps the three most important indicators of the
macroeconomic performance of an economy are:
- output [real gross domestic product (GDP)],
- the inflation rate, and
- the unemployment rate.
Good performance means
- low unemployment rate
- low inflation
-rapid productivity growth.
Current macroeconomic status of Indian
Economy
GDP growth rate (2015-16) -
Inflation (2015) -
Unemployment rate(September 2016) -
Fiscal deficit (2015-16) (% of GDP) -
Current account deficit (2015-16) -
Source: Economic Survey
Current macroeconomic status of Indian
Economy
GDP growth rate (2015-16) - 7.56%
Inflation (2015) - 5.88
Unemployment rate(August 2016) - 9.8%
(4.90 percent in 2013)
Fiscal deficit (2015-16) (% of GDP) - 3.9 %
Current account deficit (2015-16) - 1.1 % of GDP
Source: Economic Survey
Source: Basic data from Handbook of Statistics on Indian Economy, RBI.
Economic Fluctuations and
Growth
Business cycle -Rise and fall of economic activity relative to the long-term growth trend of the
economy.
Expansions: Output increases
Contractions: Output decreases
Depression
Sharp reduction in output
Lasts > 1 year
High unemployment
Recession
Lasts > 6 months
Hypothetical Business Cycles
Leading Economic
Indicators
Leading economic indicators
Predict a change in economy
Recovery
Downturn
Coincident economic indicators
Reflect changes as they occur
Lagging economic indicators
Follow changes in economy
Economic Fluctuations and Growth
in Indian Economy
Period Growth rate
1950-51 to 1964-95 4.2%
1966-67 to 1974-75 2.7%
(Hindu Growth Rate)
1991-92 to 1999-2000 6%
2000-01 to 2010-11 7.4%
Source: Basic data from MOSPI.
Source: NSSO ; IMF
What are the Macroeconomic
objectives of a nation?
Short run Macroeconomic Goals
(i) Price Stability (control of inflation); Inflation rate:
how fast prices are rising over time.
(ii) Reduction in unemployment; proportion of
workers who are not employed; and
(iii) Stable output growth (avoidance of short run
fluctuations that constitutes business cycle).
(iv) Avoiding BOP and exchange rate problem
Increasing output, employment and growth, while
keeping inflation controlled is a major issue.
What are the tools used to achieve
these objectives?
Instruments
There are three types of policies the government employs to
achieve these goals:
1.Fiscal policy: government policies concerning taxes and
spending.
2. Monetary policy: tools used by the RBI to control the
quantity of money in the economy.
3.Growth or supply-side policies: stimulating aggregate supply
instead of aggregate demand. Promoting long-run economic
growth by stimulating R&D, technological innovations, and
other measures designed to increase productivity.
What are the major macroeconomic
issues or problems of Indian
economy?
Current Macroeconomic Issues of Indian
Economy
Low investment rate
Low savings rate
High unemployment rate
High fiscal deficit
