Course Description

Systems of national accounts; input output

system; money and exchange economy;
basic models of income determination;
classical model; Keynes model; derivation of
IS and LM functions; three sector models of
income determination; four sector models of
income determination; inflation & Phillips
curve; open economy macroeconomics;
consumption, saving; investment and
Financial system.

Scope and Objective

The course aims at enabling the students to
understand the meaning, interdependence
and determination of the equilibrium level of
the macroeconomic variables like,
National Income, Saving, Investment,
Consumption, Employment, Interest Rate,
Price, Wage Rate, Foreign Exchange Rate,
etc. The methods and approach to
macroeconomic modeling and policy are
also emphasized.

Evaluation Scheme and other details

Mid Semester Test
: 30%CB
Comprehensive Exam.
: 40% Partly OB
Assignment/Term Paper : 10%
Unannounced Test/Quiz : 15%
Class Participation
: 05%
Chamber Consultancy hour
: Thursday 9th
Chamber number
: 1201 A
E-mail
:akgiri.bits@gmail.com

The Scope of Economics

Microeconomics and Macroeconomics

TABLE Examples of Microeconomic and Macroeconomic Concerns

Divisions
of Economics

Production

Microeconomics Production/output in
individual industries
and businesses
How much steel
How many cars

Macroeconomics National
production/output
Total output
Gross domestic
product
Growth of output

Prices

Income

Employment

Price of individual
goods and
services

Distribution of
income and
wealth

Price of medical
care
Price of gasoline
Food prices

Wages in the
auto industry

Employment by
individual
businesses
and industries
Jobs in the steel
industry Number of
employees in a firm

Aggregate price
level

National
income

Consumer prices
Producer prices
Rate of inflation

Total wages
and salaries
Total profits

Employment and
unemployment in
the economy
Total number of jobs
Unemployment rate

Microeconomics and
Macroeconomics
Microeconomics The study of how households and
firms make choices, how they interact in markets, and
how the government attempts to influence their choices.
Microeconomics examines the economic behavior of
individual households and firms their responses to
prices, income, tastes, opportunities and other
fundamental variables.

Microeconomics and
Macroeconomics
Macroeconomics The study of the economy as a
whole, including topics such as inflation, unemployment,
national income, interest rate, exchange rate, stock
prices and budget deficit etc.
Macroeconomics examines the sum of microeconomic
actions, their dynamics and interactions.
Therefore, macro must be fully compatible with micro in
its explanations of behaviors.
To trust any macro answer, you must be sure of each off
its micro roots.

Course Strategy
Define the important concepts, magnitude and
questions in the real world.
Learn alternative theories suggesting answers
and explaining behavior
Evaluate data to test the validity and then
choose among theories
Put in a position to have a serious opinion on
important topics.

Macroeconomic Issues
Why macroeconomic issues are more
controversial?
Macro hits us on our pockets through its
policy prescription, so we want clear answer.
Macro gets intimately involved in politically
sensitive issues.
Media cares these issues and wants to find
controversy to sell those.

Why Study Macroeconomics?

As an investor
As a planner
As a manager or employee
An intellectually curious person

As an Investor
Where are the interest rate heading?
Which sector will do best/worst during the
next quarter, year or decade?
What is the real interest rate?
What is the investment sentiments in the
economy?
What is the exchange rate currently.
Answer to exchange rate, interest rate and
inflation rate variables

Planner
What determines the interest rates and what are
appropriate monetary targets?
What the appropriate monetary tools to apply?
What are the appropriate taxes to raise?
What is the composition of best budget?
How will international trade affect jobs, inflation
and credit?
What is the cost of inflation?
What is the cost of fiscal deficit?
What is the cost of unemployment?

Manager or Employee
What growth will my current market
provide if I maintain the share?
Can I raise my prices as rapidly as costs?
What opportunities are emerging in the
emerging and developed countries.
Should I employ more or not?
Which sector I will target for investment
and growth?

Intellectually curious person

Why do business cycle exist?
Why inflation?
How inflation be cured?
Why exchange rate is unstable?
What is interest rate?
Why interest rate is so important?
Why financial market is unstable?
And so on

What Macroeconomics Is About

Macroeconomics: the study of structure and
performance of national economies and
government policies that affect economic
performance
Issues addressed by macroeconomists:

Economic growth
Business cycles
Unemployment
Inflation
Investment
Consumption
The international economy and exchange rate
Macroeconomic policy fiscal and monetary

Macroeconomic Variables
Total output in the economy (GDP/NDP/NNP..)
Aggregate price level (Inflation/Deflation)
Employment/unemployment
Interest rate
Wage rate
Foreign exchange rate
Fiscal deficit
Stock prices
Study all the variables in levels and how they
changes over time.

Macroeconomic models
To understand the complexity of economic
system, economist use models
Macroeconomic models allow economists
to link a phenomenon which they wish to
explain (dependent) to one, two or more
variables (independent) believed to be
largely responsible for the behavior of the
phenomenon under study.

Macroeconomic models
Variables are exogenous/endogenous:
Endogenous variables are the variables whose
values are determined by the model.
A dependent variable is endogenous
Exogenous variables are those whose value is
determined by forces outside the model.
Macroeconomic theory will help us to identify
those variables from the system and establish
the theoretical linkages between those two set of
variables.

Macroeconomic Questions???
How are the levels of output, employment determined
and why do they fluctuate?
Why does inflation occur and when should we worry
about it?
How does government policies affect inflation and
unemployment?
How do trade, international financial markets and
exchange rate affect employment and inflation
domestically?
What policies are optimal in the sense of achieving the
most desirable behavior of aggregate variables?
Why some countries are rich and some are poor?

A World Tour
The United States
The European Union
China
India

1-1 The United States

When macroeconomists study
an economy, they first look at
three variables:

Output
The unemployment rate
The inflation rate
Fiscal deficit

1-1 The United States

Table 1-1

Growth, Unemployment, and Inflation in the United States Since 1970

19702006
(average)

19962006
(average)

2007

2008

2009

Output growth rate

3.1%

3.4%

3.3%

2.1%

2.5%

Unemployment rate

6.2

5.0

4.6

4.6

4.8

Inflation rate

4.0

2.0

2.9

2.6

2.2

Output growth rate: annual rate of growth of output (GDP). Unemployment rate: average over the year. Inflation rate:
annual rate of change of the price level (GDP deflator).

The period 1996-2006 was one of the best decades in

recent memory:
The average rate of growth was 3.4% per year.
The average unemployment rate was 5.0%.
The average inflation rate was 2.0%.

1-2 The European Union

Table 1- Growth, Unemployment, and Inflation in the Five Major European Countries
2
Since 1970 (Germany, France, UK, Italy, Spain)
19702006
(average)

19962006
(average)

2007

2008

2009

Output growth rate

2.3%

2.0%

2.7%

2.6%

2.2%

Unemployment rate

7.4

8.7

7.6

7.0

6.7

Inflation rate

5.4

1.8

1.7

1.8

2.2

Output growth rate: annual rate of growth of output (GDP). Unemployment rate: average
over the year. Inflation rate: annual rate of change of the price level (GDP deflator).

1-2 The European Union

The economic performance of the five countries in
Table 1-2 has been far less impressive than that of the
United States over the same period:
Average annual output growth from 1996 to 2006
was only 2.0%.
Low-output growth was accompanied by persistently
high unemployment.
The only good news was about inflation. Average
annual inflation for these countries was 1.8%, much
lower than the 5.4% average over the period 1970 to
2006.

1-2 The European Union

How Can European Unemployment Be Reduced?

There is still disagreement about the causes of

high European unemployment:
Politicians often blame macroeconomic policy.
Most economists believe, however, that the
source of the problem is labor market
institutions.
Some economists point to what they call labor
market rigidities.
Other economists point to the fact that
unemployment is not high everywhere in
Europe.

1-3 China
Table 1-3

Growth and Inflation in China Since 1980

19802006

1996
2006

2007

2008

2009

Output growth rate

9.3%

8.8%

10.7%

10.0%

9.5%

Inflation rate

5.4

3.3

1.5

2.5

2.2

Output growth rate: annual rate of growth of output (GDP). Inflation rate:
annual rate of change of the price level (GDP deflator).

Since 1980, Chinese output has grown at close to 10%

per year, and the forecasts are for more of the same.
This is a truly astonishing number: Compare it to the
3.1% number achieved by the U.S. economy over the
same period. At that rate, output doubles every 7 years.

1-4 India
Table 1-4

Growth, inflation and Fiscal deficit in

India Since 2006
2006

2007

2008

2009

2010

2011

2012

Output
growth rate

9.6%

9.3%

6.7%

8.4%

8.4%

6.5%

4.8%

Inflation rate

6.6

4.7

8.1

3.8

9.6

7.6

6.16

Fiscal
Deficit

3.5

2.7

6.0

6.7

4.9

5.8

5.1

Output growth rate: annual rate of growth of output (GDP). Inflation rate:
annual rate of change of the price level (WPI), Fiscal deficit: annual
percentage to GDP
Year
Unemployment rate
1972-73
1.6
1977-78
2.6
1982-83
1.9
1987-88
2.7
1993-94
1.9
1999-00
2.8
2004-05
3.1

GDP Growth Rates

2005- 2006- 2007- 2008- 2009- 2010- 2011- 201206
07
08
09
10
11
12
13
Gross
Domestic
Product

9.48

9.57 9.32 6.72 8.59

9.32

6.21 4.96

Agriculture &
Allied Services

5.14

4.16

7.94

3.65 1.79

Industry and
Manufacturing

10.1

14.32 10.28

4.33

11.3

9.73

2.69

1.89

10.91

10.06 10.27

9.98

10.5

9.75

8.2

6.59

Services

5.8 0.09 0.81

Sector wise share to total GDP

2005 2006 2007- 2008- 2009- 2010- 2011- 2012
-06 -07 08
09
10
11
12
-13

Agriculture 18.2 17.3 16.81 15.77 14.64 14.45

14.1 13.6

Industry

27.9 28.6 28.74 28.13 28.27 28.23 27.51 27.0

Services

53.7 53.9 54.45 56.11 57.09 57.32 58.39 59.2

Employment- Sector wise (in %)

Sector

1999-2000

2004-05

2009-10

Agriculture

59.90

56.60

53.20

Industry

18.2

18.2

21.51

Services

23.74

24.66

25.27

396.76 millions

457.46 millions

460.22 millions

Total Employment

Fiscal Indicators
2007- 200808
09
2.5
6.0

Gross
Fiscal
deficit
Revenu 1.1
e Deficit
Primary
Deficit

-0.9

200910
6.5

201011
4.8

201112
5.7

201213
5.1

4.5

5.2

3.2

4.3

3.5

2.6

3.2

1.8

2.6

1.9

Inflation

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

WPI

4.7

8.1

3.8

9.6

8.9

7.6

6.6

CPI

6.2

9.1

12.4

10.4

8.4

10.0

9.9

Monetary Tools
Sep 2012

Apr 2013

Nov 2013

Bank Rate

9.00

8.50

8.75

Repo Rate

8.00

7.50

7.75

Reverse Repo
Rate

7.00

6.50

6.75

CRR

4.75

4.00

4.00

SLR

23.00

23.00

23.00

Exchange Rate
USD vs INR

USD

Dec 2012

Feb 2013

Aug 2013

Dec 2013

Jan 2014

54.56

53.08

68.36

62.22

61.60

1-4 Looking Ahead

These are the questions to which you have been exposed in
this chapter:
What determines expansions and recessions? Can
monetary policy be used to prevent a recession in the
United States? How will the Euro affect monetary policy in
Europe?
Why is inflation so much lower today than it was in the
past? Can Europe reduce its unemployment rate? Should
the United States reduce its trade deficit?
Why do growth rates differ so much across countries, even
over long periods? Has the United States entered a New
Economy, in which growth will be much higher in the
future?

Looking Ahead India and China

Why do growth rates differ so much across
countries, even over long periods? Can
India emulate China and grow at the same
rate?
Inflation is bothering India whereas
inflation is well within control for china.
Can India reduce the burden of fiscal
deficit?