Macro economic+framework

Macro-Economic Framework

Prof. Swaha ShomeMumbai

2

Measurement & Determination of National Income : Identify appropriate Macro-economic concepts

Growth, Unemployment, Trade cycles & Inflation

Performance Indicators – significance

Outline (1)

3

Elements of Monetary & Fiscal System Implications of Monetary & Fiscal Policy

Patterns of international trade & trade policy, regional trading blocks, globalization of production

Balance of Payments, Foreign Exchange Markets & European Monetary Union

Outline (2)

4

Stock vs. Flow variables (1)

Stock variables : Accumulation of flows• No time dimension • Change in stock – discontinuous

Flow variables : Changes in stocks• change over time : time dimension• rate of change at some point of time

5

Stock vs. Flow variables (2)

Stock Flow

Capital Investment

Wealth Income

Price Index Inflation

Balance Sheet Profit/Loss account

Forex Reserves Exports/wages/taxes

Unemployment level GDP

6

Macro-economic variables

Price

GDP

Unemployment rate

Forex Reserves

7

Macro-economic targets

Price stability

Adequate growth

Minimum unemployment

Stable Foreign exchange rate

8

Opportunity cost

Situation X Y

1 0 20

2 1 18

3 2 15

4 3 11

5 4 6

6 5 0

• Opp cost of X = Amount of Y to be

compensated for one more unit of X

• Opp cost of X increases as you

produce more of X

9

Opportunity Cost - Illustrated Sacrifice of alternatives in

production/consumption of a good

Eg. Let a farm produce 1000 tonnes of wheat or 2000 tonnes of sugar

Opportunity Cost of producing 1 ton wheat = 2 tonnes of sugar foregone.

10

Production Possibility Curve

0

1

2

3

4

5

6

0 1 2 3 4 5 6

X

Y

Enclosed region – unemployment

Outside graph – not feasible

Various combinations of 2 classes of goods produced provided resources in the economy are

fully employed

11

PPF – Illustrated

PPF

012345678

0 5 10

Clothing

Fo

od

Units of Food Units of Clothing

8 0

7 2.2

6 4

5 5

4 5.6

3 6

2 6.4

1 6.7

0 7

12

• Downward sloping

• Concave to origin

• Resources have alternative uses but not equally efficient in all

Properties of a PPC

13

Production Possibility Frontier Curve shows all possible 2-goods

combination that an economy can produce - Specified time period- Resources fully & efficiently employed- Issues of choice & opportunity cost Concave to origin – increasing opportunity

cost Region interior to PPF – economy has not

attained Productive Efficiency - unemployment

14

Production Possibility Frontier Shifting

PPF Shift

0

1

2

3

4

5

6

7

8

0 1 2 3 4 5 6 7 8

X

Y

Economic Growth Improvement in skills

Improved Technology Increase in factors of production

15

Economic growth shifting PPF

Necessities

Lu

xuri

es

Poor Nation High Income nation

Poor nation devotes resources mostly to food

Rich nation : expansion in food consumption low compared to increased consumption of luxuries

16

Before Investment

Current consumption

Cap

ital

Investm

en

t

After Investment

Future Consumption

Cap

ital

Investm

en

t

Country I Country II Country III

Countries that invest more heavily forge ahead

Countries that invest heavily have higher investment and consumption in future

Households Firms

Real goods & services

Money FlowMoney

Flow

Factors of Production

Circular Flow

Payment for

Factors

Payment for

goods

Money Flow

Money Flow

Real flow

Real flow

18

Leakages & Injections

Leakages :1. Savings2. Taxes 3. Imports

Injections : 1. Investment 2. Government expenditure 3. Exports