Understanding Global Macroeconomy PDF

1 Understanding Global Macroeconomy Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  2 Flow of presentat...

1 Understanding Global Macroeconomy Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  2 Flow of presentation What is macroeconomics? Classical vs Keynesian Circular flow in the economy National income Price level and output Inflation Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  3 WHAT IS MACROECONOMICS? “Macroeconomics is the study of the behaviour of the economy as a whole. It examines the overall level of a nation’s output, employment, and prices” …. P. A. Samuelson and W. D. Nordhaus Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  The Classical view on Macroeconomics According to classical school of thought, if market forces of demand and supply are allowed to work freely, then i. there will always be full employment in the long run, and unemployment, if any, will be a short-run phenomenon; ii. there will be neither over-production nor under-production at the aggregate level; and iii. the economy will always be in equilibrium in the long run. Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  Say’s Law: The Foundation of Classical Macroeconomics Say’s law states that “ supply creates its own demand” The postulates of classical macroeconomics failed to hold during the great depression of 1930s. This marked the collapse of the classical macroeconomics. Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  The Keynesian Macroeconomics are separate branch of Economies Macroeconomics was created by J.M. Keynes after analysing the causes and consequences of the Great Depression. The central theme of the keynesian macroeconomics are following- – The level of output and employment in an economy is determined by the aggregate demand given the resources. – Money market equilibrium is determined by the demand for and supply of money. – The unemployment in any country is caused by lack of aggregate demand and economic fluctuations are caused by demand deficiency. – The demand deficiency can be removed through compensatory government spending. Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  The Circular Flows in a Two- Sector Economy Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  Circular Flows in Two-Sector Model with the Capital Market Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved Circular Flows of Incomes in a Three- Sector Model Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  The Circular Flows of Income and Expenditure in Four-Sector Model Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  National Income In general sense of the term, national income refers to the aggregate money value of all final goods and services resulting from the economic activities of the people of a country over a period of one year. Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  12 Measures of National Income: Gross Domestic Product (GDP) Gross National Product (GNP) Net National Product (NNP) Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  Gross Domestic Product (GDP) The Gross Domestic Product (GDP) can be defined as the sum of market value of all final goods and services produced in a country during a specific period of time, generally one year. It includes income earned by the foreigners in the country and excludes income earned abroad by the residents. The market value of domestic product is obtained at both constant and current prices. Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  Gross National Product (GNP) The concept of GNP includes the income of the resident nationals which they receive abroad, and excludes the incomes generated locally but accruing to the non-nationals. GNP = Market value of domestically produced goods and services plus incomes earned by the residents of a country in foreign countries minus incomes earned by the foreigners in the country. GDP = Market value of goods and services produced by the residents in the country plus incomes earned in the country by the foreigners minus incomes received by residents of a country from abroad. Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  Net National Product (NNP) The NNP is the measure of national income which is available for consumption and net investment to the society. NNP = GNP- Depreciation of capital It the actual measure of national income. The NNP divided by the population of the country gives the per capita income. Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved Determination of the Price Level 16 and Output Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  17 The Effect of Shift in AD and AS Curves on Price and Output Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  Nominal and Real GNP The GNP estimated at current prices is called nominal GNP and GNP estimated at constant prices in a chosen year is called real income. Real GNP gives national income estimates free from distortion caused by inflation or deflation. Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  19 What is Inflation? According to Pigou, “Inflation exists when money income is expanding more than in proportion to increase in earning activity.” According to Samuelson, “Inflation denotes a rise in the general level of prices”. Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  20 Measuring Inflation by PIN The formula used for measuring the rate of inflation through the change in the Price Index Number (PIN): where PINt is the price index number in the year selected for measuring inflation and PINt–1 is the price index number in the preceding year. The two widely used PINs are Wholesale Price Index (WPI), also called Producer Price Index (PPI), and Consumer Price Index (CPI). Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  21 Measuring Inflation by GNP Deflator The GNP deflator is the ratio of nominal GNP to the real GNP of the same year, i.e., where Nominal GNP is GNP at current prices and Real GNP is GNP at constant prices. In the opinion of the economists, GNP deflator gives a more appropriate measure of inflation. In general, however, WPI is more commonly used to measure the inflation in India. Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  22 Types of Inflation 1. Moderate Inflation 2. Galloping Inflation 3. Hyper Inflation Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  23 Inflation, Disinflation and Deflation Inflation refers to a persistent increase in the general price level. Disinflation means decline in the rate of inflation. Deflation means fall in the general price level below the base year level. Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved  24 Discussion Copyright © 2019 by McGraw Hill Education (India) Private Limited. All rights reserved