IILM - Macroeconomics-Environment of Business

8/14/2019 IILM - Macroeconomics-Environment of Business

1/26

TOPIC 1

MACROECONOMICEnvironment of BusinessIntroduction


2/26

Macroeconomics

Distinction between Microeconomics andMacroeconomicsMicroeconomics is the study of how

individual households and firms makedecisions and how they interact with oneanother in markets.Macroeconomics is the study of theeconomy as a whole. Its goal is to explainthe economic changes that affect manyhouseholds, firms, and markets at once.


3/26

THE BUSINESS CYCLEThe Business cycle is the rise and fall of economic activity

relative to the long-term growth trend of the economy

O

Nationa

loutput

Time

1

2

3

4

4

The business cycle

The recession

The peaking out

The boom

The upturn

Recession

4


4/26

Naoop

Potential output

Actual output

The business cycleINDIA

O Time


5/26

O

Potential output

Actualoutput

1

2

34

1

23

4

The business cycle

The recession

The peaking out

The boom

The upturn

Recession

44

Naoop

Time


6/26

Real

Output

100300

500

700

900

1100

1300

1950

-51

1954

-55

1958

-59

1962

-63

1966

-67

1970

-71

1974

-75

1978

-79

1982

-83

1986

-87

1990

-91

1994

-95

1998

-99

Thousands

y

Output of the U.S. economy, 1869-1996India: 1950-2001


7/26

The unemployment rate, 1890-1998

USA


8/26

Consumer prices: 1800-1998

USA


9/26


10/26

Depression and Recession

- A depression is a severereduction in an economys totalproduction accompanied by highunemployment lasting severalyears

- A recession is a decline in aneconomys total productionlasting six months or longer


11/26

Economic Expansion

- An expansion is anincrease in theeconomys totalproduction lasting sixmonths or longer

- Boom/Overheating


12/26

Leading Economic Indicators

Leading economic indicators are theseeconomic statistics, housing starts, stock prices, demand for consumer durables, and consumer expectations,that foreshadow futurechanges in economicactivity


13/26

Aggregate demand is the relationbetween the general price level inthe economy and the quantity ofaggregate output demanded

Aggregate demand is the keyconcept in understanding demand-side (or Keynesian) economictheories

Aggregate Demand


14/26

The price level in the economy is acomposite measure reflecting the prices

of all goods and services in theeconomy

The consumer price index and the

implicit price deflator are twoinstruments to measure the price levelof various groups of products

The Price Level(The CPI, WPI and GDP Deflator)


15/26

The Aggregate Demand Curve

A curve representing

the relation between

the economys pricelevel and the amount

of aggregate output

demanded per period

of time, other things

held constant

Real GDP

Price level

AD


16/26

Aggregate Output

The total quantity of final goods andservices produced in an economyduring a given time period

Gross domestic product (GDP) is the

most commonly used measure ofaggregate output


17/26

The Aggregate Supply Curve

A curve representing

the relation between

the economys price

level and the amountof aggregate output

supplied per period of

time, other things heldconstant

Real GDP

Price level

AS


18/26

Macroeconomic Equilibrium

Q

AS

AD


19/26

The Great Depression of 1930s(and are we going into the next one?)

Aggregate demand was reducedbecause of,

A sudden drop in expectationsfor business activity and anassociated reduction inbusiness investment

An accompanying contraction

in the nations money supply


20/26

The Age of Keynes

In 1936 John Maynard Keynes (1883-1946),of Cambridge University, published TheGeneral Theory of Employment, Interest, andMoney, which started Macroeconomics.

Keynesian theory emphasizes the demandside of the economy, the instability of theprivate sector, and the role of fiscal policy

Keynesian theories grew in their importancefrom the 1930s and achieved their goldenage during the 1960s


21/26

Demand-Side Economics

Macroeconomic policy that focuseson changes in aggregate demand asa way of promoting full employmentand price stability

h fl i ( )


22/26

The Great Stagflation (1973-1975) Stagflation is a

contraction of anations outputaccompanied byinflation

Stagflation isgenerally a supply-side phenomenon

A dramatic increasein oil prices causedthe stagflation of the1970sReal GDP

AS1973

AD

AS1975


23/26

Since 1980s and in 1990s

Supply-side economics

Macroeconomic policy that focuses on the use oftax cuts to stimulate production so as toincrease aggregate supply

According to aggregate demand and supply, this

would have the effect of increasing real GDPwhile lowering the price level

This was the intent of Economic Reforms in

many countries of the world, policies of RonaldReagan and Margaret Thatcher were based onsupply-side economics. In India 1990s reformsare also in similar tradition under Manmohan

Singh, former FM, Present PM


24/26

economic growth & stabilization

Monetary and fiscal policy

Inflation: cost of living index

balance of payments & exchange rates

balance of payments deficits and surpluses

exchange rate movements

Basics of Demand and Supply

The major macroeconomicissues relevant for businesses


25/26

The Objective of Macroeconomics

The ultimate objective ofmacroeconomics is to developand test theories about how theeconomy as a whole workstheories that can be used topredict the consequences ofeconomic events for businesses

The focus of macroeconomics isthe performance of the nationaland world economies


26/26

Understanding the Economy

Identify the important areas: Total output (and income)

The average of prices

Balance of Payments

Resource employment

Measure the important areas using:

Real Gross Domestic Product Consumer Price Index

Exports, Imports & Exchange Rate

Unemployment rate

IILM - Macroeconomics-Environment of Business

Documents

Transcript of IILM - Macroeconomics-Environment of Business