CHAPTER 1

BY GRP 1V I N D A , KO M A L , P U R N I M A , C H A R L E S, TA N M AY, J A S O N

MACROECONOMICS

MACROECONOMICS

Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions.

Explains the effect of variables such as- Price level, Interest rates, National income.

Explains the growth & fluctuations in an economy.Eg. effects of population, businesses , new technology etc.

Includes national, regional, and global economies

Macro economics / Micro economics

Study of individual behaviour of consumers

Eg- considers income of consumers

Concerned with individual markets

Study of the economy as a whole

Eg- considers GDP of the country

Concerned with national/global market

Uses of Macroeconomics

Essential for having good economic policies

To increase and sustain long-term economic growth

(e.g. through Govt. spending and tax proposals)

To help deal with economic issues especially inflation, national debt etc.

GDP-GROSS DOMESTIC PRODUCT

Total Value of all the goods & service produced in a country

GDP measures the actual physical production of goods and service ,in which country produces for trade to rest of the world

Recession- Decrease in GDP.

Recovery- Increase in GDP post recession but under the trend line

Expansion- Periods where GDP rises above its trend line

Inflation

The percentage change in the average price of all goods & services in an economy

Prices tend to rise when economy is at its peak, prices rises less rapidly when economy is near at a dip.

Generally increases before recession & subsides in the wake of a recession

Inflation

Employment Rate

Employment rate closely follows the fluctuations in real GDP.

Firms lay off workers as GDP declines and inflation rises the economy suffers a downturn

Employment rate

Interest rates

The amount charged for a loan by the bank, an institution or any other lender

One of the controlling factors to regulate money supply in the economy, ( by the RBI )

Real interest rate- interest rate minus the expected rate of inflation

Growth rate

The growth rate of an economy depend on Population growth, capital accumulation & technological progress.

Calculating % growth rate-

100 Difference in growth of current year over previous

Rate of current year

Model of long-run growth

Macroeconomics uses long-run Growth to study the general upward moving economy over a period of time

Does not dwell on how the economy adjusts to Temporary elements that effect it.

Eg- any short financial turmoil

Inflation & unemployment in long-term/short-term

No Long-term trade-off between rate of inflation & rate of unemployment.

Inflation affects unemployment rate only in the short run.

Monetary policy

Exercising controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability

E.g. By changing Interest rate.