Macroeconomics 10 dec
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Transcript of Macroeconomics 10 dec
December 10 2011
Macroeconomics
Concept of National Product
2
»Capacity to produce goods and services
over a period of time
»GNP growth rate is a powerful indicator of
the growth rate of an economy
»Sum of all final goods and services
produced during a specified time period
»Output can be measure at Market Prices of
Factor Cost
»Concept of value addition
Relationship
3
GNPMP
NNPMP GNPFC
GDPFC
NDPFC
NDPMP
NNPFC
GDPMP
- Dep- Net indirect taxes
- Net indirect
taxes
- Net indirect taxes - Dep
- Dep
- Dep
- Net income from abroad
- Net in
com
e
from
abro
ad
- N
et
inco
me
from
abro
ad
- Net indirect
taxes
- Net income from abroad
Real Vs. Nominal GNP
4
»“Real” refers to prices or values that have
been adjusted for inflation or price level
fluctuations
»Real GNP is the GNP in current rupees
deflated for changes in the prices of items
included in GNP
»Nominal GNP is just expressed as current
rupees
»Doesn’t indicate change in price levels
Real Vs. Nominal GNP
5
»Over time Nominal values reflect changes in
»Real size of an economic variable
»General level of prices
»For example, if nominal GNP in 1998-99 was
16 crores compared to 7 crores in ’93-94.
Does this mean output has doubled?
»Real GNP for ‘93-94 is only 10 crores. What
does this imply?
Real Vs. Nominal GNP
6
»What are the situations in which Nominal
GNP increases?
»If more output is produced
»If prices rise
»What are we more interested in and why?
»Concept of GNP Deflator
»Real GNP = Nominal GNP *(GNP deflator for
base year/GNP deflator for current year)
Price Indices
7
»2 aspects of movements in prices – change
in relative prices, change in overall price
level
»Consumer Price Index (CPI)
»What is CLI?
»Concept of “utility”
»The ‘compromise’ called CPI
»Compared to the base year (Laspeyre)
CPI
8
»(Cost of purchasing the base year basked in
current year*100) / Cost of purchasing the
base year basket in the base year
»Factors considered
»Consumption basket in the base year
»Prices of items in the basket in the base
year
»Price relatives in the current year
CPI
9
Item Qty 1970-71
Price 197-71
Price 1980-81
Price Relative
Rice 15 kg Rs. 3/kg Rs. 4/kg
Wheat 10 kg Rs. 2/kg Rs. 3/kg
Milk 30 ltrs Rs. 3/ltr Rs. 5/ltr
Cotton Cloth
5 mtrs Rs. 8/mtr Rs. 12/mtr
Housing A two room house
Rs. 100 p.m.
Rs. 200 p.m.
»Calculate Total expenditures, weights, price
relatives, CPI
Wholesale Price Index
10
»Similar principles of construction
»Differences:
»Items included
»Wholesale prices
»Weights calculation
»Published by the Office of the Economic
Adviser to the GoI
National Income Deflators
11
»Ratio of current price GDP to constant price
GDP
»Covers all final goods and services
»Difference from CPI – Includes investment
goods
»Difference from WPI - ???
»Can deflators be calculated for other
product measures?
Index Numbers of Production
12
»Index Number of Agricultural Production
»Covers mining, manufacturing, electricity
generation; excludes construction –
incorporates 352 items
»Current problems?
»Index of agricultural production
»42 crops under 2 groups
»Similar construction methodology
Money and Credit
13
»Instruments of growth – monetary and fiscal
policy
»Liquidity
»Money stock measures:
»M1: RBI currency notes with public +
Rupee coins and notes with public +
Small coins + DD with banks + Other
deposits with RBI
Money and Credit
14
»M2: M1 + PO Savings Deposits
»M3: M1 + TD with banks
»M4: M3 + All PO Deposits
»These money measures are in the
descending order of liquidity
»Money supply – stock or flow? Why?
Money and Credit
15
»Monetary liabilities of banking system +
Non-monetary liabilities = Financial Assets
+ Other assets
»Net non-monetary liabilities = Other assets
– Non-monetary liabilities
»Monetary liabilities = Financial assets – Net
non-monetary liabilities
»Changes in monetary liabilities ~ changes in
financial assets + Net non-monetary liab.
Measurement of National Income
16
»3 methods, ideally yielding the same result
»Output method
»Expenditure method
»Income method
Output method
17
»Aggregates values of all final goods and
services produced during a year or by
aggregating the values of all intermediate
products
»Yields GDPFC and GNPFC
»Used especially for primary sectors
»Example: Agricultural and extractive
industries + Manufacturing Industries +
Services and Construction = GDPFC
Expenditure method
18
»Aggregates all money spent by private
citizens, firms and government
»Excludes values of intermediate goods
»Yields GNPMP
»Example: Consumer’s expenditure +
Government current expenditures on goods
and services + Fixed capital formation +
Exports – Imports = GNPMP
Income method
19
»Aggregates incomes of only the residents’
incomes that obtain income directly from
the current production of goods and
services
»Yields GDP at factor cost
»Example: Income from employment +
Income from self-employment + Gross
profits of companies + Rents = GDPFC
»Conceptually, should yield the same result
Alternative measures of National Output
20
»Gross National Product
»Net National Product
»National Income
»Personal Income
»Disposable Income
Alternative measures of National Output
21
»Net Export (E-M) + C + I + G
»GNPMP – Depreciation = NNPMP
»NNPMP – Net Indirect Taxes + Wages
+Proprietors’ Income + Interest + Rents +
Corporate Profits = NI = NNPFC
»NI – Corporate Profits and Social Security
Insurance taxes + Transfer Payments = PI
»PI – Personal Taxes = PDI – Personal Savings
= Personal Consumption
Difficulties in measuring NI
22
»Non-market Production
»Imputed Values
»Underground Economy
»Side Effects and Economic Bads
»Leisure and Human Costs
»Double Counting
Uses of NI Statistics
23
»As an instrument for Economic Planning and
Review
»As a means of indicating changes in a
country’s standard of living
»To indicate changes in economic growth of a
country
»As a means of comparing economic
performance of different countries
Practice Problems
24
»Calculate
»Depreciation
»Net Factor Income from Abroad
»Subsidies
»NDP at FC
Particulars Rupees
GNP at FC 95023
Indirect taxes 14723
NDP at MP 100422
NNP at MP 100575
GNP at MP 107226
Solution
25
»Depreciation = 107226 – 100575 = 6,651
»NFIA = 107226-(100422+6651) = 100575-
100422 = 153
»Subsidies = 95023 + 14723 -107226 = 2520
»NDPFC = 100575 – (14723-2520) = 88,372
Particulars Rupees
GNP at FC 95023
Indirect taxes 14723
NDP at MP 100422
NNP at MP 100575
GNP at MP 107226
Practice Problems
26
»Calculate GNP at MP, National Income,
Personal Disposable Income
Particulars Rupees
GDP at FC 6000
Corporate Income Tax 1200
Personal Income Tax 800
Subsidies 400
Factor Income Received from abroad
1500
Factor Income Paid abroad
1800
Undistributed Profits 250
Indirect Taxes 800
Depreciation 400
Solution
27
»GNPMP = 6000 –
(1500-1800) +
(800-400) = 6100
» NI = NNPFC = 6100
– 400 – 800 + 400 =
5,300
»PDI = Personal
Income – Personal
Tax = 5300 – 250 –
1200 – 800 = 3,050
Particulars Rupees
GDP at FC 6000
Corporate Income Tax 1200
Personal Income Tax 800
Subsidies 400
Factor Income Received from abroad
1500
Factor Income Paid abroad
1800
Undistributed Profits 250
Indirect Taxes 800
Depreciation 400
Practice Problems
28
»Difference between GDP at MP and NNP at
FC is?
Particulars Rupees
Net Factor Income from abroad
(-)500
Depreciation 2000
Indirect Taxes 1900
Subsidies 1000
»GDPMP + NFIA – Dep +Subsidies – Indirect
Taxes = 2000 + 500 +1900 – 1000 = 3,400
Practice Problems
29
»Calculate GNP at MP, NNP at MP, NDP at
MP, NDP at FC, GNP at FC
Particulars Rupees
NNP at FC 4,73,246
Depreciation 61,809
Subsidies 19,431
Net Factor Income from abroad
(-)6,833
Indirect Taxes 87,043
Personal Income Tax 9,759
Corporate Taxes 7,300
Retained Profit 6,758
Practice Problems
30
»Calculate GNP at FC
Particulars Rupees
NDP at MP 88,750
Net factor income from abroad
(-)260
Depreciation 5,220
Subsidies 1,820
Indirect taxes 10,825
31
Aggregate Demand and Supply
Aggregate Demand and Aggregate Supply
32
»Some countries are rich and some are not!
»Aggregate Demand and Aggregate Supply
answer questions about equilibriums in
goods, money market, unemployment, GDP
levels etc
»Provides a “big picture” view of the
economy
»Describes the overall relationship between
overall price level and output
Aggregate Demand and Aggregate Supply
33
»Aggregate Supply (AS) curve describes, for
each given price level, the quantity of
output firms are willing to supply
»Aggregate Demand (AD) curve shows the
combinations of the price level and level of
output at which the goods and money
markets are simultaneously in equilibrium
Aggregate Demand and Aggregate Supply
34
»Difference in the micro and macro economic
concepts of demand and supply
»Equilibrium state of AS and AD
»Shift in AD curve
»Shift in AS curve
Aggregate Supply curve
35
»Classical Supply curve:
»Vertical – indicating that the same
amount of goods will be supplied
whatever be the price level
»Assumption: Labor market equilibrium
»Long term possibility
»Why should supply curve be vertical in
long run? Recall how it was in
microeconomics!
Aggregate Supply curve
36
»Classical Supply curve:
»Potential GDP
»Shift of vertical AS curve
»Does potential GDP grow over time?
»Changes in potential GDP do not depend
on the price level
»Potential GDP changes very little over
time
Aggregate Supply curve
37
»Keynesian Supply curve:
»Horizontal– indicating that firms will supply
whatever amount of goods is demanded at
the existing price level
»Assumption: Unemployment
»Why should supply curve be horizontal in the
short run?
»Short-run price stickiness
»Price level does not depend on GDP - inflation
Aggregate Demand curve
38
»AD curve shows the combination of the
price level and level of output at which the
goods and money markets are
simultaneously in equilibrium
»Expansionary policies’ effects?
»Do consumer and investor confidence have
an effect on AD?
»Depends on real money supply
»AD curve slopes downwards and shifts
AD in Alternative Supply assumptions
39
»Equilibrium under Keynesian case
»Given perfectly elastic supply, shifting
AD to the right will increase output but
leave the equilibrium price level
unchanged
»Equilibrium under Classical case
»Given perfectly inelastic supply, shifting
AD to the right results in an increase in
the price level but no change in output
Supply side economics
40
»Some supply-side policies:
»Removing regulations, maintaining an
efficient legal system, technological
progress
»What is the effect of cutting tax rates?
»Does it have an effect on AD or AS?
»Only supply-side policies permanently
increase output
»AS and AD in the long run
Questions???
Have a happy Sunday!