This presentation has been uploaded by Public Relations Cell, IIM Rohtak to help the B-school aspirants crack their interview by gaining basic knowledge on Economics. References: www.investopedia.com/terms/o/opportunitycost.asp http://sparkcharts.sparknotes.com/economics/macroeconomics/section1.php http://www.slideshare.net/RahulKaurav/xx-unit-iii http://www.investopedia.com/articles/04/051904.asp https://www.rbi.org.in/home.aspx

1. Webinar – Economics Basics
An initiative by PR Cell, IIM Rohtak
Indian Institute of Management Rohtak
Presented by: Soumya Soni

2. Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends
Macroeconomics: Looks at the economy as a whole, and focuses on issues such as growth, unemployment, inflation, and
business cycles.
Macroeconomics examines the aggregate behavior of the economy – how the actions of all the individuals and firms in the
economy interact to produce a particular level of economic performance as a whole.
Economic Actors
Households
Firms
Government
Financial Sector
External Economy
Decision Making Parameters
Marginal Cost – The additional cost incurred for choosing an action
Marginal Benefit – The Benefit received by choosing the action
Opportunity Cost - The cost of an alternative that must be forgone in order to pursue a certain action
Decision Making - An action must be chosen only if the marginal benefit exceeds the marginal cost of
that action. Or the opportunity cost must be less than the benefits received from the action chosen
Macroeconomic Objectives
Maintaining High Economic Growth
Maintaining economic stability – Controlling Inflation
Reducing unemployment and poverty
Controlling Fiscal Deficits
Maintaining external stability – Balance of payment / Exchange rate
fluctuations/ FDI inflows
Business Cycles

3. Inflation
Inflation is a rise in the overall price level over time. It
is measured through the use of price indexes.
Price indexes summarize what happens to the prices in
a constant “market basket” of goods and services.
Different price indexes may produce different results
because they contain a different composition in their
market baskets.
Price indexes choose a base year in which the price
level for the market basket of goods is set to 1 or 100.
The price level in other years is then shows changes of
the price level since the base year.
Consumer Price Index (CPI) measures the prices of a
fixed basket of consumer goods, which is designed to
represent the average consumer’s expenditures.
[(Dec. 2015 – Positive 5.61%) (Base Year – 2010)]
Wholesale Price Index (WPI) represents the price of
goods at a wholesale stage i.e. goods that are sold in
bulk and traded between organizations instead of
consumers.
[(Dec . 2015 – Negative 0.72%) (Base Year – 2004-05)]
Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends
Important Question :
Difference between WPI and CPI. Which is a better measure?
Purchasing Power Parity ? Look – Hamburger Index

4. Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends
Gross Domestic Product (GDP)
1. GDP is the international standard for measuring the
economic output and growth of countries. It is the market
value of all final goods and services produced within a
country, usually measured in the span of a year, stated in
terms of that year’s prices
2. Gross national product (GNP), which is a measure of the
final output of the citizens and businesses of a country,
regardless of where in the world the output is produced
3. GDP only measures final output, and each final good is
multiplied by its price; intermediate products do not count
toward GDP; this prevents double-counting. Intermediate
goods can be eliminated from the calculations either by
only counting final goods or by counting the value added
by each firm toward a final product.
4. There are three ways to calculate GDP - expenditure
approach, income approach, and production approach
Expenditure Approach
GDP = C + I + G + (X – M))
GDP can be calculated as the sum of four categories:
consumption (C), investment (I), government expenditures
(G), and net exports (exports – imports, or X – M)
Consumption: Households buy the goods produced by the
businesses; this is the biggest category of GDP
Investment: Households can save a portion of their
income, which goes into financial markets
Government expenditures: This category consists of
government payments for goods and services.
Net exports are equal to exports minus imports.
You can check for Income and Production Approach .
Nominal GDP: GDP calculated at existing prices
Real GDP: Nominal GDP adjusted for inflation, and it measures what is really produced; real GDP = nominal GDP / GDP deflator

5. Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends
Fiscal Policy
1. Fiscal Policy refers to the combined governmental
(read Finance minister) decisions regarding a
country's taxing and spending
2. The term fiscal policy is associated with British
economist John Maynard Keynes, who believed that
governments should influence macroeconomic
productivity levels by doing such things as improving
the employment rate, combating inflation, and
flattening business cycles.
3. Government can reduce Tax rates and increase
spending to adopt Expansionary fiscal policy and do
the vice versa to adopt Contractionary fiscal policy.
4. Expansionary fiscal policy may cause Inflation in the
economy whereas Contractionary fiscal policy may
lead to recession and high unemployment levels
Monetary Policy
1. Monetary policy is the actions a central bank (RBI in
India) takes to influence the country’s money supply and
the overall economy
2. Monetary policy objectives are Price stability, credit
availability , stability of exchange rate , low
unemployment rate , high economic growth
3. RBI influences money supply in three ways
a) Buying and selling government bonds through Open
Market Operations
b) Setting the Repo Rate
c) Establishing Reserve Requirements
4. RBI can reduce Repo rate , Reserve requirements and
buy govt. bonds to adopt Expansionary Monetary policy
and do the vice versa to adopt Contractionary Monetary
policy
5. Open Market Operation is an activity by a Central Bank to
adjust Liquidity in the system by buying and selling Govt.
bonds

6. Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends
Monetary Policy Instruments - Rates
Repo rate : Bank sells the security to RBI to raise money.
When banks sell security , banks promise to buy back the
same security from RBI at a predetermined date with an
interest at the rate of REPO . It is actually a repurchase
agreement. ( 6.75 %)
Reverse Repo rate is the rate at which banks park their short-
term excess liquidity with the RBI. Opposite of Repo. (5.75%)
Bank Rate : Bank rate is the rate at which RBI lends money to
commercial banks for meeting shortfall for a long period
without selling or buying any security. (7.75%)
MSF rate (marginal standing facility) is the rate at which
banks borrow funds overnight from the Reserve Bank of
India (RBI) against approved government securities. (7.75%)
Monetary Policy Instruments - Ratios
Cash Reserve Ratio (CRR): Each bank has to keep a certain
percentage of its total deposits with RBI as cash reserves.
(4%)
Statutory Liquidity Ratio (SLR): Amount of liquid assets such
as precious metals(Gold) or other approved securities, that a
financial institution must maintain as reserves other than the
cash. (21.5%)
CRR limits the ability of the banks to pump more money into
the economy. SLR is used to limit the expansion of bank
credit, for ensuring the solvency of banks
Real vs Nominal Rates
Real Rate = Nominal Rate – Inflation Rate
Ex: Your FD gives you a interest rate of 5% and Inflation is 7%
then,
Real Rate = 5% - 7% = -2%
Negative Nominal Interest Rates -
Sweden , Japan , Denmark , Switzerland and more to come…

7. Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends
Balance of Payments
Set of accounts that record a country’s international
transactions, and which always balance out with no surplus
or deficit shown on the overall basis.
A surplus or deficit can be shown in any of its three
component accounts
• Current account – covers export and import of goods and
services
• Capital account – covers investment inflows and outflows
• Gold account – covers gold inflows and outflows
BOP = Current + Capital +Gold
Exchange Rates
An exchange rate is the current market price for which one
currency can be exchanged for another.
Devaluation - A deliberate downward adjustment to the
value of a country's currency, relative to another currency,
group of currencies or standard.
Devaluation is a monetary policy tool of countries that have a
fixed exchange rate or semi-fixed exchange rate.
Devaluation causes a country's exports to become less
expensive, making them more competitive on the global
market.
Currency depreciation is the loss of value of a country's
currency with respect to one or more foreign reference
currencies, typically in a floating exchange rate system.
Deficits
In simple words, it is mount of borrowing the government
has to resort to meet its expenses.
Fiscal Deficit = Total Expenditure – Total receipts excluding borrowings
Fiscal Deficit = Borrowings
Safe limit of fiscal deficit is considered to be 5% of GDP.

8. Macroeconomics Overview National Income Accounting Fiscal and Monetary Policy Emerging Trends
Negative Nominal Interest rates around the world
Strengthening of US Dollar
Weakening of domestic currencies for developing countries
Low oil prices – What is the reason ?
Prediction of slowdown in developing nations including China
Lift of US Quantitative Easing and expected rise in interest rates coupled with negative
interests will see a shift of capital inflows from US
Devaluation of Yuan
Problems of Greece – High on Debt !
Sustainability of EuroZone
Hyperinflation in Venezuela ( Also see for Zimbabwe )
All the Best !

9. www.investopedia.com/terms/o/opportunitycost.asp
http://sparkcharts.sparknotes.com/economics/macroeconomics/section1.php
http://www.slideshare.net/RahulKaurav/xx-unit-iii
http://www.investopedia.com/articles/04/051904.asp
https://www.rbi.org.in/home.aspx
References