This document provides an outline for a macro-economic framework course taught by Professor Swaha Shome in Mumbai. It covers key topics like measuring national income, economic growth, unemployment, inflation, monetary and fiscal policy, international trade, and the balance of payments. It also defines important macroeconomic concepts like stock and flow variables, opportunity cost, production possibility curves, the circular flow of income, and leakages and injections in the economy.

1. Macro-Economic
Framework
Prof. Swaha Shome
Mumbai

2. Outline (1)

Measurement & Determination of National
Income : Identify appropriate Macroeconomic concepts

Growth, Unemployment, Trade cycles &
Inflation

Performance Indicators – significance
2

3. Outline (2)
Elements of Monetary & Fiscal System
 Implications of Monetary & Fiscal Policy


Patterns of international trade & trade
policy, regional trading blocks,
globalization of production

Balance of Payments, Foreign Exchange
Markets & European Monetary Union
3

4. Stock vs. Flow variables (1)

Stock variables : Accumulation of flows
•
•

No time dimension
Change in stock – discontinuous
Flow variables : Changes in stocks
•
•
change over time : time dimension
rate of change at some point of time
4

5. Stock vs. Flow variables (2)
Stock
Flow
Capital
Investment
Wealth
Income
Price Index
Inflation
Balance Sheet
Profit/Loss account
Forex Reserves
Exports/wages/taxes
Unemployment level
GDP
5

6. Macro-economic variables
 Price
 GDP
 Unemployment
 Forex
rate
Reserves
6

7. Macro-economic targets

Price stability

Adequate growth

Minimum unemployment

Stable Foreign exchange rate
7

8. Opportunity cost
Opp cost of X =
Amount of Y to be
compensated for
one more unit of X
•
Opp cost of X
increases as you
produce more of X
X
Y
1
0
20
2
1
18
3
2
15
4
•
Situation
3
11
5
4
6
6
5
0
8

9. Opportunity Cost - Illustrated

Sacrifice of alternatives in
production/consumption of a good

Eg. Let a farm produce 1000 tonnes of
wheat or 2000 tonnes of sugar
Opportunity Cost of producing 1 ton wheat
= 2 tonnes of sugar foregone.
9

10. Production Possibility Curve
Enclosed region – unemployment
6
Outside graph – not feasible
5
Y
4
3
2
1
0
0
1
2
3
4
5
6
X
Various combinations of 2 classes of goods
produced provided resources in the economy are
fully employed
10

11. PPF – Illustrated
Units of Food
8
Clothing
10
Food
5
4
5
4
5
0
2.2
6
8
7
6
5
4
3
2
1
0
0
7
PPF
Units of Clothing
5.6
3
6
2
6.4
1
6.7
0
7
11

12. Properties of a PPC
•
Downward sloping
•
Concave to origin
•
Resources have alternative uses but not
equally efficient in all
12

13. Production Possibility Frontier
Curve shows all possible 2-goods
combination that an economy can produce
- Specified time period
- Resources fully & efficiently employed
- Issues of choice & opportunity cost
 Concave to origin – increasing opportunity
cost
 Region interior to PPF – economy has not
attained Productive Efficiency unemployment

13

14. Production Possibility Frontier Shifting
PPF Shift
8
7
6
Y
5
4
3
2
1
0
0
1
2
3
4
X
5
6
7
8
Economic Growth
Improvement in skills
Improved Technology
Increase in factors of production
14

15. Luxuries
Economic grow th shifting PPF
Necessities
Poor Nation
High Income nation
Poor nation devotes resources mostly to food
Rich nation : expansion in food consumption low compared to
increased consumption of luxuries
15

16. Capital Investment
Before Investment
Countries that invest
heavily have higher
investment and
consumption in future
Current consumption
Countries
that invest
more heavily
forge ahead
Capital Investment
After Investment
Future Consumption
Country I
Country II
Country III
16

17. Payment
for
Factors
Money
Money
Money
Flow
Flow
Flow
Real goods &
services
Real flow
Households
Firms
Real flow
Factors of
Production
Payment
for
goods
Circular Flow
Money
Flow

18. Leakages & Injections

Leakages :
1. Savings
2. Taxes
3. Imports

Injections :
1. Investment
2. Government
3. Exports
expenditure
18