Macroeconomics
December 10 2011
Concept of National Product

»Capacity to produce goods and services over
a period of time

»GNP growth rate is a powerful...
Relationship

ep
D

NNPFC

D

ep

-

-N
et i
n
tax direct
es

3

GNPFC

GDPMP

-

NDPMP

- Net
indire
taxes ct

N
et
ta in...
Real Vs. Nominal GNP

»“Real” refers to prices or values that have
been adjusted for inflation or price level
fluctuations...
Real Vs. Nominal GNP

»Over time Nominal values reflect changes in
»Real size of an economic variable
»General level of pr...
Real Vs. Nominal GNP

»What are the situations in which Nominal
GNP increases?

»If more output is produced
»If prices ris...
Price Indices

»2 aspects of movements in prices – change
in relative prices, change in overall price
level

»Consumer Pri...
CPI

»(Cost of purchasing the base year basked in
current year*100) / Cost of purchasing the
base year basket in the base ...
CPI
Item

Qty 197071

Price 19771

Price
1980-81

Rice

15 kg

Rs. 3/kg

Rs. 4/kg

Wheat

10 kg

Rs. 2/kg

Rs. 3/kg

Milk
...
Wholesale Price Index

»Similar principles of construction
»Differences:
»Items included
»Wholesale prices
»Weights calcul...
National Income Deflators

»Ratio of current price GDP to constant price
GDP

»Covers all final goods and services
»Differ...
Index Numbers of Production

»Index Number of Agricultural Production
»Covers mining, manufacturing, electricity
generatio...
Money and Credit

»Instruments of growth – monetary and
fiscal policy

»Liquidity
»Money stock measures:
»M : RBI currency...
Money and Credit

»M : M
2

1

+ PO Savings Deposits

»M : M
3

1

+ TD with banks

»M : M

3

+ All PO Deposits

4

»Thes...
Money and Credit

»Monetary liabilities of banking system +
Non-monetary liabilities = Financial Assets
+ Other assets

»N...
Measurement of National Income

»3 methods, ideally yielding the same result
»Output method
»Expenditure method
»Income me...
Output method

»Aggregates values of all final goods and
services produced during a year or by
aggregating the values of a...
Expenditure method

»Aggregates all money spent by private
citizens, firms and government

»Excludes values of intermediat...
Income method

»Aggregates incomes of only the residents’
incomes that obtain income directly from
the current production ...
Alternative measures of National Output

»Gross National Product
»Net National Product
»National Income
»Personal Income
»...
Alternative measures of National Output

»Net Export (E-M) + C + I + G
»GNP

MP

»NNP

MP

– Depreciation = NNPMP
– Net In...
Difficulties in measuring NI

»Non-market Production
»Imputed Values
»Underground Economy
»Side Effects and Economic Bads
...
Uses of NI Statistics

»As an instrument for Economic Planning and
Review

»As a means of indicating changes in a
country’...
Practice Problems
Particulars

Rupees

GNP at FC

95023

Indirect taxes

14723

NDP at MP

100422

NNP at MP

100575

GNP ...
Solution
Particulars

Rupees

GNP at FC

95023

Indirect taxes

14723

NDP at MP

100422

NNP at MP

100575

GNP at MP

10...
Practice Problems
Particulars

Rupees

GDP at FC

6000

Corporate Income Tax

1200

Personal Income Tax

800

Subsidies

4...
Solution
Particulars

Rupees

GDP at FC

6000

Corporate Income Tax

1200

Personal Income Tax

800

Subsidies

400

Facto...
Practice Problems
Particulars

Rupees

Net Factor Income from
abroad

(-)500

Depreciation

2000

Indirect Taxes

1900

Su...
Practice Problems
Particulars
NNP at FC

Rupees
4,73,246

Depreciation

61,809

Subsidies

19,431

Net Factor Income from
...
Practice Problems
Particulars

Rupees

NDP at MP

88,750

Net factor income from
abroad

(-)260

Depreciation

5,220

Subs...
Aggregate Demand and
Supply

31
Aggregate Demand and Aggregate Supply

»Some countries are rich and some are not!
»Aggregate Demand and Aggregate Supply
a...
Aggregate Demand and Aggregate Supply

»Aggregate Supply (AS) curve describes, for
each given price level, the quantity of...
Aggregate Demand and Aggregate Supply

»Difference in the micro and macro economic
concepts of demand and supply

»Equilib...
Aggregate Supply curve

»Classical Supply curve:
»Vertical – indicating that the same
amount of goods will be supplied
wha...
Aggregate Supply curve

»Classical Supply curve:
»Potential GDP
»Shift of vertical AS curve
»Does potential GDP grow over ...
Aggregate Supply curve

» Keynesian Supply curve:
» Horizontal– indicating that firms will supply
whatever amount of goods...
Aggregate Demand curve

»AD curve shows the combination of the price
level and level of output at which the goods
and mone...
AD in Alternative Supply assumptions

»Equilibrium under Keynesian case
»Given perfectly elastic supply, shifting AD
to th...
Supply side economics

»Some supply-side policies:
»Removing regulations, maintaining an
efficient legal system, technolog...
Questions???
Have a happy Sunday!
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Macroeconomics 10 dec

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Macroeconomics 10 dec

  1. 1. Macroeconomics December 10 2011
  2. 2. Concept of National Product »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 2
  3. 3. Relationship ep D NNPFC D ep - -N et i n tax direct es 3 GNPFC GDPMP - NDPMP - Net indire taxes ct N et ta ind xe i r s ec t - Net income from abroad NDPFC p De - - Net income from abroad ct re di in s et xe N ta - Net income from abroad - Net income from abroad - NNPMP GNPMP - - Dep GDPFC
  4. 4. Real Vs. Nominal GNP »“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 4
  5. 5. Real Vs. Nominal GNP »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? 5
  6. 6. Real Vs. Nominal GNP »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) 6
  7. 7. Price Indices »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) 7
  8. 8. CPI »(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 8
  9. 9. CPI Item Qty 197071 Price 19771 Price 1980-81 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. Price Relative Rs. 200 p.m. »Calculate Total expenditures, weights, price relatives, CPI 9
  10. 10. Wholesale Price Index »Similar principles of construction »Differences: »Items included »Wholesale prices »Weights calculation »Published by the Office of the Economic Adviser to the GoI 10
  11. 11. National Income Deflators »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? 11
  12. 12. Index Numbers of Production »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 12
  13. 13. Money and Credit »Instruments of growth – monetary and fiscal policy »Liquidity »Money stock measures: »M : RBI currency notes with public + 1 Rupee coins and notes with public + Small coins + DD with banks + Other deposits with RBI 13
  14. 14. Money and Credit »M : M 2 1 + PO Savings Deposits »M : M 3 1 + TD with banks »M : M 3 + All PO Deposits 4 »These money measures are in the descending order of liquidity »Money supply – stock or flow? Why? 14
  15. 15. Money and Credit »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. 15
  16. 16. Measurement of National Income »3 methods, ideally yielding the same result »Output method »Expenditure method »Income method 16
  17. 17. Output method »Aggregates values of all final goods and services produced during a year or by aggregating the values of all intermediate products »Yields GDP FC and GNPFC »Used especially for primary sectors »Example: Agricultural and extractive industries + Manufacturing Industries + Services and Construction = GDPFC 17
  18. 18. Expenditure method »Aggregates all money spent by private citizens, firms and government »Excludes values of intermediate goods »Yields GNP MP »Example: Consumer’s expenditure + Government current expenditures on goods and services + Fixed capital formation + Exports – Imports = GNPMP 18
  19. 19. Income method »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 19
  20. 20. Alternative measures of National Output »Gross National Product »Net National Product »National Income »Personal Income »Disposable Income 20
  21. 21. Alternative measures of National Output »Net Export (E-M) + C + I + G »GNP MP »NNP MP – Depreciation = 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 21 Savings = Personal Consumption
  22. 22. Difficulties in measuring NI »Non-market Production »Imputed Values »Underground Economy »Side Effects and Economic Bads »Leisure and Human Costs »Double Counting 22
  23. 23. Uses of NI Statistics »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 23
  24. 24. Practice Problems Particulars Rupees GNP at FC 95023 Indirect taxes 14723 NDP at MP 100422 NNP at MP 100575 GNP at MP 107226 »Calculate »Depreciation »Net Factor Income from Abroad »Subsidies 24 »NDP at FC
  25. 25. Solution Particulars Rupees GNP at FC 95023 Indirect taxes 14723 NDP at MP 100422 NNP at MP 100575 GNP at MP 107226 »Depreciation = 107226 – 100575 = 6,651 »NFIA = 107226-(100422+6651) = 100575100422 = 153 »Subsidies = 95023 + 14723 -107226 = 2520 25 »NDPFC = 100575 – (14723-2520) = 88,372
  26. 26. Practice Problems 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 »Calculate GNP at MP, National Income, Personal Disposable Income 26
  27. 27. Solution 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 6100 – 400 – 800 + Undistributed Profits 250 400 = 5,300 Indirect Taxes 800 Depreciation 400 »GNP MP = 6000 – (1500-1800) + (800-400) = 6100 » NI = NNPFC = »PDI = Personal Income – Personal Tax = 5300 – 250 – 27 1200 – 800 = 3,050
  28. 28. Practice Problems Particulars Rupees Net Factor Income from abroad (-)500 Depreciation 2000 Indirect Taxes 1900 Subsidies 1000 »Difference between GDP at MP and NNP at FC is? »GDP MP + NFIA – Dep +Subsidies – Indirect Taxes = 2000 + 500 +1900 – 1000 = 3,400 28
  29. 29. Practice Problems Particulars NNP at FC Rupees 4,73,246 Depreciation 61,809 Subsidies 19,431 Net Factor Income from abroad Indirect Taxes (-)6,833 87,043 Personal Income Tax 9,759 Corporate Taxes 7,300 Retained Profit 6,758 »Calculate GNP at MP, NNP at MP, NDP at MP, NDP at FC, GNP at FC 29
  30. 30. Practice Problems Particulars Rupees NDP at MP 88,750 Net factor income from abroad (-)260 Depreciation 5,220 Subsidies 1,820 Indirect taxes »Calculate GNP at FC 30 10,825
  31. 31. Aggregate Demand and Supply 31
  32. 32. Aggregate Demand and Aggregate Supply »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 32
  33. 33. Aggregate Demand and Aggregate Supply »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 33
  34. 34. Aggregate Demand and Aggregate Supply »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 34
  35. 35. Aggregate Supply curve »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! 35
  36. 36. Aggregate Supply curve »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 36
  37. 37. Aggregate Supply curve » 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 37
  38. 38. Aggregate Demand curve »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 38
  39. 39. AD in Alternative Supply assumptions »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 39
  40. 40. Supply side economics »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 40 »AS and AD in the long run
  41. 41. Questions???
  42. 42. Have a happy Sunday!

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