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MACRO ECONOMIC MANAGEMEN

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Suggested Readings Dornbusch, Fischer, Startz,

Macroeconomics,Tata Mc Graw Hill Dwivedi D. N., Macroeconomics: Theory

and Policy, Tata McGraw Hill Gupta G.S., Macroeconomics, Theory and

Application, Tata McGraw-Hill

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Macro econs Is an applied science Study of the economy as a whole

Involves inter-temporal choices Broad division of the economy Household sector Firm sector

Government sector External sector

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The Circular Flow

A visual model of the economy.

Exhibits the basic transactions the linkthe households and the firms in an

economy.

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Variants

2 sector economy 3 sector economy 4 sector economy

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Economic Indicators

Variables that signal or reveal an economysconditions

Examples: Economic growth, Employment,

Investment, Savings, Price level, MoneySupply, Fiscal Deficit, BOT, BOP, Debt, etc.

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Income of the economy the most comprehensive

measure of a countrys growth

Income Variants National Income Per Capita Income

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National Income - Functions Indicates a countrys economic

performance Enables inter-country comparison Enables inter-temporal comparison Indicates the contribution of various

sectors Helps making projections for future Enables policy formulation

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MEASUREMENT OF NATIONALINCOME

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An Example -

Imagine a Samosa frying economy;1 product, 2 factors

Samosas = f (friends, kitchens)

Factor payments in the form of samosas;money is absent

Output Factor incomes Expenditureon purchasing output

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Measuring National Income: Options

Production or Value Added

approach

Income approach

Expenditure approach

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Production Method

Value of all final goods and servicesproduced in the economy during a giventime period

NY Value of Total Output

= Gross Value Added + Changes ininventories

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Income Method Total of all the incomes generated in the

economy during a given time period dueto the production of goods and services inthat time

NY

Total Earnings= Rent + Interest + Wages + Profit

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Expenditure Method

Total of all the expenses made (on thegoods and services produced) in a given

time period

NY Total Spending= Spending on consumer goods +

spending on capital goods + spending bygovernment + Net Exports

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Variants of National Income GDP FC , GDP MP

GNP FC , GNP MP

NDPFC

, NDPMP

NNP FC , NNP MP

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Real vs. Nominal Income Calculating GDP using current prices

renders it useless for inter temporalcomparisons in case prices are changing

Real Income = Nominal Income x IncomeDeflator

Deflator is the Index of average price ofall goods and services in the economy

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Stocks Vs Flows- Meaning; examples

Income at PPP

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Measuring NY In India

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National Accounts Statistics History - National Income Committee set

up in 1949; chairmanship of P.C.Mahalanobis

First official estimates of national income with base year 1948-49, published in 1956

MOSPI; October 1999

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MOSPI National Statistical Office

CSO Computer Centre

NSSO Programme Implementation Wing Twenty Point Programme Infrastructure Monitoring and Project

Monitoring MP Local Area Development Scheme

In addition National StatisticalCommission and ISI

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Publication periodicity Annual national accounts statistics and

quarterly estimates of GDP (lag of 1 qtr)

Annual GDP estimates Advance estimates (2 months before the

close of the year) Quick estimates /1 st revised estimates(with10 months lag)

Revised estimates (over next 2-3 years)

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Quarterly Estimates of GDP

GDP FC at constant (2004-2005) prices for

Q1 of 2013-14 is estimated at Rs.13.71 lakhcrores

GDP FC at current prices in Q1 of 2013-14 is

estimated at Rs.24.38 lakh crores

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Income levels across the world Low income-

Bangladesh, Kenya, Afghanistan, Nepal,Cambodia, Myanmar, Zambia

Low-Middle income-India, Maldives, Pakistan, Egypt, Philippines,Ukraine

Upper-Middle Income-Brazil, Mexico, Malaysia, South Africa

High income-US, France, Japan, Germany, Italy, Luxembourg,Spain, UK, UAE, Kuwait

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Distribution of Income

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India faces serious disparity inincome distribution

Regional disparityRural-Urban disparityGender disparity

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Income inequality gives rise topoverty !

Poverty ispronounceddeprivation in well-

being

It includes lowincomes and the

inability to acquirethe basic goods andservices necessary forsurvival with dignity

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Measuring Income Inequality

Lorenz Curve; Max Lorenz; 1905

It plots the proportion of the total incomeof the population (y axis) that is

cumulatively earned by the bottom x % ofthe population (x axis)

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Gini Coefficient Measures inequality of income

distribution Uses the Lorenz curve; Corrado Gini;1912

It is the ratio of the area between the lineof equality & Lorenz curve and the area

between the line of equality and the lineof complete inequality The Gini coefficient can range from 0 to 1

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