Nature and scope of macro economics, growth and development PDF

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Nature and scope of macro economics, growth and development...

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1. Introduction: Nature, Scope and Subject Matter of Macro Economic s Any business that wants to prosper and survive has to understand that it is not operating in an isolated environment, and hence should analyze the internal and external environment in which it is operating and take appropriate decisions. One of the important environmental factors that affect any business is the economic environment in which the business is operating. Hence, as a management student, you need to understand the economic variables that shape the economic environment. The businesses should be concerned both about the micro environment which consists of the firm, the market and the competitors and the macro environment. This chapter aims at providing you with an understanding of the important issues in macroeconomics that affect the overall performance of an economy, which in turn decides the individual business performance. Macroeconomics as a subject really emerged in the 1930s as a panacea for the Great Depression when there was a complete collapse of business, and unemployment rates rose to historically high levels. The theoretical framework for much of macroeconomics and the major policy debates, which continue even today, emerged at that time. John Maynard Keynes founded the science of macroeconomics when he tried to understand the economic mechanisms that produced thegreatdepression. Macroeconomics is the study of the economy at the aggregate level. It goes beyond understanding the behaviour of individual economic units and the determination of prices in particular markets, which is the subject of microeconomics. It tries to understand the activities of households and business as a group in addition to the behavior and role of local and national governments. To study macroeconomics we must begin with a solid understanding of the individual behavior of these households, business firms, and government entities such that there is consistency with behavior in aggregate. In particular, it focuses on the interaction of the goods, labour, and assets market in the economy and tries to explain how economic behaviour and policies affect the overall functioning of these markets. It also studies the subsequent impact of these interactions on variables such as output, employment, wages, prices, money supply, interest rates, inflation, the budget, debt, balance of payment, and exchange rates.

Goals of Macroeconomics Macroeconomics help us to understand the different forces that shape our economy, how the economies performance can be improved, and how economic outcomes can be affected. By providing us with this understanding, it helps us to forecast the future of the economy, what is likely to happen to various macroeconomic variables including prices, demand, income and employment. There are five major goals in macroeconomics, which are: 1. Full employment

2. 3. 4. 5.

Price Stability Efficiency Economic growth Equity

We can also consider many other goals, but these goals broadly encompass an entire spectrum of issues that are studied in macroeconomics. Many of these goal complement or conflict with each other. For instance the goals of stable prices tend to encourage efficient resource allocation whereas the goals of low unemployment may come at the cost of higher inflation. Thus prioritizing is important when pursuing various goals of macroeconomics.

Meaning & Scope of Macro Economics The term Macro has been taken from the Latin word Macros which means big. In this way, the study of various economic aggregates is called Macro Economics. In short, Macro-economic theory is the study of economic aggregates, wherein economic relations between various aggregates of an economy such as total employment, aggregate demand, national income, total savings, total investment etc. arc studied. This study is based on the principle of aggregates wherein aggregates of various units arc expressed as a variable. The determination of level of employment and national income is a part of the subject matter of Macro Economics. In the words of Shapiro, "Macro Economics deals with functioning of the economy as a whole." According to Prof. Boulding, "Macro Economics deals not with individual quantities as such but with aggregates of the quantities, not with individual incomes but with the national income, not with the individual prices but with the price level, not with the individual output but with the national output.” Therefore, as is clear from the above, the following issues/subjects define the scope of Macro Economics: 1. Aggregates of national income and its determination 2. Theories of Income and Employment. 3. Theory of Money and Banking. 4. Fiscal Theory. 5. Balance of Payment

INTRODUCTION TO MACRO-ECONOMICS: NATURE AND SCOPE.

*INTRODUCTION:Economics is the study of allocation of scarce resources among competing ends which have alternative uses. Economics is broadly divided into two parts: Microeconomics. Macroeconomics Macro-economics is that branch of economic analysis that studies the behaviour of aggregates i.e. of all the units combined together. MEANING:Macroeconomics is the study of aggregates covering the entire economy. Thus, macro-economics is related to study of aggregates like total employment, total output, total consumption, total savings, total investment, national income, aggregate demand, aggregate supply, general price level, etc. Since macro-economics deals with aggregates, it is also known as theory of income and employment or income analysis.

NATURE/SCOPE:Macro-economics studies the aggregates of the entire economy. The nature of macro-economics can be understood with the help of the following aspects: i) DETERMINATION OF NATIONAL INCOME AND EMPLOYMENT: Macro-economics deals with aggregate demand and aggregate supply that determines the equilibrium level of income and employment in the economy. The level of aggregate demand determines the level of income and employment. Macroeconomics also deals with the problem of unemployment due to lack of aggregate demand. Moreover, it studies the economic fluctuations and business cycles. ii) DETERMINATION OF GENERAL PRICE LEVEL: ~ Macroeconomics studies the general level of price in an economy.

~ It also studies the problem of inflation and deflation. iii) ECONOMIC GROWTH AND DEVELOPMENT: ~ Macroeconomics deals with economic growth and development. ~ It studies various factors that contribute to economic growth and development. vi) DISTRIBUTION OF FACTORS OF PRODUCTION: ~ Macroeconomics also deals with various factors of production and their relative share in the total production or total national income

SCOPE AND SIGNIFICANCE: Macroeconomics occupies a significant place in economic analysis and has a lot of theoretical and practical importance. The importance of macro-economics can be understood from the following points: i) POLICY FORMULATION: ~ Macroeconomics plays a very important role in formulating economic policies. Since Government intervention in economic affairs is indispensable in the present economic scenario, the knowledge of aggregates is of great importance in the framing as well as the implementation of economic policies of the nation. ii) BASIS FOR MICROSTUDY: ~ Macroeconomics provides the basis for microeconomic analysis as the study of aggregates helps to understand and verify the behaviours of individual units. iii) MULTI-DIMENSIONAL STUDY: ~ Macroeconomics has a very wide scope and covers multi-dimensional aspects like population, employment, income, production, distribution, consumption, inflation, etc. ~ This is very helpful in controlling fluctuations in these factors. vi) NATIONAL INCOME: ~ Macroeconomics studies national income accounting which helps to understand the distribution of income among different groups of people. It is also instrumental in forecasting the level of economic activity. v) SPECIAL GROWTH MODELS:

~ Macroeconomics has been useful in developing special growth models. These growth models are applied for economic development because the economics of growth is, in essence, the study of macroeconomics. vi) MONETARY PROBLEMS: ~ Macroeconomics has special significance in studying monetary problems that adversely affect the economy. ~ In fact, macroeconomics focuses on the problems of inflation and deflation and their solution by adopting monetary, fiscal and direct control measures. *LIMITATION: ~ Though macro-economics is essential in economic analysis and has great practical and theoretical importance, it suffers from certain drawbacks or limitation. These are: i) UNREALISTIC ASSUMPTIONS: ~ Macroeconomics assumes that the aggregates are homogeneous. Such an assumption is, however, unrealistic. ii) GENERAL ECONOMIC WELFARE: ~ Macroeconomics deal with general welfare and disregards the welfare at individual levels though individual welfare forms an important part of economic study. 

Macro Economic Variables

1.National income  National income is the flow of goods and services produced in an economy in a particular period of a year. Modern economy is a money economy. Thus, national income of the country is expressed in money terms. We may say that national income is a money measure of the value of net aggregate of goods and services becoming available annually to the nation as a result of the economic activities of the community at large, consisting of households or individuals, business firms, and social and political institutions. GDP or gross domestic product is the value of all the final goods and services produced in the economy in a given time period. It is a measure of aggregate economic activity. We use GDP per capita, which is GDP divided by the population in the economy, to measure living standards. 2. Investment, Savings and Employment Saving means economic surplus. It may be defined as an accounting difference between current income and current consumption. According to Keynes, it can be defined as the excess of

income over expenditure of consumption. In the case of an individual, saving is that part of income which is not consumed by him and in the case of the community, it is the aggregate of the unconsumed part of the national income of all members of the community. We can represent saving symbolically S = Y - C where S denotes Saving Y stands for income and C stands for Consumption

Aggregate domestic savings are the sum of savings made by the households, firms and the government.

�Household saving = Disposable personal income -consumption expenditure �Firm Saving = Profits - (Dividends+ Business taxes) �Government saving = Public revenue - current expenditure 3.Inflation Inflation is a rise in the general level of prices, measured against some baseline of purchasing power. It is understood by more people as a substantial and rapid general increase in the level of prices and consequent deterioration of the value of money. The common feature of inflation is the price rise, the degree of which may be measured by price indices. Inflation is statistically measured in terms of the percentage increase in the price index per unit of time.

�Reflation: It is a situation of rising prices, deliberately undertaken to relieve depression. With rising prices,employment, output and income also increase till the economy reaches the full-employment.

�Inflation: It occurs when prices rise after the full employment is reached. It is a long term operating dynamic process of persistently rising price levels, which is irreversible in the short run. It is usually characterized by an overflow of money and credit. In fact, the root cause of inflation is the expansion of money supply beyond the normal absorbing capacity of the economy.

�Disflation: When prices are falling due to anti-inflationary measures adopted by the authorities, with no corresponding decline in the existing level of employment, output and income.

�Deflation: It is a condition of falling prices accompanied by the decreasing level of employment, output

and income. Deflation is just the opposite of inflation.

Measures of inflation Examples of common measures of inflation include:

�Consumer price indexes (CPIs) which measure the price of a selection of goods purchased by a typical

consumer

�Producer price indexes (PPIs) which measure the price received by a producer. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid.

�Wholesale price indexes, which measure the change in price of a selection of goods at wholesale, prior to Price Indexes.

retail mark ups and sales taxes. These are very similar to the Producer

�Commodity price indexes, which measure the change in price of a selection of commodities. In the present commodity price indexes are weighted by the relative importance of the components to the all in cost of an employee. 4 Balance of Payment The Balance of Payments (BOP) is an account of all transactions between one country and all other countries transactions that are measured in terms of receipts and payments. From the Indian perspective, a receipt represents any Rupees flowing into the country or any transaction that requires the exchange of foreign currency into Rupees. A payment represents Rupees flowing out of the country or any transaction that requires the conversion of Rupees into some other currency. The three main components of the Balance of Payments are the current account, capital account and balancing account. 1The Current Account including Merchandise (Exports and Imports), Investment income (rents, profits, interest) 2The Capital Account measuring Foreign investment in the U.S. and U.S. investment abroad, and 3The Balancing Account allowing for changes in official reserve assets (SDRs, Gold, other payments) 5 Exchange Rate An exchange rate is the price of one currency in terms of another currency. As in the case of any other goods, the price of a currency is affected by supply and demand. As demand for a currency increases (or supply decreases) its price will rise. This is referred as an appreciation. Conversely, as demand for a currency decreases, or supply increases, its value will depreciate. The prospect of large and rapid swings in exchange rates introduces uncertainty into the business environment. A well-functioning international monetary system ensures stability in the exchange rates. The central element of the international monetary system involves the arrangements by which exchange rates are set. The purpose of an exchange-rate system is to facilitate and promote international trade and finance. There have been three major exchange rate regimes from a historical perspective – Fixed Exchange Rates, Floating or Flexible Exchange Rates, and Managed Exchange rates.

Distinction Between Economic Growth and Economic Development The term ‘economic growth refers to increases over time in a country’s real output of goods and services or product per capita. Economic Growth is when an increased output of a nation of goods and services available to satisfy the material wants of the people, but not the welfare of a nation (health cover, housing, schooling). Economic growth is associated with the well being of a nation, through increasing incomes. However, the welfare of a nation is not included in economic growth. Economic growth focuses on the quality. Economic growth may be a result of all idle resources being employed as resulted from an increase in aggregate demand. Economic growth can easily become uneven because some industries may grow much quicker than others; so more resources will the allocated towards these industries. In addition to that, the industries that are not growing at such a rapid rate relative to others will have a chance of being neglected. Economic growth is usually associated with negative externalities, eg. Environmental damage, an inequality in the distribution of income. Economic Development is a more comprehensive measure than economic growth. It implies progressive changes in the socio-economic structure of a country. Economic development is an increase in the real GDP per capita as well as the welfare of the nation (improving material and non-material standards of living). Economic development focuses on the quality. Economic development occurs when the costs of growth are minimised, and the benefits of growth are distributed among the whole population. Both economic growth and economic development is aimed at measuring the amount of growth in the economy and how it leads to development. An increased income is spread evenly over the population; this will allow more purchasing power, increased revenue for the government, and a higher standard of living. When economic growth occurs in LDCs, this may inequality in the distribution of income because some industries may grow more rapidly than others, therefore the people associated with these industries incomes will also rise more quickly than people of other industries. But economic development is aimed at the whole nation's income rising. Economic development is the ultimate goal.

India Real GDP Growth It is the growth of Gross Domestic Product or GDP that determines the performance of Indian economy. Between the period 2007 and 2008, India real GDP growth stood somewhere at 9.20% and 9.00%, respectively. However, owing to the global financial meltdown, witnessed by all the developed and developing nations alike, with few still managing to perform better, the GDP growth rate of India drastically fell down to 7.40 %. This also added to the increase of fiscal deficit in India by 10.3% in the same period, making it the highest in the world.

Components affecting GDP Growth in India The components that decide the GDP growth in India can be divided under three broad categories like: Agriculture Industry Services

Contribution of the sectors in GDP growth According to statistics, the service industry contributes about 54% and industrial sector makes up 29% of the GDP. The agriculture sector accounts for 17% of the Gross Domestic Product. Major employment is seen in the arena of agriculture, which can be projected as 60%. Industrial sector and service sector account for 12% and 28% of employment, respectively. The main industries that contribute efficiently towards GDP growth in India are: Textiles Chemicals Steel Cement Food processing Transportation equipment

Mining Petroleum Machinery Information technology enabled services and software

In the agricultural sector, the products that largely decide the fate of the economic growth in India are rice, wheat, pulses, cotton, oilseed, jute, sugarcane, tea, potatoes, cattle, water sheep, goats, buffalo, poultry and fish. The recent data, which considerably reflect the performance of the above mentioned sectors in India's GDP growth, are provided as below. A snapshot of India real GDP growth in 2008-09:

Manufacturing industry registered a growth of only 2.4% in 2008-09 as against 8.2% in 2007-08. Agriculture saw a rise of 1.6% in the current fiscal as against 4.9% in 2007-08. Community and social and personal services, which reflected positive growth in the current financial year, grew by 13.1% in 2008–09 from 6.8% in the previous financial year. Mining and quarrying also showed improvement by touching 3.6% growth rate from 3.3%. Gas, electricity and water supply including other services sectors showed marginal growth in 2008-09 reaching 3.4% as against 5.3% in 2007–08. Hotels, trade and transport sectors posted 8.1% growth as against 13% in the last fiscal.

The growth in the construction industry was 7.2% in the previous fiscal against 10.1% in the period between 2007 and 2008. Nevertheless, it reflected the same rate of growth in the 4th quarter reaching 6.8%.

COMPONENTS OF GDP I. Personal consumption a) Durables --> Durable goods, such as autos (3.6%) and furniture (3%) is the smallest, at only 8% of GDP. b) Nondurables --> Non-durable goods are 20%...