Macroeconomics

Lecture 1:
National Income & its measurement
 Macroeconomics
• 3 main Statistics:
– Growth (of output),
– employment,
– inflation, (prices); GDP, UR, CPI. (YEP)
• Other aspects:
– Balance of Payments
– Exchange rates
• Instruments:
– Fiscal policy: Taxation and Expenditure policy of Govt.
– Monetary Policy: Controlling money supply, interest
rate and credit, done by Reserve Bank of India.
 Why Managers should know
Macroeconomics?
• How Govt. Policy affects business decisions?
• Ease of doing business in India?
– India 142 ; Singapore 1, Pakistan 128, Af. 183
– Hyd 2, Mumbai 10, BLR 13, Chennai 15, Kochi, Kol 17
• What is the growth rate of the country? This
determines demand for product.
• What is the tax rate? Are tax laws clear?
• What is the inflation rate? Will my money erode?
• Employment and labour force – tools of prodn.
• Stable exchange rate? What is the interest rate?
 What macro-economics does?
• It builds models to understand relationships
and verifies with data.
• Earlier theory was first and data used to verify
• Now, with big data, there is opportunity to
construct theory from data!
• Plural of anecdote is data.
 Gross Domestic Product: GDP
• GDP= total income of everyone in the economy
= total expenditure on economy’s output of
goods and services.
For economy as a whole, income must equal
expenditure.
2 sector economy: Households supply labour; firms
produce output, say bread.
Wage income =Rs.1,000
Expenditure on food = Rs.1,000
• 3 Sector economy: Hh , firm, Govt.
Wage income = Rs.1,000
Income tax = Rs.200 --Govt. receives
Net wage income = Rs.800 -- Labour (H/h) receives
Expenditure on food = Rs.1,000.
Firm: Income of sellers = Rs.1,000 =distributed bet.
wages = Rs.500, and profit = Rs.500.
H/h: Expenditure of buyers = Rs.1,000
 Stocks and flows
Stock: 100 litres of water in a tub.
Flow: 10 litres per minute that goes thro’ a tap.
GDP is a flow; $2 tr /year.
• Wealth is a stock. Capital is a stock;
investment a flow. No. of unemployed people
is a stock; no. of people losing jobs is a flow.
Govt debt is stock; budget deficit is a flow.
 GDP - features
• GDP is the market value of all final goods and services produced
within a country in a given period of time, say a year.
• GDP relates to currently produced goods.
– I bought a used car for Rs.4 lakhs. No GDP increase.
• I produce 100 loaves of bread. Sell 100.
• I produce 100 loaves of bread. Sell 50. 50 spoilt.
• Income: Wages=50; profit = 50. Exp. = 100
• Income: wages = 50; profit = 0; Exp. = 50
• Inventory: wages:=50; profit =50. Exp. Inventory = 50; purchase
= 50
• Production for inventory increases GDP; but sale from inventory
does not.
 GDP features…
• GDP includes only value of final goods.
• Value added by a firm is the value of final goods it
produces less the value of intermediate goods it
purchases. So, GDP = sum of value added of all firms.
• Imputed values in GDP: value of house you stay in.
• Criticisms/Limitations:
• Omits nonmarket goods and services
– Informal sector’s output broadly ignored
– Marry your cook, and gdp falls!
• No accounting for ‘bads’, eg. Pollution, crime
• No correction for quality improvements
• UK included services of prostitution, and had to pay
more to EU.
 Real and nominal GDP
Base Year 2010 Current year 2015
Qty (a) Price (b) Qty © Price (d)
Apples 10 100 5 110
Oranges 20 50 30 55
Bananas 30 20 40 22
GDP 2010 = a.b = 1000 +1000+600 = 2600

GDP2015 Nominal c.d= 550+1650+880 = 3080

GDP2015 Real c.b = 500+1500+800 = 2800

Nominal GDP increase = 3080 – 2600 = 18.5%

2600

Real GDP increase = 2800 – 2600 = 7.7%

2600

GDP deflator = Nominal GDP / Real GDP = 1.1

Price Rise

Price b (a) Qty. b(b) Price 2015 ©

Apples 100 10 110
Oranges 50 20 55
20 30 22

Value Level 2010 = a.b = 2600

Value level 2015 for the same vector of goods = c.b = 2860

CPI = 2860/2600 = 1.1 or 10%

Nominal GDP increase = Real GDP increase + Price increase

18.5 = 7.7 + 10 approx. = 17.68

CPI and GDP deflator are different only in the goods basket considered.
But Q, P should not be out of date
• US remedy: Chain weighted GDP.
• Base year changes continuously with time.
• For every year, the previous year is the base
year.
• Year-to-year growth rates are put together to
form a chain that can be used to compare
output of goods and services between any
two dates.
 Components of Expenditure
• National income accounts identity:
• Y = C + I + G + X – M.
• Consumption: on durables, non-durables and
services.
• Investment: business + residential + inventory
– Ram buys an old house for Rs.10 cr; Sita
constructs a new house for Rs.4 cr. Only latter.
– Murthy sells Rs.10cr stock to Premji. Prem raises
Rs.50cr. for expansion. Only latter.
 Y=C + I + G + (X – M)…
• Exports – for US and India Imports > Exports
• This is financed by loans from abroad.
• US borrows in its own currency, India in $ !
• G = Govt. expenditure by Centre and State
govts. Defence, govt. salaries, roads. Does
not include transfer payments like old age
pension etc.
• C = 56% ; I = 36%; G = 10% ; NX = (26 - 31%)
• GDP at constant prices 2017-18 :Rs.131.8 LC
 Related concepts
• GDP at factor cost + indirect taxes (less subsidies) = GDP at
market prices
– Direct taxes: Income tax and corporation tax
– Indirect taxes: GST
• GDPFC also called Gross Value added.
• GDP – depreciation = NDP net domestic product
• GDP + net factor income from abroad = GNP = Goods and
services produced by nationals of a country.
• GNI = GNPMP – indirect taxes.
• NNI = GNI – direct taxes.
India 2017-18 GDP at constant prices
Rs. Lakh Crores /trillion =1012
1. Gross value added 121
2. Taxes, less subsidies 13 – 2.8= 10.2
4. GDPMP 131.8
5. Depreciation 5.03
6. NDP 4 – 5 116.7
14. Factor payment to abroad. - 1.45
15. GNP 130.3
16. NNP 15 – 5 115
 Sectoral composition of GDP
2010. 2017
• Agriculture 14%. 15.4
• Industry 19 % 23
• Mining 2
• Mfg 15
• Elecy., gas, water 2
•
• Services 67%. 61.5
 India GDP 2018-19
Rs. LC
1. GDP at constant (2011-12) prices. 140.78. △ 6.8%
2. GDP at current prices 190.10. 11.2
3. NNI @ const. prices 123.3
4. NNI @ current prices 168.37
5. Per capita real income @ const. 92,565
6. -do- @ current 1,26,406
7. Population 1.33 billion
Every one has revised growth rate
downwads
Downward revision
GDP of some countries 2019
 GDP: India vs some countries 2010
trillion $
PPP adjusted Nominal

US 14 15.6

China 10 8.2

Japan 4.3 5.9

India 4 1.7

Germany 2.9 3.4

Russia 2.2 2.02

UK 2.17 2.44

Brazil 2.17 2.39

France 2.14 2.6

 GDP growth: India vs others
Country 2009 2010 2011 2012

India 8.5 10.5 6.3 3.2

China 9.2 10.4 9.3 7.8

Brazil -0.3 7.5 2.7 0.9

Russia -7.8 4.5 4.3 3.4

S.Korea 0.3 6.3 3.7 2.0

Pakistan 2.8 1.6 2.8 4.0

US -2.8 2.5 1.8 2.8

UK -5.2 1.7 1.1 0.1

Singapore -0.8 14.8 5.2 1.3

 GDP, growth, inflation ….
Rs. Trillion (lakh crore)
GDP, growth, inflation 2010-11 2011-12
GDP - current market prices 77 89 (16.1)
GDP at factor cost -real 49 52 (6.9)
Savings rate 32.30%
Capital formation rate 35.10%
Per capita national income -
FC, MP 53,331 60,972
5000 p.m.
Growth of industrial
production 8.20% 3.60%
Food grain mt 245.00% 250
Electricity growth 5.50% 9.40%
Inflation WPI 9.60% 9.1
Inflation CPI 10.40% 8.4
 India’s increase in growth rate
• Growth rate increased retrospectively!
• What did statistics office of India do recently?
– Changed from factor cost to market prices (in line
with other countries)
– Changed base year
– Changed the basket of goods in gdp.
• Prof. Nagaraj of IGIDR and other experts
questioned the figures.
• Rationale for questioning: It did not correlate
with the Li Kaquiang index for India.
• But it is really difficult to determine a new
representative basket of goods which would
have been 5 years ago, today.
 Employment
• Employment is a very important index for advanced
economies. US meticulately computes that.
A: unemployed
B - A: Employed
A
C: Stopped
B C searching for job
D :Disguised unemploy-
ment
Unemployment ratio is only A/B. In US, C is more!!
In India picture is hazy due to D.
Circular flow of money in economy
 Conclusion
• Key characteristics of economy:
– GDP, its growth
– Employment
– Inflation
• Controversies on growth and employment:
– ’Govt. Overstated growth’
– Govt. concealed employment figures
• RBI controls inflation. Govt. wants to control RBI.
Recently RBI saved Govt. by giving it Rs.1.76 LC
from its huge reserves.