Nature of macroeconomics

 Economics- micro & macroeconomics

 Macroeconomics
 - aggregate economic activity of the nation
 Eg. Macro variables like ,national income, national
investment, inflation, employment , BOP, annual
budget etc.

 Role of the macroeconomist

 How accurate can be macroeconomic policy
analysis ??
The circular flow of economic activity

MARKETS
Revenue FOR Spending
GOODS AND SERVICES
•Firms sell
Goods Goods and
•Households buy
and services services
sold bought

FIRMS HOUSEHOLDS
•Produce and sell •Buy and consume
goods and services goods and services
•Hire and use factors •Own and sell factors
of production of production

Factors of MARKETS Labor, land,

production FOR and capital
FACTORS OF PRODUCTION
Wages, rent, •Households sell Income
and profit •Firms buy
= Flow of inputs
and outputs
= Flow of dollars
Major macroeconomic issues facing the
policy analyst….

1. What determines the overall level of

output & employment ?
2. Controlling business cycles ?
3. Controlling inflation ?
4. Understanding international independence
5. How does an economy grow over time?
Macroeconomic stability & buss.
envt.
History of developed countries shows the
importance of good macroeconomic
management…
Providing stability and predictability in the macro
envt. induces the pvt sector to invest in capital
formation.

Some symptoms of instability & macro

mismanagement that can harm business
decision making…..
 1. Excessive & ill-designed govt. intervention
 2. High inflation
 3.Fiscal Insolvency
 4. Financial fragility
 5. Ex. Rate mismanagement
Bussiness envt. In India…….

 Prior to 1991-
 permit & license raj
 Pride of place for public sector- very few
industries for pvt. Sector
 High protection for domestic industries-
infant industry argument
 Import substitution policy etc…..
 Post 1991-
 LPG ???
 Impact ???
Nirmalya Kumar- India’s Global Power Houses
India’s Global Acquisition Spree:

 2001 – Indian outward Investment < $ 1 b

 2006 - ,, ,, ,, > $ 10 b
which for the first time > FI into India

 [ Jan & Feb. 2007 alone, Indian cos. were

involved in foreign Investment deals worth $21
b]
 Indian FI in the fin. year ending 31-3-07 >FI by
Indian cos. In 58 years between 1947 & 2005
Some Large Deals

 2007 – Indian corporate sector involved in

$ 60 b of Mergers and Acquisitions
- Oct. 2006 –Tata Steel ( 56th largest co.)
acquired the Anglo-Dutch co., Corus (the 9th
largest co. ) for $12 b – became world’s 5th
largest steel producer.
- Feb. 2007 – Hindalco purchased Canadian
Novelis for $ 6 b –became the world’s largest
aluminium rolling co.
 - 2008 – Tata motor brought the brands
Jaguar & Land Rover from Ford paying $ 2.3 b

 INDIANS ARE SECOND ONLY TO

AMERICAN’S AS EMPLOYERS OF BRITONS-
TATA ALONE EMPLOYS 50, 000 IN UK.
Economic methodology

 Economic models- set of relations describing

how variables interact with each other..
 Models help in predicting real world variables –
then predictions are validated with actual
observations to test the models
 Variables – Endogenous[dependent] Exogenous
[ independent], constants, Parameters
 Eg. Consumption function
C=a+bY