28-04-2023

Definition
Macroeconomics (from the Greek
prefix makro- meaning "large" + economics) is a
branch of economics dealing with the performance,
structure, behavior, and decision-making of
an economy as a whole. This includes regional,
national, and global economies.

Nature of Macroeconomics:

Macroeconomics is the study of aggregates or averages

covering the entire economy, such as total employment, national
income, national output, total investment, total consumption, total
savings, aggregate supply, aggregate demand, and general price level,
wage level, and cost structure.

Macroeconomics is also known as the theory of income and

employment, or simply income analysis. It is concerned with the
problems of unemployment, economic fluctuations, inflation or
deflation, international trade and economic growth.

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It is the study of the causes of unemployment, and the

various determinants of employment.
In international trade, the problems of balance of payments
and foreign aid fall within the purview of macroeconomic analysis.
Above all, macroeconomic theory discusses the problems of
determination of the total income of a country and causes of its
fluctuations. Finally, it studies the factors that retard growth and
those which bring the economy on the path of economic
development.

Macro economic Indicators

Gross Domestic Product (GDP)

Often used as the primary indicator of macroeconomics, absolute
GDP represents the economy’s size at a point in time. GDP is
usually calculated and released by the government on a quarterly
or annual basis.
GDP of India in 2021 (3.18 lakh crores USD)
“Nominal GDP or GDP at Current Prices in the year 2022-23 is
estimated at Rs. 273.08 lakh crore, as against the Provisional
Estimate of GDP for the year 2021-22 of RS. 236.65 lakh crore,
released on 31st May, 2022.

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• As a rule of thumb, spending stimulates growth. Individual

consumer consumption drives businesses, business
investments promote growth, and government spending
maintains social welfare. Net exports, as calculated by (exports
– imports), measures trade. Positive net exports represent a
trade surplus, while negative net exports represent a trade
deficit.
• Economic growth can be calculated by comparing GDP over
time, such as year-over-year increases.

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Inflation
• Inflation is the increase of overall price levels and
consequently the decrease in purchasing power. It occurs
primarily due to increased demand for products and services,
which, in turn, raises prices. Inflation, therefore, represents
growth.
• However, too much inflation is also harmful if purchasing
power decreases much more than inflated prices, decreasing
overall spending and devaluing the currency. The target
inflation rate is usually around 1% to 3%.

Unemployment
Unemployment accounts for individuals who are jobless and are
actively seeking one. Individuals who are retired or disabled are
not included as unemployed. Unemployment is a natural
occurrence and cannot be completely eliminated. We can
distinguish unemployment into different categories:

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• Frictional unemployment occurs when individuals spend time

searching for a job.
• Structural unemployment occurs when jobs are eliminated due to
economic structural changes.
• Cyclical unemployment occurs due to fluctuations in the business
cycle.
• The sum of frictional and structural is called natural unemployment.
It arises from everyday events, such as individuals changing jobs or
industries shrinking from a decline in demand.
• The sum of natural unemployment and cyclical unemployment
represents the actual unemployment. Naturally, in recessions,
employees are laid off, and in times of prosperity, employment rates
skyrocket.
• Since employment is directly related to economic output, it is a good
indicator of economic conditions. Actual unemployment is useful to
gauge the economy’s short-term conditions, while natural
unemployment can identify trends in the long term.

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Interest Rates
• Interest rates are the return the borrower pays from lending.
They are set by the central bank – the Federal Reserve in the
U.S. and the Bank of Canada in Canada. Because interest rates
influence consumer decisions, it is a very useful tool for
influencing economic activity.
• When interest rates are high, borrowing becomes more
expensive, so consumers are incentivized to reduce spending.
Conversely, when interest rates are low, it is cheaper to
borrow, so consumers will be incentivized to spend more.

Scope and Importance of Macroeconomics:

(1) To Understand the Working of the Economy:

The study of macroeconomic variables is indispensable for understanding the
working of the economy. Our main economic problems are related to the
behaviour of total income, output, employment and the general price level in the
economy.
2) In Economic Policies:
Macroeconomics is extremely useful from the point of view of economic policy.
Modern governments, especially of the underdeveloped economies, are
confronted with innumerable national problems. They are the problems of
overpopulation, inflation, balance of payments, general underproduction, etc.

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In General Unemployment:
In National Income:
In Economic Growth
In Monetary Problems:
In Business Cycle
(3) For Understanding the Behaviour of Individual Units:
For understanding the behaviour of individual units, the study of macroeconomics is
imperative. Demand for individual products depends upon aggregate demand in the
economy. Unless the causes of deficiency in aggregate demand are analysed, it is
not possible to understand fully the reasons for a fall in the demand of individual
products.

Difference between Micro economics and Macro

economics are given below :

Micro economics is branch of economics that deals with human behavior and choices
as they relate to relatively small units whereas Macro economics is branch of economics that
deals with human behavior and choices as they relate to higher aggregate makers.

Micro economics is also known as Price theory whereas Macro economics is also
known as Income theory.

Micro economics takes into small components of the whole economy whereas Macro
economics takes into consideration the economy as whole.

Micro economics deals with price determination and Macro economics deals with price level.

Micro economics concerned with the optimization of individuals producer and consumers
whereas Macro economics concerned with optimization of growth process of entire economy.

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Micro economics theories help us in formulating appropriate policies for resource

allocation at the firm level whereas Macro economics theories help us in formulating
appropriate policies for controlling inflation, unemployment etc.

Micro economics works with homogeneous products whereas Macro economics

works with heterogeneous products.

History of Macroeconomics
• While the term "macroeconomics" is not all that old (going
back to the 1940s), many of microeconomics' core concepts
have been the study focus for much longer. Topics like
unemployment, prices, growth, and trade have concerned
economists since the beginning of the discipline in the 1700s.
Elements of earlier work from Adam Smith and John Stuart
Mill addressed issues that would now be recognized as the
domain of macroeconomics.
• In its modern form, macroeconomics is often defined as
starting with John Maynard Keynes and his book The General
Theory of Employment, Interest, and Money in 1936. Keynes
explained the fallout from the Great Depression when goods
remained unsold, and workers were unemployed.

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• Before the popularization of Keynes' theories, economists did

not generally differentiate between micro- and
macroeconomics. The same microeconomic laws of supply
and demand that operate in individual goods markets were
understood to interact between individual markets to bring the
economy into a general equilibrium, as described by Leon
Walras.
• The link between goods markets and large-
scale financial variables such as price levels and interest rates
was explained through the unique role that money plays in the
economy as a medium of exchange by economists such as
Knut Wicksell, Irving Fisher, and Ludwig von Mises.

Limitations of Macroeconomics
It is also important to understand the limitations of economic
theory. Theories are often created in a vacuum and lack specific
real-world details like taxation, regulation, and transaction costs.
The real world is also decidedly complicated and includes matters
of social preference and conscience that do not lend themselves
to mathematical analysis.
Even with the limits of economic theory, it is important and
worthwhile to follow significant macroeconomic indicators like
GDP, inflation, and unemployment. This is because the
performance of companies, and by extension their stocks, is
significantly influenced by the economic conditions in which the
companies operate.

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Likewise, it can be invaluable to understand which theories are in

favor and influencing a particular government administration.
The underlying economic principles of a government will say
much about how that government will approach taxation,
regulation, government spending, and similar policies. By better
understanding economics and the ramifications of economic
decisions, investors can get at least a glimpse of the probable
future and act accordingly with confidence.

Macroeconomic Schools of Thought

The field of macroeconomics is organized into many different
schools of thought, with differing views on how the markets and
their participants operate.
 Classical
 Classical economists held that prices, wages, and rates are
flexible and markets tend to clear unless prevented from doing
so by government policy, building on Adam Smith's original
theories. The term “classical economists” is not actually a
school of macroeconomic thought but a label applied first by
Karl Marx and later by Keynes to denote previous economic
thinkers with whom they respectively disagreed.

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 Keynesian
 Keynesian economics was founded mainly based on the works
of John Maynard Keynes and was the beginning of
macroeconomics as a separate area of study from
microeconomics. Keynesians focus on aggregate demand as
the principal factor in issues like unemployment and the
business cycle.
 Keynesian economists believe that the business cycle can be
managed by active government intervention through fiscal
policy, where governments spend more in recessions to
stimulate demand or spend less in expansions to decrease it.

 Monetarist
 The Monetarist school is a branch of Keynesian economics
credited mainly to the works of Milton Friedman. Working
within and extending Keynesian models, Monetarists argue
that monetary policy is generally a more effective and
desirable policy tool to manage aggregate demand than fiscal
policy. However, monetarists also acknowledge limits to
monetary policy that make fine-tuning the economy ill-advised
and instead tend to prefer adherence to policy rules that
promote stable inflation rates.

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 New Keynesian
 The New Keynesian school also attempts to add
microeconomic foundations to traditional Keynesian economic
theories. While New Keynesians accept that households and
firms operate based on rational expectations, they still
maintain that there are a variety of market failures, including
sticky prices and wages. Because of this "stickiness," the
government can improve macroeconomic conditions through
fiscal and monetary policy.

 Austrian
 The Austrian school is an older school of economics that is
seeing some resurgence in popularity. Austrian economic
theories mainly apply to microeconomic phenomena.
However, they, like the so-called classical economists, never
strictly separated micro- and macroeconomics.
 Austrian theories also have important implications for what is
otherwise considered macroeconomic subjects. In particular,
the Austrian business cycle theory explains broadly
synchronized (macroeconomic) swings in economic activity
across markets due to monetary policy and the role that money
and banking play in linking (microeconomic) markets to each
other and across time.

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Aggregate Demand: Formula, Components, and

Limitations
Aggregate demand is a measurement of the total amount of
demand for all finished goods and services produced in an
economy. Aggregate demand is commonly expressed as the total
amount of money exchanged for those goods and services at a
specific price level and point in time.
 Aggregate demand measures the total amount of demand for
all finished goods and services produced in an economy.
 Aggregate demand is expressed as the total amount of money
spent on those goods and services at a specific price level and
point in time.
 Aggregate demand consists of all consumer goods, capital
goods, exports, imports, and government spending.

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Understanding Aggregate Demand

• Aggregate demand is a macroeconomic term and can be
compared with the gross domestic product (GDP). GDP
represents the total amount of goods and services produced in
an economy while aggregate demand is the demand or
desire for those goods. Aggregate demand and GDP
commonly increase or decrease together.
• Aggregate demand equals GDP only in the long run after
adjusting for the price level. Short-run aggregate demand
measures total output for a single nominal price level without
adjusting for inflation. Other variations in calculations can
occur depending on the methodologies used and the various
components.

Aggregate demand consists of all consumer goods, capital goods,

exports, imports, and government spending programs. All
variables are considered equal if they trade at the same market
value.

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Aggregate Demand Components

Aggregate demand is determined by the overall collective
spending on products and services by all economic sectors on the
procurement of goods and services by four components:

 Consumer Spending
 Consumer spending represents the demand by individuals and
households within the economy. While there are several
factors in determining consumer demand, the most important
is consumer incomes and the level of taxation.

 Investment Spending
 Investment spending represents businesses' investment to
support current output and increase production capability. It
may include spending on new capital assets such as
equipment, facilities, and raw materials.

 Government Spending
 Government spending represents the demand produced by
government programs, such as infrastructure spending and
public goods. This does not include services such as Medicare
or social security, because these programs simply transfer
demand from one group to another.

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 Net Exports
 Net exports represent the demand for foreign goods, as well as
the foreign demand for domestic goods. It is calculated by
subtracting the total value of a country's exports from the total
value of all imports.

 Aggregate Demand Formula

 The equation for aggregate demand adds the amount of
consumer spending, investment spending, government
spending, and the net of exports and imports. The formula is
shown as follows:

Aggregate Demand=C+I+G+Nx

where:
C=Consumer spending on goods and services
I=Private investment and corporate spending on non-
final capital goods (factories, equipment, etc.)
G=Government spending on public goods and social
services (infrastructure, Medicare, etc.)
Nx=Net exports (exports minus imports)

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Overview of Macro economics

• The world has entered a new era of rapid global change driven
by major shifts in demographics, wealth, technology, and
climate.
• But economic growth has been uneven, has come at the
expense of the environment, and already has slowed due to
climate damages. Global challenges — including fiscal strains
on governments exacerbated by the COVID-19 pandemic,
conflicts, environmental degradation resource depletion, and
record levels of displacement — are threatening recent gains.
These challenges are compounded by intensifying systemic
risks, including trade tensions, rising debt levels, reduced
effectiveness of monetary policy as a crisis instrument, and
increasing inequality — among and within countries.

To accelerate sustainable economic growth and inclusion,

developing countries must tackle a variety of related underlying
challenges. These include low levels of productivity and
international competitiveness, inefficient public spending,
inadequate domestic resource mobilization, price distortions from
the fiscal system that discourage sustainability, lack of economic
resilience, rising debt levels, an uncertain trade environment, and
the rising danger of climate change.

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Economic growth must benefit all and be sustainable. The

World Bank Group is working with its clients and partners to
develop smart economic policies that foster sustainable and
inclusive economic growth, and address challenges to economic
stability including climate change. Priority areas include:
 Fiscal policy: Fiscal policy is key to developing sustainable
trajectories for revenues, expenditures, and deficits and the
management of fiscal risks, with an emphasis on determining
fiscal space and funding sources and improving public
expenditure management.
 Domestic resource mobilization: Better tax systems are one
of the largest untapped resources to promote poverty reduction
and support climate, health, and other key government
objectives.

 Debt: Debt is a critical form of financing for the sustainable

development goals, but only when borrowing is done at
sustainable levels and in a transparent fashion. Failure to
achieve sustainable development goals furthermore risk
exacerbating debt.
 Economics of climate change: Climate change is no longer
seen simply as an environmental problem. It is recognized as a
serious financial, economic and social problem that, left
unmitigated, could push an additional 132 million people into
extreme poverty by 2030, underscoring the importance of
zero-carbon growth strategies.
 Trade: Open trade within appropriate policy
frameworks [DH1] is an engine of growth that creates jobs,
reduces poverty, and increases economic opportunity,
including for women in developing countries.

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• India’s GDP grew by 6.3% year over year (YoY) in the July–
September quarter of FY23. While this growth appears substantially
lower compared to the April–June quarter (13.5%), strong growth in
the latter was because of the low base effect. In 2021 this quarter,
the economy was severely impacted by the second wave of the
infection and consequent mobility restrictions, which dragged
economic activity down.
• It is heartening to see that, from the expenditure side of accounting,
gross fixed capital investment and private consumption remained
robust and grew by 10% YoY. Participation of the state governments
and the private sector in investment spending was low. Strong
growth in private consumption, especially in the discretionary
segment, is a good sign and may cue the private sector to boost
investment, which has remained muted despite higher capacity
utilization. All other drivers weighed on growth. Negative
inventories suggest that businesses preferred to exhaust their stocks,
which means that they will have to ramp up production if consumer
spending holds up.1
• Surprisingly, government spending contracted by 4.4%, taking away
a chunk of the GDP growth in Q2. This was despite strong revenue
growth in the quarter. Both exports and imports increased, but the
latter accelerated faster thereby widening the current account deficit.

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On the production side, gross value added (GVA) grew by 5.6%.

Contraction in manufacturing and mining sectors (–4.3% and –
2.8% YoY, respectively) weighed on the overall sectoral
contributions to economic activity. In our previous outlook, we
highlighted the issue around the possible low contribution of
manufacturing, despite the sustained push by the government.
The revival of the services sector by 9.3% helped boost growth,
with “trade, hotels, transport, communication, and services
related to broadcasting” sectors witnessing very strong growth of
14.7%. That said, these sectors remained below the prepandemic
trend levels (and are the only services sectors that have not yet
caught up). Agriculture grew at a healthy rate of 4.6% despite the
unseasonal and uneven pattern of rains.

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India’s top exports at a glance

 Engineering goods: These include industrial machinery and
equipment, automobiles and their parts, and products made from
iron, steel, and other metals. India’s engineering goods exports
crossed the $9-billion mark for a single month for the first time in
July 2021 and repeated the feat in the following two months.
Demand from traditional markets such as the US, UAE, and China
drove the surge. Earnings in April-September 2021 stood at $52.3
billion. Engineering goods were India’s top export in 2020-21 too,
earning the country $75.97 billion, a slight dip from $81.02
billion in 2019-20.
 Petroleum products: These include petrol, diesel, gasoline,
naphtha, jet fuel, liquified petroleum gas (LPG), and lubricants.
India ranks among the top five exporters of refined petroleum,
catering largely to markets like the US, UAE, China, Singapore, and
the Netherlands. India is also the second largest refiner in Asia after
China. Petroleum products exports were severely impacted by
Covid-19 in 2020-21 due to the imposition of lockdowns and
mobility restrictions and declined 37.3 percent year-on-year.
However, they have made an impressive rebound this year.

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 Gems and jewellery: These include diamonds (rough as well as cut and
polished), gold jewellery, coloured gemstones, pearls, non-gold jewellery, and
synthetic stones. India is the fifth largest exporter of gems and jewellery with a
5.8 percent share in global exports. Exports of cut and polished diamonds lead
this segment, followed by gold jewellery. The US, Hong Kong, UAE, Belgium,
and Israel are the top importers. Gems and jewellery make up 14 percent of
India’s total merchandise exports. After a disappointing 2020-21, when exports
fell 27.5 percent year-on-year, this commodity segment has seen a healthy
revival in 2021-22. India exported gems and jewellery worth $18.98 billion in
April-September 2021, 136.95 percent up from $8.01 billion in the
corresponding period last year and an impressive 5.13 percent growth from the
same period in pre-pandemic 2019. Exports of cut and polished diamonds are
up 125 percent this year.
 Organic and inorganic chemicals: Chemicals containing carbon in their
molecular structure are called organic chemicals. They have numerous uses.
Some have pharmaceutical and medical applications while others are used in
plastic production. Examples of organic chemicals exported by India include
acetic acid, acetone, phenol, formaldehyde, and citric acid. Inorganic chemicals
are those that don’t contain carbon or its derivatives as principal elements. They
are used in the paint, automotive, and paper industries as well as an ingredient
in cleaning solutions. Soda ash, liquid chlorine, caustic soda, red phosphorus,
and calcium carbide are some of the inorganic chemicals exported by India.
The US, China, Brazil, Germany, and UAE are key customers for Indian
chemicals.

 Drugs and pharmaceuticals: With its large raw material base and
skilled workforce, India is the third largest pharmaceutical market
by volume. It accounts for 20% of global generic drugs exports,
reportedly supplying 40 percent of the generic formulations used in
the US. It is also the country with the largest vaccine production
capacity. India’s pharma exports – which account for 8 percent of its
total merchandise exports – have shown great resilience in the face
of economic turmoil, including Covid-19. They registered a growth
of 18 percent in 2020-21 and continue to stay strong this
year.
 Electronic goods: These include mobile phones, accessories and
components, laptops and computers, among others. India’s
electronic goods exports fetched $11.11 billion in 2020-21, almost
the same as the $11.7 billion earned in 2019-20. With global demand
rallying this year, exporters are hoping for an even better
performance in 2021-22. In fact, the Electronics and Computer
Software Export Promotion Council says India has the potential to
hit $180 billion in electronic goods exports by 2025 provided it
receives long-term policy support from the government.

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 Cotton yarn/fabrics/made-ups, handloom products, etc: India is the second

largest cotton-producing country (China ranks first), growing 23 percent of the
world’s cotton. It also has the largest area under cotton cultivation. As such,
India’s textile industry is largely cotton-based. Cotton yarn/fabrics/made-ups
and handloom products account for 40 percent of India’s total textiles export as
of June 2021. Towels, bedsheets and other home linen are some of the most
exported Indian cotton made-ups. China, Bangladesh, and Vietnam are the top
three importers of Indian cotton. Despite the difficulties posed by the
pandemic, India’s cotton exports rose in volume by 127 percent and in value
by 106 percent in April-December 2020 compared to the same period in 2019.
Indian cotton and cotton products have a price advantage over those produced
in the US, Brazil, and Australia, which increases their export
potential.
 Ready-made garments (RMG) of all textiles: India’s RMG industry
comprises garments made from natural fibres such as cotton, wool, and silk as
well as man-made and synthetic fibres. However, cotton is the predominant raw
material used in Indian ready-made apparel. The RMG sector makes up 50
percent of India’s textiles and apparel industry. India is also the fifth largest
exporter of RMG in the world (it used to be second till a decade ago). The US,
UAE, UK, Germany, and France are the largest importers of Indian RMG by
value. Despite being one of India’s top exports and one of its largest job
creators, RMG exports have been falling in recent years, primarily due to stiff
competition from Bangladesh and Vietnam, which enjoy preferential tariffs in
the global market and have lower production costs.

 Marine products: India’s main seafood exports are frozen shrimp and frozen
fish. The US is the largest importer of Indian marine products, followed by
China, the European Union, and Japan. In the past two years, the pandemic has
severely tested Indian exporters of marine products. Exports fell 10.88
percent in 2020-21 from the previous financial year as demand went flat. This
year too, exports suffered as China suspended seafood imports from India,
citing the presence of coronavirus traces in packaging. It also blacklisted six
Indian seafood exporters. In September 2021, China started online
inspections of marine products at multiple processing-cum-export units in
several Indian states. This, coupled with a resurgence in demand in the US and
a good shrimp harvest, has given hope to exporters that they will be able to
meet the government’s target of $7.8 billion in seafood exports for this
financial year.
 Plastic and linoleum: Thanks to a large raw material base, India produces and
exports a wide range of plastic products such as packaging, sanitary fittings,
electrical accessories, sacks/bags, tarpaulins, laminates, and medical
equipment. However, India accounts for a mere 1 percent of the global plastics
market, which is dominated by China (10 percent). The US and China are the
top importers of Indian plastics. India’s plastic and linoleum exports
totaled $7.45 billion in 2020-21. They have shown a stronger performance this
year, growing by 55 percent in the April-June 2021 period compared to the
same period in 2020. The revival is due to initiatives by the Plastics Export
Promotion Council to boost exports to Europe, especially France.

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India’s Imports
India Imports By
Category Value Year
Mineral fuels, oils, $170.40B 2021
distillation products
Pearls, precious stones, $88.35B 2021
metals, coins
Electrical, electronic $56.73B 2021
equipment
Machinery, nuclear $48.41B 2021
reactors, boilers
Organic chemicals $27.25B 2021
Plastics $19.26B 2021

Animal, vegetable fats and oils, $17.46B 2021

cleavage products

Iron and steel $11.68B 2021

Optical, photo, technical, medical $11.32B 2021
apparatus

Inorganic chemicals, precious metal $9.64B 2021

compound, isotope

Fertilizers $9.12B 2021

Miscellaneous chemical products $7.78B 2021

Copper $6.69B 2021

Vehicles other than railway, tramway $6.41B 2021

Aluminum $5.68B 2021

Ores slag and ash $4.98B 2021
Articles of iron or steel $4.83B 2021
Ships, boats, and other floating $4.80B 2021
structures
Rubbers $4.10B 2021

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Printed books, newspapers, pictures $263.02M 2021

Miscellaneous edible preparations $241.63M 2021

Wool, animal hair, horsehair yarn and fabric $241.57M 2021

Special woven or tufted fabric, lace, $232.75M 2021

tapestry

Photographic or cinematographic goods $193.55M 2021

Fish, crustaceans, molluscs, aquatics $143.96M 2021

invertebrates

Cereal, flour, starch, milk preparations and $141.10M 2021

products

Silk $135.88M 2021

Vegetable, fruit, nut food preparations $124.44M 2021

Arms and ammunition, parts and $121.84M 2021

accessories
Vegetable plaiting materials, vegetable $103.00M 2021
products

Carpets and other textile floor coverings $100.09M 2021

END OF MODULE 1

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