HSS- 207

Macroeconomics

Prof. Sudhakar Patra

Professor of Economics
Berhampur University
 Syllabus
• Introduction
• Consumption, saving and investment
functions
• Joint equilibrium in goods and financial
markets
• Inflation and unemployment
• Open economy macroeconomics
 Module-1
• Introduction
• Macroeconomic aggregates
• Sectoral contributions to domestic
product
• International comparisons and
purchasing power parity
• closed and open economies
 Macroeconomics
• Macro is been derived from the Greek word
"MAKROS"which means LARGE.
• Macro economic is the study of large part of
the economy i.e.,The whole economy.
• The study of economic behaviour of the
economy as a whole & not the individual
economic units of the economy.
 Definition of Macroeconomics
• Prof. Boulding states that
Macroeconomics deals with not with
individual quantities but with
aggregates of these quantities, not with
individual income but with national
income, not with individual Prices but
with price level, not with individual
output but with national output.
 Complementary
• Macroeconomics is more useful and realistic
than micro economics.
• They are interrelated and complementary to
each other.
• Both are necessary for a perfect study of
Economics.
 Macroeconomic Aggregates
• Macroeconomic aggregates are used to
understand the health of the economy as a
whole through the total or aggregate values
of macroeconomic variables.
• In simple words, these are the variables
using which performance of an economy is
commented on.
 Aggregates
• Aggregate Output
• Aggregate Consumption
• Aggregate Investment
• Aggregate Price
• Total National Income
• Balance of Payment
 Concepts of Aggregate Output
• Gross National Product(GNP)
• Gross Domestic Product(GDP)
• Net National Product(NNP)
• GNP at factor cost(GNPfc)
• GNP at Market Price(GNPmp)
 GNP
• Gross national product (GNP) refers to the
total value of all the goods and services
produced by the residents and businesses of
a country, irrespective of the location of
production.
• GNP takes into account the investments
made by the businesses and residents of the
country, living both inside and outside the
country.
 GNP & GDP
• Gross domestic product (GDP) is the value of
the finished domestic goods and services
produced within a nation's borders.
• On the other hand, gross national product
(GNP) is the value of all finished goods and
services produced by a country's citizens,
both domestically and abroad.
 GNI & GNP
• GNI is the total income received by the
country from its residents and businesses
regardless of whether they are located in the
country or abroad.
• GNP includes the income of all of a country's
residents and businesses whether it flows
back to the country or is spent abroad.
 NNP
• In numerical terms, the NNP is the total market value of
the goods and services produced by a nation during a
specified period (generally a year) with depreciation
subtracted from it.
• Economic depreciation is a measure of the decrease in
the market value of an asset over time.
• In accounting parlance, depreciation is referred to as the
reduction in the cost of a fixed asset in sequential order,
due to wear and tear until the asset becomes obsolete.
• Machinery, vehicle, equipment, building are some
examples of assets that are likely to experience wear
and tear or obsolescence.
 Factor Cost and Market Price
• GNP at market price refers to the aggregate
market value of all final goods and services
produced by the residents of a country.
• GNP at factor cost is the aggregate earnings
received by different factors of production
supplied by the residents of a country during
any particular year.
 Methods of National Income estimation

• Output Method
• Income Method
• Expenditure Method
 Classification of Economy
• Primary Sector- N – C
• Secondary Sector- C- C
• Tertiary Sector-C- S
• As Development takes place, Contribution of
Tertiary sector increases and of primary sector
decreases.
 Sectoral Contribution to GDP
• Gross Value Added (GVA) at current prices for
the services sector is estimated at 131.96 lakh
crore INR in 2022-23.
• The services sector accounts for 53.33% of total
India's GVA of 247.43 lakh crore Indian rupees.
• With GVA of Rs. 69.89 lakh crore, the Industry
sector contributes 28.25%.
• Agricultural Sector contributes only 18.42%.
International Comparison Programme(ICP)
• About the International Comparison Program (ICP)
• The International Comparison Program (ICP) is one of the
largest, and most enduring, statistical initiatives in the world.
• It is managed by the World Bank under the auspices of the
United Nations Statistical Commission (UNSC), and relies on a
partnership of international, regional, sub-regional, and
national agencies working under a robust governance
framework and following an established statistical
methodology.
• At its forty-seventh session, in March 2016, the UNSC
instituted the ICP as a permanent element of the global
statistical programme.
 Objectives of the ICP
• The main objectives of the ICP are:
• (i) to produce purchasing power parities
(PPPs) and comparable price level indexes
(PLIs) for participating economies and
• (ii) to convert volume and per capita
measures of gross domestic product (GDP)
and its expenditure components into a
common currency using PPPs.
 Purchasing Power Parity
• PPPs convert different currencies to a common currency and,
in the process of conversion, equalize their purchasing power
by controlling for differences in price levels between
economies.
• They provide a measure of what an economy’s local currency
can buy in another economy.
• PPP-based comparisons of economic output differ from
market exchange rate-based comparisons as the latter do not
distinguish between the relative price levels of different items
in economies.
• PPP-based comparisons are also less impacted by the
potential volatility of market exchange rates.
 PPP
• PPPs are calculated by the ICP based on the prices
of items within a common basket of goods and
services and expenditure shares, used as
expenditure weights, on groups of items in each
of the participating economies.
• These data are benchmarked to a reference year
for each comparison cycle.
• The most recent ICP results are available for the
ICP 2017 cycle, with the ongoing cycle
benchmarked to 2021.
 Closed and Open Economies
• An open economy allows trading with other
nations, whereas a closed economy does not
allow it.
• Based on the free movement of labour and
money with other countries in the world, an
economy is classified as either open or
closed.
 Closed and Open……….
• Almost every country trades globally since no
country can produce enough of each product
to suit the requirements of its inhabitants.
• However, some nations tend to limit their
trade and transactions with other countries.
 Features of an Open Economy

• An open economy carries out the following

activities:
• It buys and sells securities from other countries,
including shares and bonds.
• It borrows money from other countries and lends it
to them.
• It can send and receive gifts from outside the
country.
• Citizens are free to travel or work in other
economies’ domestic areas.
 Understanding Open Economy
• Singapore: Singapore is regarded as one of the most easy-to-do-business
countries globally that has an open economy. Its dedication to free-market
policies has aided the country in attracting substantial amounts of foreign
investment, resulting in rapid economic growth. It simply means that
consumers have significant consumption options in the country.
• Netherlands: International trade is responsible for most of the Netherlands’
economic success, thanks to its well-connected seaports. As a result, the
country is integral to Europe’s trade and economy.
• Finland: Finland has stayed dedicated to preserving an open economy as anti-
globalisation sentiment has expanded worldwide. Finland has one of the
lowest corporation tax rates in the European Union, at 20%, and it consistently
ranks first in international surveys for economic competitiveness and
transparency.
• India: Despite extensive domestic political risks, the open economy in India,
which began in 1991, has been maintained. It has ramifications for countries
looking to advertise prominent or controversial concepts on a political level.
Devaluation, increased interest rates, fiscal and monetary constraints, and
import constriction were among the extreme measures used by the
government to initiate an open economy in India.
 Features of a Closed Economy
• It exports no products or services to other countries and
imports no goods or services from other countries.
• It does not buy or sell shares, debentures, bonds, or
other financial instruments to other countries.
• A closed economy does not trade with other countries.
• Ordinary citizens of a closed economy cannot go to
other countries to work on their own. No foreigner is
allowed to labour on the home territory of a closed
economy.
• For the reasons described above, Gross Domestic
Product and Gross National Product are the same in a
closed economy.
 Understanding Closed Economies
• Brazil: Brazil’s economy is unusually limited in terms of trade penetration,
with exports plus imports accounting for only 27.6% a few years ago. Brazil’s
immense size is frequently used to justify its lack of openness.
• China: In the 2020s, China’s economy changed from a small open economy
to a continent-sized, far more closed economy. It has more in common with
the United States than with trade-dependent economies such as Japan,
Germany, the United Kingdom, or large emerging markets such as Brazil.
• Japan: The Japanese economy is restricted to foreign goods and companies,
and it does not respond to market incentives or other countries. According
to proponents of a results-oriented approach to Japanese trade, a managed
trade system is not ideal.
• Moldova: Moldova has close economic links to both Ukraine and Russia. Its
rising energy crisis and the consequences of mass displacement are placing a
strain on the 2.6 million-strong country during the Ukraine war. Thus, it
identifies as a closed economy.
Thanks