macro economics- development orientation

7/27/2019 Macro Economics- Development Orientation

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MACRO ECONOMICS-DEVELOPMENT ORIENTATION

P.BHARATHI,Senior Faculty Member,

Dr. MCR HRD Institute of AP,Hyderabad


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ECONOMICS

MICRO MACRO


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Investors

Government

Firms(produce the

domestic product)

Consumers

Financial SystemRest of the

World

The Circular Flow


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Investors

Consumers

Financial System

Y

Firms(produce the

domestic product)

2Even in a simplemodel with out

Government or Trade in order tobe at fullemployment S must be equal I

A Simplified Circular Flow


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National income accounting a set of rules and definitions for measuring

economic activity in the aggregateeconomy i.e., in the economy as a whole.

National income accounting is a wayof measuring total, or aggregateproduction.

National Income


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Concepts of National Income

Gross Domestic Product (GDP ) is the totalvalue of all final goods and services produced inan economy in one-year period. GDP is outputproduced within a countrys borders.

Gross National Product (GNP) is the aggregatefinal output of citizens and businesses of aneconomy in one year. GNP is output produced bya countrys citizens.


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The Aggregate Demand

A gg rega te dem and is the totaldemand for goods and servicesin the economy.


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Aggregate Supply

Aggregate supply is the relationship between theprice level in the economy and the quantity of

aggregate output firms are willing and able tosupply, other things held constant

The foundation of aggregate supply is the labor market

Like any market, the labor market has a demand sideand a supply side A good understanding of aggregate supply requires a

correct understanding of the demand and supply sidesof the labor market


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Labor Supply

The supply of labor depends primarily on the

wage rate (the cost of a unit of labor, such as anhour of work)

The supply of labor also depends on The size of the adult population The skills (productivity) of the adult

population Households preferences for work versus

leisure


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Factor payments

Consumption of domestically

produced goodsand services (C)

Investment ( I )

Government

expenditure ( G )

Exportexpenditure ( X )

BANKS, etc

Netsaving ( S )

GOV.

Nettaxes ( T )

ABROAD

Importexpenditure ( M )

The circular flow of income

WITHDRAWALS


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The Equilibrium Price Level

The equi l ibr ium

pr ice level is thepoint at which theaggregate demandand aggregatesupply curvesintersect.


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An autonomous change in consumer spending (caused by something other than an increase in income) shifts theconsumption function and has amultiplier effect.

Multiplier Analysis


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The Multiplier Is a General Concept

The growth in a country's exportshas a multiplier effect, raising theGDP

Booms and recessions tend to betransmitted across national borders.


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International tradeInflation

Income taxationFinancial system

Factors that reduce the size of the multiplier

Multiplier Analysis


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Market failure is possible

when competitive markets failto be optimal institutions toproduce and distributegoods.

Market Failure


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EXTERNALITIES

An externality is a benefit or cost to thirdparties who are not directly involved in a

transaction.

Externalities are sometimes called

neighborhood effects.


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Externalities can be either beneficial or harmful, and can originate with either consumers or producers.

Here are some examples:1) Your consuming cigarettes imposes costs on

others nearby in the form of bad smells anddangerous smoke.

2)Your wearing perfume or cologne makesothers near you feel better off.

3) A dam built for electricity generation providesflood control to farmers and towns.

How Extern al i ties Wo rk


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The existence of an externality creates adifference between either

a) the private and social cost of production,

or

b) the private and social benefits fromconsumption.

How Ex tern al it ies Wo rk


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Marginal external cost is the extra social cost(over and above the private cost) of producingone more unit of the good.

Marginal external benefit is the extra socialbenefit of consuming one more unit of agood.

The presence of external benefits and costsmeans there will be a difference between theprivate and social consequences of

production.

Extern al Cos t and B en ef i t


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EXA MPLE 1:

Suppose the market in beer is perfectlycompetitive. But beer production createsterrible odors, and makes people wholive downwind from breweries worse off.

Extern al Cost and B enef i t Pr ivate & Socia l Con sequ enc es


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A pure public good is a good or servicethat is consumed in its entirety by

everyone. Public goods have two special

properties compared to private

consumption goods.

PUBLIC GOODS


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Non rivalry: When one personconsumes a unit of a public good theamount available to be consumed byeveryone else is not diminished.

Non excludability: Once a public goodis produced it is difficult or impossibleto exclude people from consuming it.

PUBLIC GOODS


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If left to private market, these goods will

tend to under production or notproduced or produced at higher prices

Public goods are not the same aspublicly provided goods. Just becauseGovernment provides a good does notmake it a public good.

PUBLIC GOODS


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Markets help to organize economic activity

Firms decide whom to hire and what to make

Households with their incomes decides whichfirms to work for and what to buy

These firms and households interact in the

market place, where prices and self interestguide their decisions


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Governments Role

The invisible hand can work only if the

Government enforces the rules andmaintains the institutions that are key to amarket economy

Markets work only if the individualinterests are protected by Governmentpolicy


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macro economics- development orientation

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