Macroeconomic Analysis and Policy

Session-1
Biswa Swarup Misra

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Learning Objectives

• What is Macroeconomics?
• Macroeconomics vs. Microeconomics
• Why Study Macroeconomics?
• Fundamental Concepts

Macroeconomic Analysis and Policy Biswa Swarup Misra

 What is Macroeconomics?
• Macroeconomics Deals with the economy as a
whole.
• Macroeconomics focuses on the determinants of
national income, deals with aggregates such as
aggregate consumption and investment, and looks at
the overall level of prices instead of individual prices.
• Macroeconomics may be defined as that branch of
economic analysis which studies the behaviour of not
one particular unit, but of all the units combined
together.
Macroeconomic Analysis and Policy Biswa Swarup Misra
 Fields of Macroeconomics

The following are the fields covered by macroeconomics:

• Theory of Income, Output and Employment with its two
constituents, namely, the theory of consumption function, the
theory of investment function and the theory of business cycles or
economic fluctuations.
• Theory of Prices with its constituents of the theories of inflation
and deflation.
• Theory of Economic Growth dealing with the long-run growth of
income, output and employment.
• Macro Theory of Distribution dealing with the relative shares of
wages and profits in the total national income.

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Macroeconomists...

• Try to figure out why overall economic activity rises

and falls

• Try to understand what determines the level and

rate of change of overall prices

• Study other variables that play a major role in

determining the overall levels of production, income,
employment, and prices

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Macroeconomists...

• The words Micro and Macro have Greek origins

Mikros and Makros.

• Mikros implies small and Makros large.

• Microeconomics is concerned with the most

‘Elemental’ economic units, like consumer, firm, input,
market and industry.

Macroeconomic Analysis and Policy Biswa Swarup Misra

Microeconomics vs. Macroeconomic
• The micro-macro distinction in economics is not based
solely on size.
• Ex: Studying pricing policy of GE- Realm of
microeconomics
• Studying inflation in a small country like Rwanada or
Burundi - Realm of Macroeconomics
• Microeconomics focuses on decisions of individual units,
however, large they may be; Macroeconomics
concentrates on behaviour of entire economies, no matter
how small.
• Macroeconomics study the overall price level,
unemployment rate and other things that we call economic
aggregates.
Macroeconomic Analysis and Policy Biswa Swarup Misra
 Economic aggregates

• Economic aggregates is an abstraction that people use to

describe some salient features of the economic life.

• Although we observe prices of individual products, we

never see the price level.

• Domestic product/national output is also an abstract

notion, though it represents the total production in an
economy, it is unobservable.

• The process by which real objects such as computers,

wheat, wine are combined into an abstraction called total
domestic product is aggregation

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Limitations of Aggregation

• Ignores distinction amongst the different products.

• Although composition of demand and supply in
different markets matters, it may be of little
consequence for the economy wide issues such as
growth, inflation, unemployment etc. - the issues
that concern macroeconomics
• During economic fluctuations, markets for different
products tend to move up or down together.

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Macroeconomics vs. Microeconomics
Let’s look more carefully at the difference between
microeconomic and macroeconomic questions.
MICROECONOMIC MACROECONOMIC
QUESTIONS QUESTIONS
Go to business school or take How many people are
a job? employed in the economy as
a whole?
What determines the salary What determines the overall
offered by Citibank to Cherie salary levels paid to workers
Camajo, a new Columbia in a given year?
MBA?

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Macroeconomics vs. Microeconomics
MICROECONOMIC MACROECONOMIC
QUESTIONS QUESTIONS
What determines the cost to a What determines the overall
university or college of offering level of prices in the economy
a new course? as a whole?
What government policies What government policies
should be adopted to make it should be adopted to promote
easier for low-income students full employment and growth in
to attend college? the economy as a whole?
What determines whether What determines the overall
Citibank opens a new office in trade in goods, services and
Shanghai? financial assets between the
U.S. and the rest of the world?

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Why Macroeconomics Matters

• Self-Interest
 effects of the macroeconomy on our daily lives

 understanding of changing opportunities as the

economy fluctuates

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Why Macroeconomics Matters

• Cultural Literacy
 ability to follow and participate in public debates and
discussions

 ability to understand news reports on changes in the

economy

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Why Macroeconomics Matters

• Civic Responsibility
 more informed voting

 more responsible macroeconomic policy

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Fundamentals

• Distinction between stock and flow

• Endogenous vs. Exogenous
variables

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Exogenous Variables

Fiscal Policy Monetary Shocks

Policy

Changes in Changes in Wars.

tax rate and Liquidity and Weather,
Government in short term Oil shocks,
spending interest Terrorism
rates

Government Controlled by
Controlled Nation’s
central Bank

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Endogenous versus Exogenous

• Endogenous variables are determined by and

within the macro economy
• The policies that influence the endogenous
variables are deliberately implemented and
directly controlled by policy makers.
• These policies are considered exogenous,
determined independently outside the model.

MEASURING A NATION’S INCOME B.S.Misra

 Rules of the Class

• Either you speak or the instructor.

• Cell phones in Flight Mode
• Laptop with LAN cable needs to be brought
• Attendance will not be taken
• Do not enter the class room after the scheduled class
time
• You can leave the classroom in between but are not
allowed to enter again

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Rules for Examinations

• Minimum Pass Marks - 30. <30 = F Grade

• There will Review Quizzes, Quizzes, Mid term
and End term examinations.
• Be prepared for the Review Quiz in each
session.
• No request for make up Review Quiz or Quiz

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Grading Pattern (Tentative)

Review Quizzes - 25

Quizzes - 20

Mid Term - 20

End Term - 35

Macroeconomic Analysis and Policy Biswa Swarup Misra

 Implications of Unfair Practices

• Any body found adopting unfair means in any

examination will invite penalty.
• The review quiz should be not be given from any
place other than the classroom.
• Suspicion of adopting unfair means is enough.
• You will follow the written guidelines in
examination Question paper and Answer sheet
(need not be announced during the examination)

Macroeconomic Analysis and Policy Biswa Swarup Misra