Business Environment

First Session

Microeconomics v/s Macroeconomics

Microeconomics:
The study of how individual households
and firms make decisions, interact with
one another in markets.
Macroeconomics:
The study of the economy as a whole.

Agenda of
Macroeconomics:
Understanding Macroeconomic Environment
Understanding Effects of Economic Policy on
Crucial Macroeconomic Factors: Income,
Inflation, Interest Rates

Anticipating Policy Changes

GDP

GDP and Economic Well Being

Real GDP per capita is the main

indicator of the average persons
standard of living.
But GDP is not a perfect measure of wellbeing.

GDP Does Not Value:

the quality of the environment

non-market activity, such as the child care
a parent provides his or her child at home
an equitable distribution of income
Happiness!

Then Why Do We Care About GDP?

Many indicators of the quality of life are

positively correlated with GDP. For
example

GDP and Life Expectancy in 12 countries

Life expectancy
(years)

Indonesia
China

Japan

Mexico

U.S.
Germany

Brazil
Pakistan
India

Russia

Banglades
h
Nigeri
a

Real GDP per capita

GDP and Literacy in 12 countries

China

Russia

Adult Literacy
(% of
population)

Mexico

Germany

Brazil
Indonesia
Nigeri
a
India
Pakistan
Banglades
h

Real GDP per capita

Japan

U.S.

GDP and Internet Usage in 12 countries

Internet Usage
(% of
population)

Japan

Pakistan
Nigeri
a

Germany

Indonesia

Brazil
Mexico

Russia
China
India

Banglades
Real GDP per capita

U.S.

Inflation

 Hyperinflation is generally defined as

inflation exceeding 50% per month.
Excessive growth in the money supply
always causes hyperinflation.

Hyperinflation in Zimbabwe
Large govt budget deficits
led to the creation of
large quantities of money
and high inflation rates.

date
Aug 2007
Apr 2008
May 2008
June 2008
July 2008
Feb 2009
Sept 2009

Zim$ per US$

245
29,401
207,209,688
4,470,828,40
1
26,421,447,0
43
37,410,030
355

Hyperinflation in Zimbabwe

Hyperinflation in Zimbabwe
Highest Monthly Inflation Rates in History

Country

Month with
highest inflation
rate

Highest
monthly
inflation rate

Time required for

prices to double

Hungary

July 1946

1.30 x 1016%

15.6 hours

Zimbabw
e

Mid-November
2008

79,600,000,000
%

24.7 hours

Yugoslavi
a

January 1994

313,000,000%

1.4 days

Germany

October 1923

29,500%

3.7 days

Greece

November 1944

11,300%

4.5 days

China

May 1949

4,210%

5.6 days

Source: Hanke(2009)

Openness

Crisis

The Course Flow

Investment
Investment
and
and Saving
Saving
Theory
Theory of
of
Liquidity
Liquidity
Preferenc
Preferenc
ee

IS
IS
curve
curve
LM
LM
curve
curve

IS-LM
IS-LM
mode
mode
ll
Agg.
Agg.
deman
deman
dd
curve
curve
Agg.
Agg.
supply
supply
curve
curve

Explanatio
Explanatio
nn of
of shortshortrun
run
fluctuation
fluctuation
ss
Model
Model of
of
Agg.
Agg.
Demand
Demand
and
and
Agg.
Agg.
Supply
Supply

Thanks