Chapter 16

Macroeconomic Aggregates

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 Macro Aggregates

• Aggregate output levels

• Aggregate Price levels
• Aggregate Investment levels
• Aggregate Consumption levels
• Balance of Payments

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 Fundamental Identity

Agg output ≡ Factor Income ≡

Expenditure

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 Measures of Aggregate Output

At Market Price At Factor Cost

* Gross Domestic Product

* Gross National Product
* Net Domestic Product
* Net National Product
* PPP Gross Domestic Product
National Income ≡ NNP at Factor Cost

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 Price Indices

• CPI (Also called Cost of living Index)

• WPI (Wholesale Price Index)

• GDP Deflator

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 Price Indices

• CPI : Weighted Average Retail Price of a

specific basket of goods.
• WPI : Based on wholesale prices of a
specific basket of goods ( different from CPI’s
basket both in composition and in weights).
• GDP Deflator: Ratio of Nominal GDP to Real
GDP.

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 Aggregate Consumption

• Keynesian Consumption function

- Concept of Marginal Propensity to
consume
• Irving Fisher’s Hypothesis
• Life-Cycle Hypothesis
• Duesenberry’s Hypothesis
• Random walk Hypothesis

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 Investment

• Investment as a function of changes in

income(Y)
- The Accelerator
• A relationship between Investment and the
stock market is Tobin’s Q
• Tobin’s Q = market value of a firm’s stocks /
replacement cost of a firm’s assets.
• Investment as a function of Real Interest Rate-
an inverse relationship

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 Inflation and Unemployment

Cost-Push
• Inflation
Demand- Pull

Remedy in the Short Run: Squeezing Aggregate

Demand

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 Phillip’s Curve

• Inflation (Wage rate) and Unemployment are

inversely related
• NAIRU: Non Accelerating Inflation Rate of
Unemployment
w
W is wage rate

Unemp rate

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 NAIRU
• Is the rate of unemployment that prevails
when the economy faces an absolutely
inelastic supply curve (also called the long
run Philips curve).

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 Balance of Payment

• Captures all transactions between any economy

and the rest of the world.

• Current Account: import/export of goods, services

and unilateral transfers

• Capital Account: All transactions of purchase/sale

of assets by individuals, institutions, corporates and
government.

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 Balance of Payment

• Items keenly watched:

- ratio of current account Deficit/surplus
to GDP
- ratio of Capital Account surplus/deficit
to GDP
- extent of intervention through reserves
and the level of Forex reserves.

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