Lecture 1 (2nd March 2020)
- Before we start macro, we’ll start with some concepts.
- First part: Chapters 23 - 30 from Mankiw. How some concepts of national statistics are covered.: 60 - 70%
- Prepared slides. Some Indian adaptations verbally.
- Second: full fledged macro, better than Mankiw’s macro part. Textbook - “Macroeconomics” by Danbusch and Fischer → Chapters 5-6: 30 - 40%
- Simple blackboard and chalk teaching, no slides → no slides will be shared
- Chapter 23: Measuring a nation’s income: GDP, net product, et cetera
- Chapter 24: Measuring the cost of living: Inflation → Consumer Price Index
- Chapter 25: Production and growth
- Chapter 26: Saving investment and financial system: Main types of financial system in any economy: banks, etc. What their role in the economy is. Also will talk about investments. (This will start from Chapter 23 as well.) Actually, the “investment” that we talk about in day-to-day life is not the real investment from an eco PoV.
- Chapter 27: Basic tools of Finance: Concept of “present value” → basic thing when you do any finance. “Risk aversion” → interesting concept
- Chapter 28: Unemployment: We hear about “employment figures.” We study how they’re actually measured. Several different components of the rate of unemployment will be studied.
- Chapter 29: Monetary system: We’ll understand what exactly is money? What is its economic definition. The role of central bank in any economy. All economies have a central bank. What’s the role of such a bank? How money gets created and how the flow is maintained.
- Chapter 30: Money growth and inflation: Inflation studied in earlier chapter. This is related to the money supply (learnt in chapter 29).
Outline of Danbusch and Fischer later.
All of these chapters in Mankiw are concept building. In the later textbook, all this will come together. (Oh yeah, it’s all coming together.)
There we’ll look at algebraic models.
First we’ll define GDP and then see how it’s measured.
Purpose: To see what the government can do to change GDP. Ultimate aim to et the best growth of GDP. Higher rate of growth → more welfare for citizens, better life. THat’s the point of macro.
In Micro, we only dealt at the level of individual and firm and how they interacted with each other. Macro → economy as a whole. For the purposes of this course, we’ll be sticking to the concept of a “Closed economy.” Not be doing in this course. Even in Dan, we’ll stop before open economy (international linkages). We don’t have that level of scope in class. The interested reader may continue reading it. We’ll just be doing static macro-economics → keynesian economics. Named about Keynas → Nobel prize economist. Difference between short-run and long-run: prices are constant in short-run but flexible in long-run. Makes a lot of change in theory. Thus, the same govt policy will have different impact in the short run vs long run.
(Today’s lecture is more about motivating the purpose of the course. Not so much teaching. This will change. Later on, no motivation :( )
- GDP: viewed as two things
- total income of everyone in the economy
- total expenditure …
- factors of production: inputs required for the production process. If I’m a producer who’s using such inputs, I’ll have to pay the people making them.
- factors of payments: Payments made for above factors to produce stuff. From PoV of owners of factors of production, it’s the factor income: if it’s labour, it’s called wage. If it’s land, it’s rent.
- Recalling the circular-flow diagram
- two most important things in any economy:
- production → by firms
- consumption → by households
- Firms:
- buy/hire factors of production to make goods and services
- then, sell it to households
- Households:
- they are the owners of factors of production: labour, land → they get factor income.
- then, they buy goods and services from firms
- then, they consume
- This is a very simplistic diagram. Leaves out stuff like financial institutions (banks), international activities.
- Firms and households interact via two markets:
- Markets for factors of production (e.g., PT Cell, chowks in small town, Naukri.com, Monster.com. All these are examples of labour markets.)
- Markets for (finished) goods and services:
- Flows in red: actual physical flow
- Flows in green: flow of money (revenue/wages/income/spending)
- Government also collects taxes and purchases g&s. This is not shown. Governments also play an economic role. They are not isolated from eco. If it’s communist/socialist eco, then completely done by govt. Capitalist → complete opposite. In practice, it’s a midway → they interfere to some extent, via the central bank.
- The financial system is also ignored and so is foreign sector.
- GDP: the market value of all final goods and services produced within a country in a given period of time.
- market value: the physical amount of g&s produced multiplied by the price of the object
- if no market value, aggregating won’t make sense. Can’t add 10k apples and 30k oranges with 60k cars. The physical amount by itself does not help.
- market values of different amounts of goods and services can be added up :)
- GDP is measured in the same unit
- if you iron your shirt yourself, not counted in GDP, not put up in market. However, if you give it for ironing, it’s counted in GDP. Same concept for eating outside versus mom giving you food.
- final goods: intended for the end user. Get finished after their use. Used by households, this is what we want.
- intermediate goods: goods later on used again in production. NOT included. This is because their value is embodied in the later good that they contribute to. (The later one may be a final one or another intermediate good.) In order to avoid double counting, we don’t include value of intermediate goods and services.
- GDP includes tangible goods
- DVDs, bikes, beers, oranges
- also includes intangible services
- haircuts, coaching, dry-cleaning, watching a play
- GDP includes currently produced goods, not produced in past. This is reported either annually or quarterly. We only talk about the goods produced in the particular time period. For example, in the case of annual GDP of 2014-2015, then we won’t look at production before 2014. Similarly, in the case of 2014 Q3, we only look at production that happened in the third quarter of 2014, no quarter before.
- within a country: production done within the border of the country. Either by a citizen of the country or foreigner. Value of imported goods are not included. If your cousin has sent you a laptop from US won’t count. Production must be done in the country. However, within the country, we don’t care who has done the production. Could be an Indian or not. On the other hand, exports do count. They may not be consumed within the country but they are produced within. That’s what we care about.
- Four components of GDP:
- Consumption (C)
- Investment (I) : carried out by firms
- Government purchases (GP)
- Net exports (NX) : exports minus imports
- GDP = C + I + GP + NX
Consumption (C)
Total spending on households by g&s.
If you buy a house worth 1 cr, that won’t count. Expenditure on houses is not a part of consumption. The way houses get included in GDP → rental value of the house. Monthly rent multiplied by 12 will get included in GDP. Even if you’re staying in your own house, what will get included in GDP is some imputed value → an approximation of what kind of rent that you would have had to pay if you were staying in that house.
Investment (I)
total spending on goods that will be used in the future to produce more goods
Spending on capital equipment, structures, inventories.
Note: “Investment” does not mean the purchase of financial assets like stocks and bonds. These aren’t really investment. Those are just ways of parking savings.
Actual investments: when firms spend it on stuff like above.
Government purchases (G)
Exclude transfer payments → refers to those payments which are made for nothing in return. Factors of payments was something different, you get factors of production in return. That’s not the case here. Example, pension benefits, unemployment insurances → government gives this for nothing in return. Subsidies also get included in this.
Net exports (NX)
NX = exports - imports
Q. Why do we need to add this to the GDP?
Exports to be added because they’re produced here.
Imports have to be subtracted because this involves stuff used in C, I, G.
Examples
- Included
- Not included → China
- Not included → Last year
- Changes. 30 mill for inventory and 740 mill for consumption.
No class tomorrow. Rescheduled to Thursday: 12th March, 9:30 AM - 10:30 AM
