ProfSKJain MNIT Nov24 Macroecon.

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MNIT, Jaipur: 18-22 November 2024

Basic Macroeconomic Concepts

Dr. Sudhir K. Jain


Adjunct Professor, IIM Jammu & Former Head
Department of Management Studies
INDIAN INSTITUTE OF TECHNOLOGY DELHI
Hauz Khas, New Delhi – 110016
Growing Importance of Economics
Government’s Most Important Role
• Economic Development & Economic Growth: LDCs & MDCs
• Developed Countries Obj.: Economic Growth v. Recession
• Developing Countries Obj.: Economic Development
• Economic Development: Infrastructure development
• Employment: Implications of Unemployment: Social/Political/Econ.
• Inflation: Implications: Social/Political/Economic
• Exchange Rate
• Exports & Imports
• National security
• Support to underprivileged population (Inclusiveness)
Growing Importance
• The Great Depression [1929-1933]
• Nobel Prize: Since 1969 [Jan Tinbergen & Ragnar Frisch]
• Understanding of the Economy: Socio-Economic-Political Dimensions

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Basic Macroeconomic Concepts (1/2)
Economic Growth & Economic Development: LDCs & MDCs
GNP [Nominal]: It is the value of total output of all goods &
services produced by a country at current prices
Real GNP: It is the value of total output of all goods & services
produced by a country at constant prices
Growth Rate: It refers to the growth rate of real GNP
GDP [Nominal]: It is the value of total output of all goods &
services produced within the geographical boundary of a country
at current prices
Real GDP: It is the value of total output of all goods & services
produced within the geographical boundary of a country at
constant prices
Growth Rate of GDP: Growth Rate of Real GDP [GDP at Constant Prices]
Basic Macroeconomic Concepts (2/2)
Nominal: At current prices
Real: At Constant Prices (with some past base year)
GNP and GDP

Nominal NNP = Nominal GNP – Depreciation

NNP = GNP – Depreciation [at current prices]

Real NNP = Real GNP – Depreciation [at constant prices]

Nominal NDP = Nominal GDP – Depreciation

NDP = GDP – Depreciation [at current prices]

Real NDP = Real GDP – Depreciation [at constant prices]


GNP and GDP
GNP = Consumption Expenditure + Investment +
Government Expenditure + Net Exports + Net
Income (Net Remittances)
Y = C + I + G + (X – M) + Z

GDP = Consumption Expenditure + Investment +


Government Expenditure + Net Exports
Y = C + I + G + (X – M)

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Estimation of National Income

• Methods of Measuring National Income


➢ Product or Production Method: ∑ Value Added
➢ Income Method: Income of all factors of
production (Land, Labor, Capital &
Entrepreneurship: Rent + Wages & Salaries
Interest + Profits)
➢ Expenditure Method: ∑ Expenditure

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World’s Top 10 Largest Economies (2023)
Rank & GDP GDP Per Capita
Country (USD tn) (USD thousand)

U.S.A. 26.9 80.03


#2 China 19.4 13.72
#3 Japan 4.4 35.39
#4 Germany 4.3 51.38
#5 India 3.8 2.6

#6 U.K. 3.2 46.31


#7 France 2.9 44.41
#8 Italy 2.2 36.81
#9 Canada 2.09 52.72
#10 Brazil
11/23/2024 2.08
Prof. Sudhir K. Jain 9.67 7
Top 10 Countries (Highest GDP per capita)

GDP per Capita


Rank Country Region
(USD)
1 Luxembourg $132,370 Europe
2 Ireland $114,580 Europe
3 Norway $101,100 Europe
4 Switzerland $98,770 Europe
5 Singapore $91,100 Asia
6 Qatar $83,890 Asia
7 U.S. $80,030 Americas
8 Iceland $75,180 Europe
9 Denmark $68,830 Europe
10 Australia
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$64,960
Prof. Sudhir K. Jain
Oceania 8
Purchasing Power Parity
PPP concept developed due to Price Differentials in
Goods & Services (in $ terms)

Not correctly valued when using an exchange-rate


conversion: Fresh vegetables, tea, snacks, cold drinks,
bottled water, haircut, local transport, school fee etc.

Purchasing Power Parity (PPP) Concept:

Solution of Price Differentials vis-à-vis income required to


buy same quantity of goods & services.

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Purchasing Power Parity (PPP)
Country/ Territory Region IMF World Bank
Estimate Year Est. Year
World — 174,471,283 2023 164,155,327 2022
China Asia 33,014,998 2023 30,327,320 2022
USA Americas 26,854,599 2023 25,462,700 2022
India Asia 13,033,443 2023 11,874,583 2022
Japan Asia 6,456,527 2023 5,702,287 2022
Germany Europe 5,545,656 2023 5,309,606 2022
Russia Europe 4,988,829 2023 5,326,855 2022
Indonesia Asia 4,398,729 2023 4,036,901 2022
Brazil Americas 4,020,381 2023 3,837,261 2022
France Europe 3,872,729 2023 3,769,924 2022
U.K. Europe 3,846,931 2023 3,656,809 2022
Turkey Asia 3,572,551 2023 3,180,984 2022
Italy Europe 3,195,548 2023 3,052,609 2022
Mexico Americas 3,125,902 2023 2,742,903 2022
South Korea Asia 2,924,038 2023 2,585,011 2022
Canada Americas 2,385,124 2023 2,273,489 2022
Spain Europe 2,363,535 2023 2,181,968 2022
Saudi Arabia Asia 2,300,967 2023 2,150,487 2022
Egypt Africa 1,803,584 2023 1,674,951 2022
Australia Oceania 1,718,097 2023 1,626,940 2022
PPP-Adjusted GDP Per Capita
GDP per Capita
Rank Country Region
(PPP)
1 Ireland $145,200 Europe
2 Luxembourg $142,490 Europe
3 Singapore $133,890 Asia
4 Qatar $124,830 Asia
5 Macao $89,560 Asia
6 UAE $88,220 Asia
7 Switzerland $87,960 Europe
8 Norway $82,650 Europe
9 U.S.A. $80,030 Americas
10 San Marino $78,930 Europe
Business Cycles
Business Cycle refers to the fluctuations in economic
activities such as GDP, Employment, interest, prices and
several other related economic parameters.
In a Business Cycle, combined effect of several economic
parameters leads the economy towards contraction or
expansion of economic activities.
An economic cycle, or business cycle, has four
stages: expansion, peak, contraction, and trough.
Recession & Depression:
• Decline in Employment, Industrial Production, Wage Rates, Costs of
Production, Prices, Profits, Bank Loans etc.
• Increase in business inventories
• Speculation: Little
• Feeling: Hesitation → Pessimism
Business Cycles
CHARACTERISTICS OF VARIOUS PHASES OF A
STANDARD BUSINESS CYCLE
Characteristics Recession Depression Recovery Prosperity

1. Employment Decline Low Slow Increase High

2. Industrial Output Decline Low Slow Increase High

3. Wage Rates Decline Low Slow Increase High

4. Prices Decline Low Slow Increase High

5. Bank Loans Decline Low Slow Increase High

6. Bank Reserves Increase High Decrease Low

7. Costs of Production Decline Low Slow Increase High

8. Profits Decline Low Slow Increase High

9. Business Inventories Increase High Decline Low

10. Business Failures Sudden Many Few Few

11. Speculation Little Very Little Slow Increase High

12. Feeling Hesitation Pessimism Hope Optimism

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Inflation
Inflation: Continuous rise in prises
Types of Inflation
❑ Creeping Inflation:
• Moderate, Predictable & Manageable
• Single digit (< 10%)
❑ Walking Inflation:
• High 20% to 50% & difficult to manage
❑ Galloping Inflation:
• Exceptionally high inflation rate
• Double or Triple digit: 50% to 999%
❑ Hyper Inflation:
• Prices rise very fast: > 1000% (during post-war period)
• Paper currency tends to become worthless
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Causes of Inflation
• Demand-pull: Tax cutting → Demand exceeds Supply
• Cost-push: Cost of fuel, energy, …
• Monetary policy: Increase in money supply.
• Devaluation due to BoP problem
• Rising wages
• Fiscal policy: High public expenditure → Deficit
financing; High subsidies

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Understanding the Economy (1/2)
➢ Economic Dimensions
▪ Macroeconomic indicators: GNP, GDP, PCI (Nominal & Real),
Gr. Rate, …
▪ Economy size, Income level, Income distribution, Poverty
➢ Infrastructure

➢ Gender Parity Index (India, Afghanistan, Iran, Saudi Arabia, ...)


➢ Social Dimensions: Caste, Occupation, Literacy, Gender, Crime,
Women in Workforce, …

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Understanding the Economy (2/2)
Demographic Dimensions:
▪ Distribution of Population by Income, Education, Age at
Marriage (particularly females)
▪ Dependency Ratio
▪ Longevity v. Govt. policy related to retirement age
▪ BR, DR, IMR, CMR, ..
▪ Occupational Structure: Professionals, skilled, semi-skilled,
unskilled etc.
▪ Unskilled or low skilled people cannot get high wages/salaries in
a highly populous country like India → India will remain poor
unless occupational structure is modified
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Characteristics of LDCs (1/2)
• Significant proportion of poor people

• Low spread of technology

• Poor capital markets

• Dual economy

• Varying dependence on international trade

• Rapid population growth (1.6% to 3.5%) vs. DCs @ 0.1%

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Characteristics of LDCs (2/2)
• Low literacy & school enrolment rates

• Poor quality of educational & healthcare institutions

• Unskilled labour force

• Life expectancy at birth

• Poorly developed institutions

• Non-compliance of law: Traffic Rules

• High Crime Rate: Ineffective Police, Widespread Corruption

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Lorenz Curve and Gini Coefficient
Lorenz Curve helps in understanding the distribution of income
in an economy.
Gini Coefficient measures the degree of income inequality;
= A/ (A+B); If A = 0, Gini Coefficient = 0

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[High] Gini
# Country
Coefficient
1 South Africa 63
2 Namibia 59.1
3 Suriname 57.9
4 Zambia 57.1
5 Central African Republic 56.2
6 Eswatini 54.6
7 Colombia 54.2
8 Mozambique 54
9 Hong Kong 53.9
10 Botswana 53.3
11 Angola 51.3

India 35.7
World 38

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Countries: Lowest Gini Coefficient
1. Slovakia (23.2)
2. Belarus (24.4)
3. Slovenia (24.4)
4. Armenia (25.2)
5. Czech Republic (25.3)
6. Ukraine (25.6)
7. Moldova (26)
8. United Arab Emirates (26)
9. Iceland (26.1)
10. Belgium (27.2)

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Human Development Index (HDI)
• HDI measures each country's social and economic
development by focusing on the following four factors:
1. Mean Years of Schooling
2. Expected Years of Schooling
3. Life Expectancy at Birth
4. Gross National Income (GNI) per capita
(Published by Statista Research Department, Sep 22, 2022)
➢ HDI is the geometric mean (equally-weighted) of life expectancy,
education, and GNI per capita
➢ The education dimension is the arithmetic mean of the two
education indices (mean years of schooling and expected years
of schooling)

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S. Country HDI
No.

132. India 0.633


161. Pakistan 0.54 (154th in 2020)
World Average: 0.465
South Asia Average: 0.508

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Population Explosion and High Dependency

Another major characteristic of LDCs:

High rate of growth of population

T. R. Malthus Prediction in 1798:


Either humans should check population growth,
else the nature will check it

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Demography of India
India’s Population Pyramid in 2020
A graph of a red and blue color

Description automatically generated

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India’s population (1/3)
Population 1,425,775,850 (2023 est.)

Density 473.42 people per.km2 (2021 est.)

Growth Rate 0.68% (2022 est.)


Birth Rate 16.1 births/1,000 population (2023 est.)

Death Rate 6.6 deaths/1,000 population (2023 est.)

Life Expectancy 72.0 years (2023 est.)


Males 70.5 years (2023 est.)
Females 73.6 years (2023 est.)

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India’s population (2/3)
Fertility Rate 2.03 children born per woman (2021)
(No. of live births per 1,000 females of
childbearing age 15-44)
Infant Mortality Rate 29.94 deaths/1,000 live births (2018)
Age structure (2021 est.)
0–14 years 25.68% [Males: M & Females: F]
[M: 183,695,000; F: 166,295,000]
15–64 years 67.49%
[M: 472,653,000; F: 447,337,000]
65 and over 6.83%
[M: 44,275,000; F: 48,751,000]

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India’s population (3/3)
Sex Ratio (2023 est.): Males/Female
Total 1.06
At birth 1.1
Under 15 1.11
15–64 years 1.07
65 and over 0.85
Language
Spoken • Hindi 43.6%
• Bengali 8%
• Marathi 6.9%
• Telugu 6.8%
• Tamil 6.7%
• Gujarati 4.6%
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Urdu 4.2% 30
Demographic Transition
• A sudden fall in the death rate (due to improved health
systems, better hygiene knowledge, )

• Slowly declining birth rate

→ Population Explosion

• Important: Controlling duration of demographic


transition

• Several African countries’ demographic transition is


getting prolonged.

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World Population by Year
Year World Yearly Net Density
Population Change Change (P/Km²)
2023 8,045,311,447 0.88 % 70,206,291 54
2000 6,148,898,975 1.34 % 81,140,517 41
1975 4,069,437,231 1.85 % 73,920,154 27
1927 2,000,000,000
1804 1,000,000,000
1600 500,000,000
900 240,000,000
800 220,000,000
-500 100,000,000
-1000 50,000,000
-2000 27,000,000
Delhi’s Pop
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Countries Ranked by Fertility Rate :2023 (1/2)
Country Fertility Country Fertility
Name Rate Name Rate
Ghana 3.647
Republic of
5.464
Congo Vanuatu 3.619
Angola 5.213 Timor-Leste 3.598
Nigeria 5.076 Kiribati 3.409
Zambia 4.381 Papua New Guinea 3.377
Mauritania 4.321 Kenya 3.259
Cameroon 4.295
Pakistan 3.238
Sudan 4.154
Egypt 3.131
Solomon Islands 4.145

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Countries Ranked by Fertility Rate :2023 (2/2)
Country Fertility Country Fertility Country Fertility
Name Rate Name Rate Name Rate
Lesotho 2.967 Honduras 2.321 Indonesia 2.220
Eswatini 2.803 Uzbekistan 2.309 India 2.139
Mongolia 2.731 Morocco 2.296 Sri Lanka 2.128
Micronesia 2.722 Nicaragua 2.279 Myanmar 2.073
Bolivia 2.577 Indonesia 2.220 Vietnam 2.019
Djibouti 2.522 Honduras 2.321
Philippines 2.454 Uzbekistan 2.309
Cambodia 2.394 Morocco 2.296

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India: Historical Fertility Rate
Year Fertility Rate Growth Rate
2023 2.139 -0.930%
2020 2.200 -0.900%
2015 2.334 -1.310%
2010 2.636 -2.950%
2005 3.002 -2.250%
2000 3.346 -1.990%
1991 4.006 -2.130%
1977 5.061 -1.690%
1971 5.535 -1.130%
1961 5.892 -0.030%
1951 5.906 -0.020%
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Religious Groups & Fertility Rates
NFHS: National Family Health Survey → Changing Demography

Religious NFHS-1 NFHS-2 NFHS-3 NFHS-4 NFHS-5


Group 1992-93 2019-21

Hindu 3.3 2.78 2.59 2.13 1.94

Muslim 4.41 3.59 3.4 2.62 2.36

Christian 2.87 2.44 2.34 1.99 1.88

Sikh 2.43 2.26 1.95 1.58 1.61

Buddhist – 2.13 2.25 1.74 1.39

Jain – 1.9 1.54 1.2 1.60

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Thank you
- Prof. Sudhir K. Jain

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