Overview of Overview of Economics (Macro)Economics (Macro)a surveya survey

1498- Vasco da Gama1498- Vasco da Gama

FROM LISBON TO CALICUT--- TRADE AND FROM LISBON TO CALICUT--- TRADE AND COLONIALISATIONCOLONIALISATION

COMMERCE AND RULE….COMMERCE AND RULE….

1600 – East India Co.1600 – East India Co.

History of International tradeHistory of International trade

Dominant economic Philosophy of the west – Dominant economic Philosophy of the west – Mercantalism- [ till the second half of the 18 th Mercantalism- [ till the second half of the 18 th century]century]

3 Gs- Gold , Greatness and Glory….3 Gs- Gold , Greatness and Glory…. Physiocrats- [later half of the 18Physiocrats- [later half of the 18 thth century] century] Doing away with 3Rs of Mercantalism-Doing away with 3Rs of Mercantalism-

Restriction, Restraint & RegulationRestriction, Restraint & Regulation..

18 th century18 th century

Classical Economics -1776-AdamSmith-Classical Economics -1776-AdamSmith- An Inquiry into the Causes and Nature of An Inquiry into the Causes and Nature of

the Wealth of nations – David Ricardo, the Wealth of nations – David Ricardo, J.S Mill. Malthus etc.J.S Mill. Malthus etc.

IT IS NOT FROM THE BENEVOLENCE OF THE BUTCHER, THE IT IS NOT FROM THE BENEVOLENCE OF THE BUTCHER, THE BREWER, OR THE BAKER, THAT WE EFFECT OUR DINNER BUT BREWER, OR THE BAKER, THAT WE EFFECT OUR DINNER BUT FROM THEIR REGARD FOR THEIR OWN INTEREST…..FROM THEIR REGARD FOR THEIR OWN INTEREST…..

Free markets- forces of DD and SS- price Free markets- forces of DD and SS- price mechanism- invisible hand- laissez faire…..mechanism- invisible hand- laissez faire…..

1776- American Declaration of Rights1776- American Declaration of Rights

We hold these truths to be self-evident, We hold these truths to be self-evident, that that all men are created equal, that they , that they are endowed by their Creator with certain are endowed by their Creator with certain unalienable Rights, that among these unalienable Rights, that among these are are Life, Liberty and the pursuit of Happiness..

Industrial Revolution-1789Industrial Revolution-1789

FRENCH REVOLUTION 1789FRENCH REVOLUTION 1789

A little bit of mutiny……A little bit of mutiny……

Division of labour, accumulation of capital and growing Division of labour, accumulation of capital and growing international tradeinternational trade

Benefits of freedom, democracy , a free state etc.Benefits of freedom, democracy , a free state etc. The western world being more and more attracted to The western world being more and more attracted to

free markets and the benefits of laissez fairefree markets and the benefits of laissez faire

Basic assumptions of Basic assumptions of classical economicsclassical economics

Say’s Law of markets- SS creates its own Say’s Law of markets- SS creates its own DDDD

Full employment of resources- no Full employment of resources- no voluntary unemploymentvoluntary unemployment

Price mechanism clearing the market at Price mechanism clearing the market at equilibrium quantitiesequilibrium quantities

Wage price flexibilityWage price flexibility

1919thth Century Century

Emergence of the free market capitalist economy in the Emergence of the free market capitalist economy in the global arena –global arena –

led largely by British Industrial revolution- primarily due to led largely by British Industrial revolution- primarily due to the English colonial Empirethe English colonial Empire

Emergence of the ideology of communism/socialism as an Emergence of the ideology of communism/socialism as an alternative to the free market capitalist economy-Marx, alternative to the free market capitalist economy-Marx, Engels etc.Engels etc.

Emergence of the neo classical revolution in economics – Emergence of the neo classical revolution in economics – the marginal revolution- Alfred Marshall-1890.the marginal revolution- Alfred Marshall-1890.

20 th Century- the evolution 20 th Century- the evolution of macroeconomicsof macroeconomics

Russian revolutionRussian revolution I world war – increased military spending by the major I world war – increased military spending by the major

countries of the world- diversion of expenditure from countries of the world- diversion of expenditure from investmentinvestment

Great Depression 1929-33 – unemployment ,under Great Depression 1929-33 – unemployment ,under utilized capacity, volatile prices etc.utilized capacity, volatile prices etc.

Hitherto unprecedented in capitalist history shaking the Hitherto unprecedented in capitalist history shaking the foundations of the classical capitalist economy foundations of the classical capitalist economy

Led economists and policy makers world wide to rethink Led economists and policy makers world wide to rethink the basics of classical market economics juxtaposed the basics of classical market economics juxtaposed against the fact the socialist Russia was almost against the fact the socialist Russia was almost unaffected by the depression and was already unaffected by the depression and was already registering the highest agricultural output growth rates in registering the highest agricultural output growth rates in human historyhuman history

BIRTH OF MODERN BIRTH OF MODERN MACROECONOMIC POLICYMACROECONOMIC POLICY

J.M. Keynes- 1936- The General Theory J.M. Keynes- 1936- The General Theory of Employment , Interest & Moneyof Employment , Interest & Money

Recognized the possibility for Recognized the possibility for unemployment and underutilized capacity unemployment and underutilized capacity to persist in market economiesto persist in market economies

Found that prices & wages are not flexible Found that prices & wages are not flexible to clear the labour market…to clear the labour market…

Focussed on Short run analysis of economic Focussed on Short run analysis of economic problems- b’coz in “long run we are all problems- b’coz in “long run we are all dead”.dead”.

IN SR, supply is fixed, so it’s changes in IN SR, supply is fixed, so it’s changes in demand which causes business fluctuations.demand which causes business fluctuations.

Suggested that lack of effective demand Suggested that lack of effective demand is the major factor behind recessionis the major factor behind recession

And argued for a more active role for the And argued for a more active role for the state in the form of govt. fiscal & state in the form of govt. fiscal & monetary policies [ stabilization policies] monetary policies [ stabilization policies] which could affect output and reduce which could affect output and reduce unemployment and shorten economic unemployment and shorten economic downturnsdownturns

New trend of the 1970s….New trend of the 1970s….

Keynesian ‘stabilization optimism’ stayed Keynesian ‘stabilization optimism’ stayed alive till 1970s..alive till 1970s..

Prolonged stagflation -[eco. Stagnation +Prolonged stagflation -[eco. Stagnation + Inflation] in the US in the 1970s…for Keynes Inflation] in the US in the 1970s…for Keynes

inflation wasn’t a serious problem with inflation wasn’t a serious problem with unemployed resources..unemployed resources..

A new group called “new classicals”- A new group called “new classicals”- stressed importance of money & the role of stressed importance of money & the role of expectations [ rational expectations] in expectations [ rational expectations] in analysing inflation.analysing inflation.

Consensus on a particular set of Consensus on a particular set of policies in dealing with macroeconomic policies in dealing with macroeconomic problems is unfortunately absent even problems is unfortunately absent even today. today.

““the general consensus seems to be the general consensus seems to be that the Keynesian approach is valid in that the Keynesian approach is valid in the short- medium run, while in the the short- medium run, while in the long run the classical SS side forces long run the classical SS side forces come into operation…”come into operation…”

The New International The New International Economic Order [NIEO]Economic Order [NIEO]

The post II world war regrouping of the The post II world war regrouping of the worldworld

The break down of the colonial empiresThe break down of the colonial empires The emergence of new nation states and The emergence of new nation states and

their new growth agendastheir new growth agendas

The division of the world into two The division of the world into two power blockspower blocks

The entry of the big business The entry of the big business enterprise enterprise

Objectives of Objectives of macroeconomic policymacroeconomic policy

High level and rapid growth of output- High level and rapid growth of output- economic growtheconomic growth

Full employment – high level of Full employment – high level of employment with low involuntary employment with low involuntary unemploymentunemployment

Price- level stability & Price- level stability & Exchange rate stabilty ?Exchange rate stabilty ?

Instruments of Instruments of macroeconomic policymacroeconomic policy

FISCAL POLICY- use of taxes and govt. FISCAL POLICY- use of taxes and govt. expenditureexpenditure

Govt. expenditure consists of purchases of Govt. expenditure consists of purchases of goods and services, transfer payments etc. – goods and services, transfer payments etc. – govt. spending determines the relative size of govt. spending determines the relative size of public and private sectorspublic and private sectors

Taxes impact in two ways, one by affecting Taxes impact in two ways, one by affecting people’s incomes and two, by affecting prices people’s incomes and two, by affecting prices of goods & services & thereby incentives and of goods & services & thereby incentives and behaviour.behaviour.

MONETARY POLICY- regulating the MONETARY POLICY- regulating the money supply of the country by money supply of the country by managing money , credit and banking managing money , credit and banking system of the country system of the country

Money supply influences many financial Money supply influences many financial and economic variables like interest and economic variables like interest rates, stock prices, housing prices and rates, stock prices, housing prices and foreign exchange rates foreign exchange rates