Introduction

An Overview

1. Economics

Social / Behavioural science

Material well-being

Adam Smith, 1776

Alfred Marshall, 1890

Dismal science

Scarcity, uncertainty, and choice

Lionel Robbins, 1932

Production possibility curve

- Law of increasing cost

- No free lunch

ab c

d e

f g

h

A

BO Civilian goods

Def

ence

go

ods

Figure 1 : Production Possibility Curve

Decision issues- Production: Who, what, how, where - Exchange: Whom to sell at what price- Consumption: Basket - Growth: Non-renewable resources use, strategies - Decision units: Households, firms, workers, govt.

Science of numbers

- Positive and normative - Ceteris paribus

Economics methodology

- Rational Behaviour (self interest)- Inductive- Fallacy of causation

Consensus and dis-agreements

Inexact science

- No controlled experiments

2. EconomistsClassical

Adam Smith, 1723-90 (1776): Father of modern economics: specialisation, foreign trade, laissez-faire, self-interestRobert Malthus 1766-1834 (1798): Population growth to outstrip food productionDavid Ricardo, 1772-1823 (1817): Foreign trade: principle of comparative advantage, theory of rentKarl Marx, 1818-83 (1867): Capitalist system as unfair, unstable and unsustainable

Neo – classicalLeon Walras, 1834-1910 (1874): General equilibrium Alfred Marshall, 1842-1924 (1890): Partial equil., demand–supply tools, elasticity concept, eco. as a separate discipline for study

Irving Fisher 1869-1947 (1930): Father of monetary economics, quantity theory of money, theory of interest rate Lionel Robbins (1932): Resource scarcity and choice J. B. Say: Supply creates its own demand

Vilfredo Pareto 1848-1923 (1906): Pareto optimal: None could gain without someone else’s loss A C Pigou, 1877-1959 (1920): Real balance effect

Others

John Maynard Keynes, 1883-1946 (1936): Father of Macro economics, saviour of capitalism, greatest economist of the 20th century (Time magazine)Simon Kuznets 1901-85: Measurement of income, Kuznets’ curve

Edward Chamberlin, 1899-1967 (1930s): Monopolist competition theory

Joan Robinson, 1903-83 (1930s): Golden Rule, imperfect competition

John R. Hicks, 1904-89 (1940s): IS-LM apparatus, yield curve elasticity of substitution, indifference curves

Harbert A. Simons, 1916- (1952): Satisficing - theory of firmRagner Frisch 1895-1973: Micro-macro dichotomy

Modern economists

• Milton Friedman, 1912- (1968): Natural rate of output/ unemployment, adaptive expectations theory, permanent income hypothesis, policy lags, fooling of workers, monetarist

• Paul Samuelson, 1915- (1949): Non-monetarists leader, revealed preference theory

• James Tobin, 1918- (1956): Tobin tax, transaction demand for money, portfolio theory, separation theorem

• Robert Solow, (1956): Growth model, saving as a temporary source of growth only

• Amartya Sen 1933- (1960): Freedom as development, human capabilities: Health and education, questioned rational behavior assumption.

• Arthur Laffer, (1968): Laffer curve • Robert Lucas, 1937- (1973): Rational expectation theory,

theory of policy irrelevance

3. Two branches and the bridge

Micro and macroRagnar FrischResource allocation --- resource utilisation and augmentationGiven national income and general price, determinerelative price and output --- reverse

* Interdependence* Micro foundation of macroTheory/fallacy of aggregation

Year Household - 1 Household - 2 Household - 3

Income Consumption Expenditure

Income Consumption Expenditure

Income Consumption Expenditure

1990 50,000 40,000 90,000 80,000 140,000 120,000

1999 100,000 70,000 50,000 45,000 150,000 115,000

(Rupees)

Cjt = aj + bj Yjt (1.1)

Ct = A + B Yt (1.2)

j

Cjt = Ct

j

aj = A

j bj Yjt B Yt

-Paradox of thrift

-Bumper crop

-Relative grading

4. Subject matter of Macro-economics

Measurement/monitor the economy

Economic fluctuations / stability (short-run)

-Unemployment

-Inflation

Growth(long-run)

5. Major macro-economic variables

National income Wage rate

Unemployment/employment Interest rate

Inflation Money supply

Fiscal deficit Foreign trade

/investment Saving - investment gap Forex rate

Current account deficit Forex reserves External debt

6. Tinbergen’s classification of variables

Target Indicators Intermediate Policy

7. Macro economic policy goals and relationships High and growing income

Price stability Social justice Globalization and sovereignty

- Phillips’ Curve - Kuznets’ Curve- Okun’s law

8. Economic systems and decisions

Free enterprise (capitalist) economies

Demand/supply

Command (socialist) economies Central planning authority

Mixed economies

Dual system

Guiding principle

Efficiency: Production and distribution

Pareto optimality : Sardar Sarovar Dam Project

Market/Govt. dichotomy !! / Market-Govt. failures

Decisions: rational Vs. emotions / traditions / customs

9. Role of government: Mixed economy

• Defense (public goods)

• Justice (law and order)

• Provision and maintenance of certain public works (roads, bridges, canals, rivers, harbors etc) and institutions (central bank, public work depts, etc) for improving welfare (infrastructure and regulation)

10. Study of economics

To understand environment, including policiesTo take economic decisions: Levels of national income, inflation, unemployment matters for firms

11. Economic Policies

Stabilization : Fiscal, monetary and forex rate

Regulating : Agriculture, industry, trade, labour, etc

New initiatives

-Liberalization

-Privatization

-Globalization

Policy alternatives vis-à-vis performance

12. India’s economic position vis-à-vis world

Levels Fluctuations/Growth Economic ills/policy

13. Macro- economic problems/issues

Recession / unsustainable growth Inflation / deflation Unemployment / poverty Three gaps

Saving-investment Fiscal deficit Trade deficit

Table 1.1 International Data on National Goal Variables

Country Population

Land area

GDP growth rate

Inflation rate (CPI) (average)

Unemployment rate

Total external debt

Gross int’l reserves

2002 2002 1990-2001

1990-2001 2002 2001 2002 2002

India 1048 3287 480 2570 5.9 8.7 - 28.6 34.7 8.1 46.1 97.1 71

USA 288 9629 35060 35060 3.4 2.7 5.8 - 14.1 5.2 46.4 NA 79

UK 59 243 25250 25870 2.7 2.8 3.2 - 13.1 6.1 43.2 NA 42.8

Japan 127 378 33550 26070 1.3 0.6 5.4 - 3.7 10.6 35.7 NA 462.4

Singapore 4.2 0.62 20690 23090 7.4 1.6 4.3 - - 5 49 NA 82

Indonesia 212 1905 710 2990 3.8 13.9 - 15.7 7.2 8.4 43.3 135.7 32.1

Malaysia 24 330 3540 8280 6.5 3.4 3.5 15.5 <2 4.5 53.8 43.4 34.3

Republic of Korea

48 99 9930 16480 5.7 4.9 3.1 <2 <2 7.9 37.5 110.1 121.4

China 1281 9598 940 4390 10 7.6 3.1 6 16.1 5.9 46.6 170.1 295.2

Pakistan 145 796 410 1940 3.7 9.1 7.8 28.6 13.4 9.5 41.1 32 8.8

Sri Lanka 19 66 840 3390 5 9.9 8.8 20 6.6 8 42.8 8.5 1.7

Australia 20 7741 19740 26960 3.9 2.2 6.3 — 7.8 5.9 41.3 - 21.6

Nigeria 133 924 290 780 2.5 30 — 43 70.2 4.4 56.7 31.1 7.3

Russian Federation

144 17075 2140 7820 –3.7 85.9 9 30.9 6.1 4.9 51.3 152.6 47.8

World 6201 1E+05 5080 7570 2.7 — — — — — — — —

GNP per capita Below poverty line (% of Population)

Share in GDP (%)

BOP current account balance

(%) National

(Million)

(‘000 Sq. kms)

Measured PPP

(US $)

(US $ billions)

2002 1987 – 2002** 1994 – 2002**

Int’l (US $ 1/day)*

Poorest 20%

Richest 20%

(US $ Billions)(%) (%)

4.67

-480.9

-14.41

112.5

-17.26

18.7

7.82

7.19

6.09

* For OECD countries, the benchmark figure is US$ 14.40 at 1985 instead of US$1.00** Data refer to the latest available year.

0.51

29.52

—

Sources: World Development Indicators 2003, UNDP: Human Development Report 2003, and IMF: International Financial Statistics,

35.42

3.87

-0.29

Growth Rate:Real GDP

-10

0

10

20

30

1950

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

Year

% G

row

th R

ate

USA

China

India

World

Unemployment Rate

0

2

4

6

8

10

12

14

1950

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

Year

% U

nem

plo

ymen

t

USA

Japan

UK

Malaysia

Inflation Rate:

CPI

-10

-5

0

5

10

15

20

25

30

35

1950 19

6419

6719

7019

7319

7619

7919

8219

8519

8819

9119

9419

9720

00

USA China India World