Macroeconomics and Related Concepts

Class 01: Macroeconomics vs Microeconomics

• Macroeconomics: Studies the economy as a whole, focusing on aggregate phenomena, performance, and policy influence.
• Microeconomics: Focuses on individual and business choices in specific markets, and government policy influence.

Key Terms:

• Ceteris Paribus: All things being equal.
• Positive Analysis: Descriptive, claims about how the world works (testable).
• Normative Analysis: Prescriptive, claims about how the world should be (opinion-based).

Production Possibilities Frontier (PPF)

• Represents combinations of outputs of two products using all inputs.
• Concave shape indicates increasing opportunity cost (marginal cost).

Market Concepts

• Market: Arrangements for buyers and sellers to exchange information and do business.
• Law of Demand: Higher price = lower quantity demanded (inverse relationship).
• Law of Supply: Higher price = greater quantity supplied (direct relationship).

Circular-Flow Diagram

• Illustrates interaction between households (consumers) and firms (suppliers).
• Factors of production: Labor, Capital, Land, Entrepreneurship.

Class 02: Gross Domestic Product (GDP)

• Definition: GDP is the market value of all final goods/services produced in a country.
• Approaches:
  • Output Approach: Sum of value added across production.
  • Income Approach: Sum of income paid (wages, rents, etc.).
  • Expenditure Approach: Sum of spending (Consumption, Investment).

Gross vs Net

• Gross: Before depreciation of capital.
• Net: After depreciation of capital.

Class 03: Nominal vs Real GDP

• Nominal GDP: Current year prices.
• Real GDP: Prices of a reference base year (reflects actual production change).

Inflation and Measures

• GDP Deflator: Average price level of the economy.
• Consumer Price Index (CPI): Measures consumer price level.

Class 04: Business Cycles

• Expansion: Economy recovering from recession.
• Economic Growth: Sustained long-term performance (increase in real GDP).
• Solow Model: Focuses on capital accumulation and technological progress.

Class 05: Savings and Investment

• Savings: Income not spent on consumption.
• Investment: Spending on capital goods.

Macro Fundamental Identities

• Closed Economy: Domestic Saving = Investment.
• Open Economy: Accounts for international transactions.

Class 06: Loanable Funds Market

• Summarizes supply (savers) and demand (borrowers) for funds.
• Interest Rate: Price of money over time.

Class 07: Inflation

• Defined: Increase in average price level.
• Price Index Examples: CPI, GDP Deflator.

Class 08: Quantity Theory of Money

• Long-term increase in money supply leads to price level increase.
• Equation: MV = PY (Money Supply, Velocity, Price Level, Real GDP).

Class 09: Potential GDP

• Potential GDP: Real GDP at full employment.
• Output Gap: Difference between observed and potential GDP.

Class 10: Keynesian Model

• Describes economy in short-run where prices are sticky.
• Multiplier: Change in equilibrium expenditure over change in autonomous expenditure.

Class 11: Fiscal Policy

• Expansionary Policy: Increases G or reduces T to boost GDP.
• Contractionary Policy: Reduces G or increases T to lower GDP.
• Counter-Cyclical Policy: Government actions against economic cycles.

Class 12: Monetary Policy

• Central Bank: Regulates national banks, controls money supply.
• Policy Tools: Open market operations, interest rates, reserve ratios.
• Liquidity Trap: Interest rates at 0, limiting monetary policy effectiveness.