Economics is about earnings, consumption, savings and investment choices
Macroeconomics studies aggregate values for many different variables in each of the above-mentioned areas. It is a study of level, structure and behaviour of aggregates, like any other variable of interest in economic or business situations.
In today’s context, credit has an important role in accelerating growth in consumption and investment. Study of credit is an important part of macro-economic analysis, therefore. The availability of credit and its price can impact the size of investment and its timing. An easy availability and low price can distort investment and consumption decisions.
Given that an investment is meant for fulfilling future consumption needs, it is possible to have an error of judgement in deciding the size of investment (capacity) and its timing. Imbalance in demand for and supply of capacity is one of the factors causing business and economic cycles.
In our everyday conversation, it is about growth and the variability (risk) and uncertainty associated with the growth rate. We study growth patterns to understand,
- Amplitude or Business Cycles – the degree to which state of a market or an economy differs from one another – high versus low-growth periods or increasing growth rates versus declining growth rates.
- Frequency of Change – length of time that a trend remains in each state – high or low growth state.
- Unpredictability – the degree to which the current state can help predict the future states – a situation characterized by no discernible pattern is characterized as highly unpredictable.
In this module, we will focus on the level and direction with variability for many different variables and leave the discussion on detailed study of patterns to a later date. We intend to study the following parameters and the related variables, using India as a case in point:
Size of an Economy: Gross Domestic Product (GDP) and Per Capita Income or GDP
Growth and Risk of Growth: Nominal and Real Rates
Growth Contributors: Consumption, Investment, Domestic and External
Financing of Growth: Domestic Saving and Global Savings
Impact of External Dependence
Role of Government Spend
Economic and Financial Prices
Size of Economy and Per Capita Income Level
Size being the multiplication of population and income or GDP per head.
Per Capita Income Level, its Growth and the Risk of Growth
Growth in GDP & its Variability (Constant Prices)
Constant prices implies that the values have been adjusted for inflation. In other words, we are discussion about real growth in GDP and its variability.
Gross Capital Formation Level (% of GDP) and GDP Growth
Investment is one of the contributors to GDP, the other main ones being consumption and exports (net of imports). Gross capital formation is a measure of investment and it includes investment in fixed assets (e.g., plant and equipment) and inventories.
Gross Capital Formation or Investment by Sector
Growth Composition and its External Dependence
One of the most important aspect is to understand what is driving growth in an economy, consumption (private and public), gross capital formation, exports and imports.
Financing of Economic Growth (Savings as % of GDP)
In other words, what is level of savings and how are the people saving?
Financing of Economic Growth (External Investments)
Question is – what the degree of dependence on external financing and who are investors? Is the country dependent on direct investment (typically the investment by people and businesses in brown or green field project involving real assets) or portfolio investment (typically includes the investments in financial markets – debt, equity or commodities, etc.)?
External Balances: Trade and Current Account Deficit
While the trade deficit is the imbalance between export and imports of goods, the current account includes the deficit arising from trade in services.
Public Finance (Central Government)
Fiscal deficit is the difference between government income and expenditure and is financed through borrowing by the government.
Central Government Expenditure: Level, Structure and Behaviour
Deficit Financing: External Debt
Deficit Financing: Internal Debt
Financial Prices – Interest and Foreign Exchange Rates
Inflation is changes in prices for a given basket of goods and services. In other words, it is a change in prices without a change in the nature of commodity or service that one is buying.