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

a b c d e f g h A BO Civilian goods Defence goods 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.Economists  Classical Adam Smith, (1776): Father of modern economics: specialisation, foreign trade, laissez-faire, self-interest Robert Malthus (1798): Population growth to outstrip food production David Ricardo, (1817): Foreign trade: principle of comparative advantage, theory of rent Karl Marx, (1867): Capitalist system as unfair, unstable and unsustainable  Neo – classical Leon Walras, (1874): General equilibrium Alfred Marshall, (1890): Partial equil., demand–supply tools, elasticity concept, eco. as a separate discipline for study Irving Fisher (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 (1906): Pareto optimal: None could gain without someone else’s loss A C Pigou, (1920): Real balance effect

 Others John Maynard Keynes, (1936): Father of Macro economics, saviour of capitalism, greatest economist of the 20 th century (Time magazine) Simon Kuznets : Measurement of income, Kuznets’ curve Edward Chamberlin, (1930s): Monopolist competition theory Joan Robinson, (1930s): Golden Rule, imperfect competition John R. Hicks, (1940s): IS-LM apparatus, yield curve elasticity of substitution, indifference curves Harbert A. Simons, (1952): Satisficing - theory of firm Ragner Frisch : Micro-macro dichotomy

Modern economists Milton Friedman, (1968): Natural rate of output/ unemployment, adaptive expectations theory, permanent income hypothesis, policy lags, fooling of workers, monetarist Paul Samuelson, (1949): Non-monetarists leader, revealed preference theory James Tobin, (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 (1960): Freedom as development, human capabilities: Health and education, questioned rational behavior assumption. Arthur Laffer, (1968): Laffer curve Robert Lucas, (1973): Rational expectation theory, theory of policy irrelevance

3. Two branches and the bridge  Micro and macro Ragnar Frisch Resource allocation --- resource utilisation and augmentation Given national income and general price, determine relative price and output --- reverse * Interdependence * Micro foundation of macro  Theory/fallacy of aggregation (Rupees)

C jt = a j + b j Y jt (1.1) C t = A + B Y t (1.2) C jt = C t a j = A b j Y jt  B Y t - 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  E xternal 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 policies To 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

Growth Rate:Real GDP

Unemployment Rate Year % Unemployment USA Japan UK Malaysia