Undesirable situations that exist in the macro economy, largely because one or more of
the macroeconomic goals are not satisfactorily attained. The primary problems are unemployment,
inflation, and stagnant growth. Macroeconomic theories are designed to explain why
these problems emerge and to recommend corrective policies. Macroeconomic problems
arise when the macro economy does not satisfactorily achieve the goals of full employment,
stability, and economic growth. Unemployment results when the goal of full employment
is not achieved. Inflation exists when the economy falls short of the stability goal.
These problems are caused by too little or too much demand for gross production. Unemployment
results from too little demand and inflation emerges with too much demand. Stagnant
growth means the economy is not adequately attaining the economic growth goal. Each
of these situations is problematic because society is less well off than it would be by
reaching the goals
Importance of Macroeconomics
It helps to understand the functioning of a complicated modern economic system.
It describes how the economy as a whole functions and how the level of national income and
employment is determined on the basis of aggregate demand and aggregate supply. It
helps to achieve the goal of economic growth, higher level of GDP and higher level of
employment. It analyses the forces which determine economic growth of a country
and explains how to reach the highest state of economic growth and sustain it. It helps
to bring stability in price level and analyses fluctuations in business activities. It
suggests policy measures to control inflation and deflation. It explains factors which
determine balance of payment. At the same time, it identifies causes of deficit
in balance of payment and suggests remedial measures. It helps to solve economic
problems like poverty, unemployment, inflation, deflation etc., whose solution is possible
at macro level only, i.e., at the level of whole economy. With detailed knowledge of
functioning of an economy at macro level, it has been possible to formulate correct
economic policies and also coordinate international economic policies.
Last but not the least merit is that macroeconomic theory has saved us from the
dangers of application of microeconomic theory to the problems of the economy as a
whole.
REVIEW OF LITERATURE
Since 1991, the Indian economy has pursued free market liberalisation, greater
openness in trade and increase investment in infrastructure. This helped the Indian
economy to achieve a rapid rate of economic growth and economic development. However, the
economy still faces various problems and challenges.
1. Inflation
Fuelled by rising wages, property prices and food prices inflation in India is an
increasing problem. Inflation is currently between 8-10%. This inflation has been a
problem despite periods of economic slowdown. For example in late 2013, Indian
inflation reached 11%, despite growth falling to 4.8%.This suggests that inflation is
not just due to excess demand, but is also related to cost push inflationary factors.
For example, supply constraints in agriculture have caused rising food prices. This
causes inflation and is also a major factor reducing living standards of the poor
who are sensitive to food prices. The Central Bank of India have made reducing
inflation a top priority and have been willing to raise interest rates, but cost push
inflation is more difficult to solve and it may cause a fall in growth as they try to
reduce inflation.
Although India has benefited from a high % of English speakers. (important for call
centre industry)there is still high levels of illiteracy amongst the population. It
is worse in rural areas and amongst women. Over 50% of Indian women are illiterate.
This limits economic development and a more skilled workforce.
3. Poor Infrastructure
Many Indians lack basic amenities lack access to running water. Indian public
services are creaking under the strain of bureaucracy and inefficiency. Over 40%
of Indian fruit rots before it reaches the market; this is one example of the
supply constraints and inefficiencys facing the Indian economy
Although India has built up large amounts of foreign currency reserves the
high rates of economic growth have been at the cost of a persistent current
account deficit. In late 2012, the current account reached a peak of 6% of
GDP. Since then there has been an improvement in the current account. But, the
Indian economy has seen imports growth faster than exports. This means India
needs to attract capital flows to finance the deficit. Also, the large deficit caused
the depreciation in the Rupee between 2012 and 2014. Whilst the deficit remains,
there is always the fear of a further devaluation in the Rupee. There is a need
to rebalance the economy and improve competitiveness of exports.
5. High levels of private debt Buoyed by a property boom the amount of lending in India
has grown by 30% in the past year. However there are concerns about the risk of such
loans. If they are dependent on rising property prices it could be problematic.
Furthermore if inflation increases further it may force the RBI to increase interest
rates. If interest rates rise substantially it will leave those indebted facing rising
interest payments and potentially reducing consumer spending in the future
It is hoped that economic growth would help drag the Indian poor above the poverty
line. However so far economic growth has been highly uneven benefiting the skilled and
wealthy disproportionately. Many of Indias rural poor are yet to receive any tangible
benefit from the Indias economic growth. More than 78 million homes do not have
electricity. 33% (268million) of the population live on less than $1 per day. Furthermore
with the spread of television in Indian villages the poor are increasingly aware of
the disparity between rich and poor. (3)
India has one of the largest budget deficits in the developing world. Excluding
subsidies it amounts to nearly 8% of GDP. Although it is fallen a little in the past year.
It still allows little scope for increasing investment in public services like health and
education.
8. Rigid labour Laws As an example Firms employing more than 100 people cannot fire
workers without government permission. The effect of this is to discourage firms from
expanding to over 100 people. It also discourages foreign investment. Trades Unions
have an important political power base and governments often shy away from tackling
potentially politically sensitive labour laws.
9. Inefficient agriculture
Agriculture produces 17.4% of economic output but, over 51% of the work force are
employed in agriculture. This is the most inefficient sector of the economy and reform
has proved slow.
2013/14 has seen a slowdown in the rate of economic growth to 4-5%. Real GDP
per capita growth seven lower. This is a cause for concern as India needs a high growth
rate to see rising living standards, lower unemployment and encouraging investment.
India has fallen behind China, which is a comparable developing economy
Conclusion
In spite of the problems listed above, if we compare the present economic condition of
our
country with the pre-independence period, we find that the long spell of stagnation in
Indian
economy was broken after Independence of India. The present position of Indian
economy, though
not satisfactory, is much better than it was some 50-70 years ago. With the beginning
of economic
Quantitative and structural. We see a spectacular progress has taken place in the line
of:
As a result investment in the economy has been stepped up. We also notice the increase
in agricultural
and industrial production. Steps have been taken to modernize these sectors in India.
The current economic scene in India is more or less encouraging, but we are still way
behind achieving
Methodology
Macroeconomic objectives
Broadly, the objective of macroeconomic policies is to maximize the level of national income,
providing economic growth to raise the utility and standard of living of participants in the
economy. There are also a number of secondary objectives which are held to lead to the
maximization of income over the long run. While there are variations between the objectives
of different national and international entities, most follow the ones detailed below:
1. Sustainability - a rate of growth which allows an increase in living standards without
undue structural and environmental difficulties. 'Economic growth' will be studied
later on in this book.
2. Full employment - where those who are able and willing to have a job can get one,
given that there will be a certain amount of frictional, seasonal and structural
unemployment (referred to as the natural rate of unemployment).
3. Price stability - when prices remain largely stable, and there is not rapid inflation or
deflation. Price stability is not necessarily the same as zero inflation, but instead
steady levels of low-moderate inflation is often regarded as ideal. It is worth noting
that prices of some goods and services often fall as a result of productivity
improvements during periods of inflation, as inflation is only a measure
of general price levels. However, inflation is a good measure of 'price stability'. Zero
inflation is often undesirable in an economy. ("Internal Balance" is used to describe a
level of economic activity that results in full employment with no inflation.)
4. External Balance - equilibrium in the Balance of payments without the use of
artificial constraints. That is, the value of exports being roughly equal to the value of
imports over the long run.
5. Equitable distribution of income and wealth - a fair share of the national 'cake',
more equitable than would be in the case of an entirely free market. Like the other
economic objectives, the distribution of income is a partly subjective or normative
issue
6. Increasing Productivity - more output per unit of labour per hour. Also, since labor
is but one of many inputs to produce goods and services, it could also be described
as output per unit of factor inputs per hour.
7. Thermal Equilibrium - equilibrium in the Balance of payments without the use of
artificial constraints. That is, exports roughly equal to imports over the long run.
Suggestion
(MORE: Can the Amish Teach You to Be Rich? A New Book Says Yes)
PROBLEM: Too much productive dog waste going to, well, waste
SOLUTION: Turn the poop abundant at dog parks into energy that lights street lamps.
The Arizona Republic (via The Consumerist) reports that Arizona State students hope to design a
dog waste digester and install it a popular dog park. After cleaning up after their dogs, owners
would place poop-filled biodegradable bags into the digester and turn a hand crank. The machine
converts the waste into methane gas, which would be the energy source for park lamps.