Introduction

to
Economic Analysis
- Dr Vighneswara Swamy

Dr. Vighneswra Swamy 1

What is economics?
Economics is the science that deals with the behaviour of people,
individuals, households, firms and the government concerned with the
production, distribution, and consumption of goods and services, or the
material welfare of humankind.
In simple terms, Economics is the study of how society manages its scarce
resources.
First ever recorded document on economics is from Kautilya in the form of
Arthashastra during 3 B.C.
Alfred Marshal was the first to use the term Economics in 1922.
DR. VIGHNESWRA SWAMY 2
What is Macroeconomics?
Macroeconomics is the study of the behavior of the
economy as a whole.
It concerns the business cycles that lead to
unemployment and inflation, as well as the longer-
term trends in output and living standards.

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Microeconomics vs Macroeconomics
Microeconomics
Microeconomics is the study of decision
making by individual households and
individual firms, and how they interact in
specific markets.
Macroeconomics
Macroeconomics is the study of nationwide
phenomena, such as inflation,
unemployment, and economic growth.

Usefulness of Microeconomics: Usefulness of Macroeconomics:

Determination of demand pattern Income and employment determination
Determination of the pattern of supply Price level
Pricing Business cycles
Policies for improvement of resource allocation Balance of payments
Solution to the problems of micro-units Government policies
Interrelations between markets

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Macroeconomics Objectives
The major objectives are:
Economic growth
Full employment
Price stability

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DR. VIGHNESWRA
Macroeconomic Goals
The goal of economic growth
The goal of low unemployment
The goal of low inflation
Price stability
International trade with export and import equilibrium
and exchange rate stability

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Scope of Macroeconomics
Macroeconomics involves the study of economic aggregates of
nation/s:
◦ Economic growth
◦ Employment
◦ Inflation
◦ Aggregate demand and aggregate supply
◦ Economic policies – fiscal and monetary
◦ International trade – exports and imports
◦ Money supply
◦ Interest rate trends
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The Power of Economic Analysis
Economic analysis is used in all decision making.

Economic analysis is a tool that can aid all decision

making.

The economic way of thinking provides a framework for

analyzing solutions to economic problems.

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Macroeconomic Policy Instruments
A policy instrument is an economic variable under the control of
government that can affect one or more of the macroeconomic goals
1. Fiscal Policy
Fiscal policy is the use of government expenditures and taxes to affect
aggregate demand and aggregate supply.

2. Monetary Policy
Monetary policy involves the use of interest rates to control the level
and rate of growth of aggregate demand in the economy.
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Components of
Macroeconomy
Macroeconomics focuses on
four broad groups:
1. households
2. firms
3. the government
4. the rest of the world
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Market Arenas of Macroeconomy
Macroeconomics focuses on
three broad market arenas:
1. the goods-and-services market
2. the labor market
3. the money (financial) market

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Macroeconomic Concepts
Output National Business Employment Price International
and Income Cycle Stability trade
Growth
Output, Gross Domestic Depression, Unemployment, Inflation, Exports and
Aggregate Product (GDP), Recession, Labor force, Deflation, Imports,
output, Nominal income, Expansion Unemployment Price Trade
Economic Real income, rate stability Imbalances:
growth, Gross National surplus and
Productivity Income, deficits,
growth, Real and Exchange Rate
Nominal
measures,
GDP and Human
Welfare
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GDP and related concepts
Gross Domestic Gross National Net National Nominal GDP Real GDP
Product (GDP) Product (GNP) Product (NNP)
GDP is the market GNP is the total NNP is the total Nominal GDP is Real gross domestic
value of all final value of goods value of goods GDP evaluated at product (GDP) is an
goods and services produced and produced and current market inflation-adjusted
produced within a services provided by services provided in prices. measure that reflects
country in a given a country during one a country during one the value of all goods
time period. year, equal to the year, after and services produced
gross domestic depreciation of by an economy in a
product plus the net capital goods has given year, expressed
income from foreign been allowed for. in base-year prices,
investments. and is often referred
to as "constant-price,"
"inflation-corrected"
GDP or "constant
dollar GDP."
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Importance of GDP
1. Gross Domestic Product (GDP) is the widely used measure of an
economy's output or production.
2. It represents the total dollar value of all goods and services
produced over a specific time period; you can think of it as the
size of the economy.
3. It has become widely used as a reference point for the health of
national and global economies.
4. When GDP is growing, especially if inflation is not a problem,
workers and businesses are generally better off than when it is
not.

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GDP and its Importance
Gross Domestic Product
Gross National Product
Nominal GDP
Real GDP
Potential (real) GDP

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Major issues in Macroeconomics
1. What determines a nation’s long-run economic growth?
2. What causes a nation’s economic activity to fluctuate?
3. What causes unemployment?
4. What causes prices to rise?
5. How does global economic system affect nations’
economies?
6. How do the government policies help improve economic
performance?

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 The Role of Macroeconomists
Macroeconomic Macroeconomic Macroeconomic research Data
forecasting analysis development
To predict future To analyze and To understand the structure of Macroeconomists
economic trends - interpret events the economy in general – forms use data to assess
has some success as they happen – the basis for macroeconomic the state of the
in the short run. helps both analysis and forecasting. economy, make
In the long run private sector forecasts, analyze
too many factors and public To develop theories: policy
are highly policymaking. Economic theory: a set of ideas alternatives, and
uncertain. about the economy to be test theories.
organized in a logical framework.
Economic model: a simplified
description of some aspects of
the economy.
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Keywords
Economics
Economic analysis
Macroeconomics
Production
Economic output
Economic growth
Prices
Income
Employment
Gross Domestic Product

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