ebook img

Macroeconomics: Theory and Policy PDF

681 Pages·2010·36.676 MB·English
Save to my drive
Quick download
Download
Most books are stored in the elastic cloud where traffic is expensive. For this reason, we have a limit on daily download.

Preview Macroeconomics: Theory and Policy

MACROECONOMICS Theory and Policy Third Edition weg‚yigyxywsgƒ Theory and Policy Third Edition D N Dwivedi Professor of Economics Maharaja Agrasen Institute of Management Studies Delhi Tata McGraw Hill Education Private Limited xi‡2hivrs McGraw-Hill Offices New Delhi New York St Louis San Francisco Auckland Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal San Juan Santiago Singapore Sydney Tokyo Toronto Published by the Tata McGraw Hill Education Private Limited, 7 West Patel Nagar, New Delhi 110 008. Macroeconomics: Theory and Policy Copyright © 2010, by Tata McGraw Hill Education Private Limited. No part of this publication may be reproduced or distributed in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise or stored in a database or retrieval system without the prior written permission of the publishers. The program listings (if any) may be entered, stored and executed in a computer system, but they may not be reproduced for publication. This edition can be exported from India only by the publishers, Tata McGraw Hill Education Private Limited. ISBN (13): 978-0-07-009145-0 ISBN (10): 0-07-009145-5 Managing Director: Ajay Shukla Head—Higher Education Publishing: Vibha Mahajan Publishing Manager—B&E/HSSL: Tapas K Maji Assistant Sponsoring Editor: Hemant K Jha Development Editor: Shalini Negi Assistant Manager (Editorial Services): Anubha Srivastava Senior Copy Editor: Sneha Kumari Senior Production Manager: Manohar Lal Production Executive: Atul Gupta General Manager—Marketing (Higher Education): Michael J Cruz Product Manager: Vijay Sarathi Jagannathan Senior Product Specialist: Daisy Sachdeva General Manager—Production: Rajender P Ghansela Assistant General Manager—Production: B L Dogra Information contained in this work has been obtained by Tata McGraw Hill, from sources believed to be reliable. However, neither Tata McGraw Hill nor its authors guarantee the accuracy or completeness of any information published herein, and neither Tata McGraw Hill nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that Tata McGraw Hill and its authors are supplying information but are not attempting to render engineering or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Typeset at Tej Composers, WZ-391, Madipur, New Delhi 110063, and printed at Krishna Offset, 10/122, Vishnu Gali, Vishwas Nagar, Delhi 110032 Cover Design: K. Anoop Cover Printer: Rashtriya Printers RQLBCRDZRBXRZ Preface The objective of writing this book has been to provide a comprehensive and authentic textbook on macroeconomics for undergraduate and postgraduate students. The way the earlier editions of this book have been received by the students and teachers of the subject shows that my efforts have been largely successful. However, no book is perfect for all times and for all purposes. There is always a scope and need for improving the treatment and presentation of thoughts and theories with the objective of making the subject easily comprehensible. Besides, feedback, suggestions and comments about the usefulness of the book from subject experts, teachers and students provide a good guidance for widening the scope and improving the treatment of the subject matter. Not only that, the importance of macroeconomics as a subject of study has increased immensely over the past two decades, most probably due to the persistence of macroeconomic problems—achieving and maintaining a reasonably high growth rate, preventing growth of unemployment and promotion of employment, restricting inflation to a desirable rate, and stabilising the financial market. The recent global recession and the problems that it created for both developed and developing econo- mies proves the point. In view of these facts, it was realised that there was a need for expanding the scope of the book by adding discussions of some other important aspects of macroeconomics. These factors prompted me to bring out the third edition of the book. WHAT IS NEW IN THIS EDITION Three New Chapters • Chapter 2 – Macroeconomic Issues, Concepts and Model Building—has been added with the objective of (i) giving the readers an overview of major macroeconomic issues that constitute the subject matter of macroeconomics (ii) equipping them with some basic concepts used in macroeconomic analysis and (iii) giving an idea of the need for and the purpose of macroeconomic models. • Chapter 21 – Theories of Economic Growth—has been added to this edition of the book. Most macroeconomic theories discussed in the earlier editions of the book were presented generally in a static equilibrium framework. In reality, however, most economies pass vi Preface regularly through dynamic conditions and have a tendency to grow in the long run. What was missing in the earlier editions was the answer to the questions ‘what factors make the economy grow’ and ‘what determines the growth rate’. In their effort to answer these questions, economists have formulated their own theories of economic growth. A brief discussion on the main theories of growth is the subject matter of this chapter. • Chapter 22 – Theories of Business Cycle and Global Recession. Growing economies are always open to the risk of economic downturn followed by recovery of the economy. This has been proved by the India’s economic crisis of late 1960s and the early 1990s, the Asian crisis of 1980s, the US economic recession in 1980s and again in 2008-09 which caused a global recession. The regular uptrend and downturn in the economy is called business cycle. Economists have attempted to explain why business cycles take place and what measures can be adopted to control the business cycles. Their efforts have lead to the emergence of the theories of business cycle. The theories of business cycles and a brief discussion on the recent global recession constitute the subject matter of this chapter. New Sections Added • Chapter 1 – Two new sections have been added to this introductory chapter: (i) What is Economics? containing a detailed explanation of what economics is about just to introduce the subject to the students from non-economics disciplines and guide them to the study Macroeconomics, and (ii) Use of Macroeconomics for Business Management for the benefit of management students. • Chapter 5 – The classical theory of demand for labour is the most important element of the classical theory of employment, which was ignored in the earlier editions of the book. For the sake completeness, therefore, a new section on the classical theory of demand for labour is added in this edition. • Chapter 9 – A new section on Consumption under Uncertainty: Robert Hall’s Random Theory has been added to this chapter. Besides, empirical evidence based on Indian data has been added to explain the concepts of average propensity to consume and average propensity to save. • Chapter 10 – The Introduction of the chapter to the theory of investment has been reinforced with Indian data on trends in savings and investment as percentage of GDP. In addition, a new section on the Rental Cost of Capital and Investment has been added to this chapter. • Chapter 12 – A new section RBI Measures of Money Supply has been added to show how money supply is measured in India. Besides, the discussion on money supply has been elaborated upon, with additional examples of empirical evidence. • Chapter 15 – The section on the Baumol-Tobin Theory of Transaction Demand for Money has been discussed in a much greater details with additional numerical examples. Also, the discussion on most other theories of demand for money has been elaborated upon with additional examples and algebraic treatment. • Chapter 17 – Three new sections have been added to this chapter: (i) IS-LM model of a simple economy, (ii) Derivation of the IS-curve with the government sector, and (iii)an alternative graphical method of deriving IS-curve. Preface vii • Chapter 18 – A new section—Derivation of the IS Curve: An alternative Method—has been added as an alternative algebraic method of deriving the curve. Besides, Sections 18.3 and 18.4 have been added with additional examples and explanation. In addition, the discussion on India’s Monetary Policy in Chapter 30 and India’s Fiscal Policy in Chapter 31 has been updated with recent monetary and fiscal data, respectively. HOW THIS BOOK IS DIFFERENT FROM OTHER BOOKS This book is different from other books in two important ways—one, in organisation of the subject matter, and two, in explanation of macroeconomic theories. In most other books the organisation of the subject matter is issue-based, i.e., based on such macroeconomic issues as economic growth, monetary theory, government debt, inflation, employment, business cycles, etc. This kind of approach gives an incoherent picture of macroeconomics. This approach sometimes does not give the reader a comprehensive and complete view of macroeconomics as a separate branch of economic science. It does not tell how economists’ thoughts have changed over time and how changes in their thoughts and theories have led to the growth of macroeconomics. This kind of treatment of the subject seems to assume that students have the basic knowledge of macroeconomics. In contrast, the subject matter has been organised in this book on the basis of the different stages of growth of macroeconomics—classical, Keynsian, post-Keynsian and then the issue related theo- ries. It begins with an introduction of macroeconomics as a subject of study and then proceeds to deal with subject matter in chronological order. First it deals with classical views on macroeco- nomic issues and its failure to explain the origin of Great Depression. This gives the background in which macroeconomics was born. Then it proceeds to deal with the Keynesian macroeconomics which marks the foundation of macroeconomics. The explanation of the Keynesian macroeconom- ics is followed by the post-Keynesian developments in macroeconomics. Next it deals with theories of economic growth and business cycle problems. Finally, it discusses the policy measures of macroeconomic management by the government, viz., monetary policy and fiscal policy. This approach was adopted to give a complete and comprehensive view and clear understanding of growth of macroeconomics as a subject of study, and the methods of macroeconomic management. Secondly, this book is different from other books in respect of explanation and presentation of macroeconomic theories. In exposition of the macroeconomic theories, it does not presume any prior knowledge of macroeconomics. It begins with the basics and proceeds to explain macroeco- nomic theories step-by-step by using graphics and algebraic examples. I express my gratitude to all those who have contributed directly and indirectly to the preparation of the third edition of the book. I acknowledge once again the guidance and suggestions that I have received from Shri Rama Rao Suresh of Ramjas College (retd.), Dr. Ramji Narayanan of PGDAV College, and Mrs. Kusum Gupta of Lady Sriram College, all of Delhi University. I am thankful also to Mr. Tapas Kumar Maji of Tata McGraw Hill, for his feedback and inspiration for revising the book. Comments and suggestions are always welcome and will be duly acknowledged. D N D‡s†ihs Contents Preface v €e‚„2I Introduction IF sx„‚yh…g„syx2„y2weg‚yigyxywsgƒ Q Introduction 3 1.1 What is Economics? 4 1.2 What is Macroeconomics? 7 1.3 Macroeconomics is both a Theoretical and a Policy Science 9 1.4 Microeconomics vs. Macroeconomics 10 1.5 Origin and Growth of Macroeconomics 12 1.6 Importance of Macroeconomics 16 1.7 Limitations of Macroeconomics 21 Suggested Readings 22 Questions for Review 22 PF weg‚yigyxywsg2sƒƒ…iƒD2gyxgi€„ƒ2exh2wyhiv2f…svhsxq PQ Introduction 23 2.1 Macroeconomic Issues 23 2.2 Some Concepts used in Macroeconomic Analysis 30 2.3 Macroeconomic Model Building 36 Questions for Review 39 QF „ri2gs‚g…ve‚2pvy‡2wyhivƒ2yp2igyxyw‰ RH Introduction 40 3.1 Circular Flows in a Two-Sector Model 41 3.2 Circular Flows in Three-Sector Model: A Model with Government Income and Expenditure 45 x Contents 3.3 Circular Flows in a Four-Sector Model: A Model with the Foreign Sector 47 Suggested Readings 48 Questions for Review 48 RF wieƒ…‚iwix„2yp2xe„syxev2sxgywi SH Introduction 50 4.1 Some Concepts Related to National Income 51 4.2 National Income Measures 55 4.3 Nominal and Real GNP 58 4.4 Methods of Measuring National Income 61 4.5 Treatment of Net Income from Abroad 65 4.6 Double Entry System of Accounting 66 4.7 Measurement of National Income in India 67 Suggested Readings 74 Questions for Review 74 €e‚„2P Product Market Analysis: Theory of National Income Determination SF „ri2gveƒƒsgev2„riy‚‰2yp2y…„€…„2exh2iw€vy‰wix„ UW Introduction 79 5.1 The Classical Postulates 80 5.2 Say’s Law: The Foundation of Classical Macroeconomics 81 5.3 Classical Theory of Employment: A Formal Model of Say’s Law 83 Suggested Readings 90 Questions for Review 91 TF ui‰xiƒsex2„riy‚‰2yp2sxgywi2hi„i‚wsxe„syxXe2ƒsw€viigyxyw‰2wyhiv WP Introduction 92 6.1 The Concepts and Functions 93 6.2 Income Determination in Simple Economy Model 99 6.3 The Change in Aggregate Demand and the Multiplier 104 6.4 A Simple Model of Investment Multiplier 107 6.5 Static and Dynamic Multiplier 110 6.6 The Uses and Limitations of Multiplier 112 6.7 Applicability of Multiplier Theory to LDCs 113 6.8 The Paradox of Thrift and the Multiplier 115 Suggested Readings 116 Questions for Review 116 UF sxgywi2hi„i‚wsxe„syx2sx2e2gvyƒih2igyxyw‰2wyhivX2e2wyhiv2‡s„r qy†i‚xwix„2ƒig„y‚ IIV Introduction 118 7.1 Income Determination with the Government Sector 118 7.2 The Fiscal Multipliers 127 Suggested Readings 131 Questions for Review 131 Contents xi VF sxgywi2hi„i‚wsxe„syx2sx2y€ix2igyxyw‰2wyhivX2e2wyhiv2‡s„r „ri2py‚isqx2ƒig„y‚ IQQ Introduction 133 8.1 Exports, Imports and the Aggregate Demand 134 8.2 National Income Equilibrium in a Four-Sector Model 136 8.3 A Complete Four-Sector Model of Income Determination 138 Suggested Readings 140 Questions for Review 140 €e‚„2Q Theories of Consumption and Investment WF „riy‚siƒ2yp2eqq‚iqe„i2gyxƒ…w€„syx IRS Introduction 145 9.1 The Absolute Income Hypothesis: Keynesian Theory of Consumption 146 9.2 The Relative Income Hypothesis: Duesenberry’s Theory 150 9.3 The Permanent Income Hypothesis: Friedman’s Theory of Consumption 153 9.4 The Life-Cycle Theory of Consumption: The Life-cycle Hypothesis 158 9.5 Consumption Under Uncertainty: Robert Hall’s Random-Walk Theory 161 9.6 Concluding Remarks on Consumption Theories 163 9.7 Non-Income Factors Affecting Consumption 163 Suggested Readings 168 Questions for Review 169 IHF „riy‚‰2yp2sx†iƒ„wix„2exh2ge€s„ev2egg…w…ve„syx IUH Introduction 170 10.1 Some Basic Concepts 172 10.2 Methods of Investment Decision 173 10.3 The Marginal Efficiency of Investment (MEI) and Aggregate Demand for Capital 177 10.4 The Theory of Capital Accumulation 179 10.5 Income and Investment: The Accelerator Theory of Investment 183 10.6 The Rental Cost of Capital and Investment 188 10.7 Tobin’s q Theory of Investment: Stock Market and Investment 188 Suggested Readings 189 Questions for Review 190 €e‚„2R Money Market Analysis: Theory of Money and Interest IIF wyxi‰X2hipsxs„syxD2usxhƒ2exh2p…xg„syxƒ IWQ Introduction 193 11.1 Definition of Money 193 11.2 The Kinds of Money 196 11.3 The Functions of Money 198 11.4 The Significance of Money in Modern Economy 199 Suggested Readings 202 Questions for Review 202 xii Contents IPF „ri2ƒ…€€v‰2yp2wyxi‰ PHQ Introduction 203 12.1 The Sources of Money Supply 203 12.2 The Measures of Money Supply in India 211 12.3 The Theory of Money Supply 213 12.4 Monetary Expansion and the Money Multiplier: A Simplified Model 218 12.5 Monetary Expansion, Currency Drain and Deposit Multiplier 220 Suggested Readings 221 Questions for Review 221 IQF „ri2gveƒƒsgev2„riy‚‰2yp2wyxi‰exhsx„i‚iƒ„ PPP Introduction 222 13.1 The Classical Quantity Theory of Money 222 13.2 The Cambridge Version of Quantity Theory of Money 226 13.3 The Classical Theory of Interest 227 13.4 Keynes’s Criticism of Classical Theory of Interest 228 Suggested Readings 230 Questions for Review 230 IRF „ri2ui‰xiƒsex2„riy‚‰2yp2wyxi‰exhsx„i‚iƒ„ PQP Introduction 232 14.1 The Classical and Neoclassical Views on Holding Money: A Precursor 232 14.2 The Keynesian Theory of Demand for Money 233 14.3 The Keynesian Theory of Interest and Money Market Equilibrium 240 14.4 Changes in the Money Market and the Interest Rate 241 14.5 Criticism of the Keynesian Theory of Interest 244 Suggested Readings 245 Questions for Review 245 ISF „ri2€yƒ„Eui‰xiƒsex2„riy‚siƒ2yp2hiwexhpy‚wyxi‰ PRT 15.1 An Overview 246 15.2 Portfolio Theories of Demand for Money 247 15.3 Baumol–Tobin Approach to Transaction Demand for Money 249 15.4 Tobin’s Theory of Speculative Demand for Money: the Portfolio Optimisation Approach 253 15.5 Friedman’s Quantity Theory of Money 258 Suggested Readings 261 Questions for Review 262 €e‚„2S Integration of Product and Money Market Equilibrium ITF „ri2sƒEvw2wyhiv2sx2„‡yEƒig„y‚2igyxyw‰ PTS Introduction 265 16.1 The Interdependence of Product and Money Markets 266 16.2 The IS-LM Model: An Elementary Exposition 267 16.3 Algebraic Version of the IS-LM Model 274 16.4 From Disequilibrium to Equilibrium—The Dynamics of Adjustment 278

See more

The list of books you might like

Most books are stored in the elastic cloud where traffic is expensive. For this reason, we have a limit on daily download.