Updated: Jan 8
We will be solving practical challenges through MBA concepts. No theory only applications !
This one is a lesson on macroeconomics- especially useful for professionals from engineering and science backgrounds. Well, you might wonder that you would never need this. But hey guess what ! These topics are necessary to hold important discussions just exactly what MBA teaches you. It comes really handy in case interviews. There, you would not only solve a micro industry problem but can also add such macro parameters- making you a great candidate. Now let's get started.
Step 1: How would you calculate GDP ?
Gross Domestic Product is an important parameter to gauge a nation's well being as it is directly correlated to Human development index. It might sound obvious now but usually when asked- people are not able to articulate the huge deal with this parameter.
Step 2: Expenditure Account
There are 3 methods to calculate GDP.
The method used here will lay focus on "expenditure account" which is basically sum of the expenditures. We will discuss this one because in my experience it's much more macro and provides a framework-ish approach to problem solving.
GDP= Private Consumption+ Private Investment+Government Purchases of Goods and Services+Net Exports
There is a full derivation on how we arrive at above 4 factors contributing to GDP but I would rather not get in it.
Step 3: Let's solve problems
Now if you are given a case problem of increasing Japan's GDP, you know the approach to it. You pick the 4 variables in the equation one by one and check room for improvement.
With this equation, you will be able to appreciate more why Modi has focused so much on building great investor ecosystem and relationships. This is first principles thinking. We are concerned when FMCG sector's sale goes down because effectively your private consumption is going down thereby declining GDP.
Now let's get little more contemporary. In recent Union budget of India, the finance Minister has proposed stricter measure on fiscal deficit ( Total expenditure – Total earnings) and fiscal prudence, which implies cutting down Government purchases . Given you now understand the basics of GDP better, you would be able to argue-in current dropping GDP growth times (5% per IMF)- is it a correct measure? Because once government purchases go down what might happen ? Your GDP might also decline !
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