Macroeconomics

Macroeconomics is the big picture. Not one buyer or one firm, but the whole economy at once.

It deals in totals: how much a country produces, how many people are out of work, how fast prices are rising, how much the country saves and invests.

Most of those totals are pushed around by public policy. Two bodies set that policy. The government decides taxes and spending, which is fiscal policy. The central bank decides money supply and interest rates, which is monetary policy.

For a research analyst this is the outer layer of the analysis. It sets the weather the industry and the company have to operate in.

The definition. Section 5.2: macroeconomics "is the study of the big picture in the economy." While microeconomics focuses on individual households and firms, macroeconomics deals with the economy — "factors that influence aggregate supply and demand in an economy such as unemployment rates, gross domestic product (GDP), overall price levels, inflation, savings rate, investment rate etc." Most of these factors, the workbook adds, are affected by changes in public policies.

The 2 policy makers. "Two major influencers of the public policies in an economy are the government and the central bank." Decisions of the government are collectively fiscal policy; actions of the central bank are collectively monetary policy. The workbook credits John Maynard Keynes with the emphasis on macroeconomic analysis, through his book "General Theory of Employment, Interest and Money."

The 5 uses the workbook lists. Macroeconomics helps us understand: (1) the general state of the economy — domestic production, domestic consumption, general price levels, growth, quality of life; (2) the drivers of income, savings, investments and employment; (3) how governments and central bankers formulate policy for long-run growth with stability, through macroeconomic models; (4) international trade — exports, imports, balance of payment, exchange rate dynamics; and (5) how inter-linkages across economies work.

The variables it then unpacks. Section 5.3 works through them one at a time: national income (GDP, GNP and net factor income from abroad), savings and investments, inflation and interest rates, the unemployment rate, FDI and portfolio flows, fiscal policy, monetary policy, international trade and exchange rates, and globalisation.

On figures. Section 5.2 itself carries no numeric value — no growth rate, no inflation target. The numbers in chapter 5 belong to the individual variables in 5.3, not to the definition of the subject.

Illustrative. An analyst covering a housing finance company writes down the macro picture before touching the company.

None of these 5 numbers is about the company. Yet together they say something specific: loan demand should be fine, but the cost of funds is unlikely to fall soon, and the workbook's own point about a large fiscal deficit pushing up interest rates and crowding out corporate borrowers applies directly to this lender.

So the analyst now expects volume growth with margin pressure. A Rs 40,000 crore loan book that reprices 0.25% more expensively on the liability side loses Rs 100 crore of annual net interest income, before a single loan goes bad. That is a macro conclusion with a rupee value attached to it.

Chapter 5.2 (Basic Principles of Macroeconomics) and section 5.4 (Role of economic analysis in fundamental analysis) frame the whole chapter, and 5.3 supplies the variables.

The chapter's own Sample Question 1 is drawn from here: "Two major influencers of the economic policies in an economy are ______ & ______," and the answer is Government and Central Bank. Expect that one, a micro-versus-macro discrimination question, and a question on why an equity analyst should care at all — where 5.4's answer is that fiscal deficit and inflation levels tell you how much room policy has left to support growth.

• Government and central bank are the 2 policy influencers. Not stock exchanges, not SEBI. Sample Question 1 uses exactly those distractors.
• Fiscal policy is the government; monetary policy is the central bank. Swapping them is the single most common error in chapter 5.
• Macroeconomics is defined by aggregation, not by size. A study of one very large company is still microeconomics.
• Savings rate and investment rate are macro variables in the workbook's own list, alongside GDP, unemployment and inflation.
• Economic analysis is the first of 3 baskets, not an optional preface. Chapter 4 places economic, industry and company analysis in that order, and 5.4 explains what the economic layer is for.