Macroeconomics

Macro is the concept of aggregates.

Macro economics is the study of
aggregates or the study of economic
phenomena at aggregate level.
It deals with variables such as total
income of a country or nation, total
volume of output, consumption level,
savings and investments, employment
levels and general price levels.
Macroeconomics studies how the large
aggregates such as total employment,
national product or national income of an

Macro economic
concepts

Stock and flow variables-Stock

variables are measured at a given
point of time.Flow variables are
measured over aperiod of time.macro
stock variables are total money
supply,total bank deposits, debts,
inventory etc.The flow variables
include national income and output,
wages , investment.Stocks are
expressed in rupees and flows are
expressed in rupees per month,

Macro economic
concepts

Equillibrium-A state of balance

between two opposite forces.or a
situation in which economic forces as
they exist at the time have no
tendency to change.Equilibrium can be
of two types partial and general
equilibrium.Partial is confined to a
sector or market and everything is
kept constant in the economy.General
equilibrium indicates equilibrium in all
sectors or marketsof the economy

ECONOMIC GROWTH
Economic growth is dependent
on two essential elements

Aggregate demand

Aggregate supply

ECONOMIC GROWTH

Aggregate Supply-

With the available inputs like labour,

capital and technology available
economy produces certain volume of
outputs measured by GDP(Gross
Domestic Product).The capacity
normally increase with time as the
supplies of inputs grow. The country or
economy expand its productive
capacity which leads to higher living

ECONOMIC GROWTH

Aggregate Demand-

It is the actually utilized capacity of

the country or economy to produce.
The aggregate demand should be in
line with economys capacity to
produce.

ECONOMIC GROWTH

Outcome of Aggregate supply and

Aggregate Demand-

The ideal aggregate demand and

supply leads to stabilization.
If the balance disturbs it leads to
multiple cycles of boom and doom in
business.
If there is inadequate growth of
aggregate demand it can lead to

ECONOMIC GROWTH

Outcome of Aggregate supply and

Aggregate Demand-

The ideal aggregate demand and

supply leads to stabilization.
If the balance disturbs it leads to
multiple cycles of boom and doom in
business.If there is inadequate growth
of aggregate demand it can lead to
unemployment and if there is
excessive growth of aggregate demand

Objectives Of
Macroeconomics

Rapid but smooth

economic growth
Low unemployment
Low inflation

Goal Of Economic Growth

1.

Growth policy:

Ensuring that the economy sustains

a high long run growth rate of potential
GDP.
2.

Stabilization policy:
keeping actual GDP reasonably
close to potential GDP in the short
run, so the society is not affected by
high unemployment and high

National Income
National income of a country can be
defined as the total market value of all final
goods and services produced in the
economy in a year.
Meaning of national income

NI measures the market value of annual output

in monetary terms.
For calculating NI accurately all goods and
services produced in any given year must be
counted only once .

National Income of the

country

There are three measures of national Income Of a

country:A) The sum of values of all final goods and
services produced.
B)The sum of all incomes , in cash and kind,
accruing to factors of production in a year.
C) The sum of consumer's expenditure , net
investment expenditure and government
expenditure on goods and services.
There are three major activities of nation's
economy:- production, distribution and
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expenditure.

Circular income flow in two sector

economy
Labour capital,land and enterprise

Wages,rent, Interest, profits

Factor
payments

Household
Consumption
Expenditure
Flow of goods and
services

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Business
Firms

Circular flow of
Income

If the economy is considered to have only two

agent Household and firm.
Firms are required to produce goods. For
production firms require services of production
Factors. Factors of production are paid the
rewards for their contribution in the form of
wages, rent, interest and profits. In return the
firms give goods to society . The household
then consumes the goods by paying the price
for it.

Circular income flow with

saving and investment
Factor
payments
Wages,rent, Interest,
profits

Household

Financial
Market

Expenditure on goods and services

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Business
Firms

Saving Investment
Identity in National
In calculation of national Income the
Income
accounts
consumers who save and the
business firms who invest are
identical or always equal to
investments.

In a simple economy the value of

output produced which is denoted by
Y is equal to the value of output
Y =C+ I
sold.Eq-1

Saving Investment Identity in National

Income accounts
The unsold outputs
leads to increase in

the inventories of goods and increase in

inventory of goods is treated as part of
investments.

National income can be represented in

terms of savings
and consumption.Eq-2
Y =C+S

Thus from Eq-1,2-

C+I= Y =C+S

Or subtracting Consumption from both

I=S
sides-

Circular income flow in three Sector

economy with government sector
Government

Wages ,Salaries

Govt purchase
of goods

Wages,rent, Interest, profits

Factor payments

Household

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Financial
Market

Business
Firms

Consumption expenditure on goods and services

Circular Money flow with

Government

Total expenditure flow in the economy is the

sum of consumption expenditure (c),
investment expenditure (I)& Govt expenditure
(G). Thus-

Total expenditure
(E)=C+I+G.(i)

Total Income (Y) received is allocated to

Consumption (c), Savings (S) & taxes (T ). Thus

Total Income (Y)= C+S+T

..(ii)
Since E=Y,

Circular Money flow in

four sector open
National income=
C+I+G+X (Where
economy
X is net exports, X-M)
Since NI can be either consumed,
saved or paid as taxes to
government we have,

C+I+G+X = C+S+T or

I+G+X= S+T

Thus sum of private investments (I),

Govt. expenditure (G)& net exports
(X) is equal to sum of savings and

Circular income flow in three Sector

economy with government sector
Wages ,Salaries

Government
Wages,rent, Interest, profits

Govt purchase
of goods

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Factor payments

Household

Savings

Financial
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Investment

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Business
Firms

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Consumption expenditure on goods and services
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CONCEPT OF NATIONAL INCOME

AND NATIONAL PRODUCT

In two sector economy the NP= NI

Value
of final
Goods
National =and
Services
product
produced

Wages
+
Rent
+
Interest
+
profits

NATIONAL
INCOME

CONCEPT OF NATIONAL INCOME

AND NATIONAL PRODUCT

Other than two sector economy the

NI is not equal to National product.
The reasons for the above said
equation is-

No assumptions of depreciation fund

No subsidy grants.

No indirect taxes.

Components of national Income

GNPGross National Product

NNPNet National Product
GDPGross Domestic Product
NDPNet Domestic Product
NI- National income
PIPersonal income
DI Disposable Income

Gross National Product

GNP has following components:

Value of final consumer and services produced in a year

and consumed by household is denote by consumption (C)
Value of new capital goods produced and addition to the
inventories of goods such as raw material, unfinished
goods and consumer goods produced but not sold during a
year. This is called gross private investment (I)
Value of output of general government which is taken to be
equal to the value of purchases of goods and services by
the Govt denoted by (G)
Net exports which is equal to exports minus imports
denoted by (X)

Net Factor Income

Net factor income from abroad is the

difference between factor income
received from abroad by residents of
parent company for rendering factor
services in other countries on the
one hand and the factor incomes
paid to the foreign residents for
factor services rendered by them in
the domestic territory on the other
hand.

Net Factor Income

Net factor income earned from abroad
has
three components.

Net compensation of employees

Net income from property i.e. rent,
interest and income from
entrepreneurship (that is profit and
dividends)
Net retained earnings of the resident

Gross Domestic Product

Gross Domestic Product is the money value
of all final goods and services produced by
Residents as well as non residents in the
domestic territory of a country but does not

include net factor income earned from

GDP=
GNP- net factor Income from abroa
abroad.
or

GDP = C+I + G+X

Net National Product

NNP or National income at market

prices is the market value of all
goods and services after providing
depreciation.
NNP= GNP- Depreciation

Net Income At Factor

Cost

National income or national

income at factor cost = NNP at

market prices Indirect taxes +
subsidies.

Net Income At Factor

Cost

National income or national

income at factor cost = NNP at

market prices Indirect taxes +
subsidies.

Personal Income

Personal Income is the sum of all

incomes actually recd by all
individuals or household during a
given year.
PI= NI undistributed corporate
profit- social security contributionscorporate taxes+ Transfer payments.

Disposable Income

DI= personal Income personal

taxes.
Or
Personal disposable income =
consumption +savings

Disposable Income

DI= personal Income personal

taxes.
Or
Personal disposable income =
consumption +savings

CONSUMPTION
& INVESTMENT

CONSUMPTION
Aggregate demand consists of two parts

Consumption

Investment

Consumption function- It relates to the

amount of consumption to the level of
income. When the income of the
community rises consumption also rises.
The consumption rises in response to a
given increase in income depends upon
marginal propensity to consume.

Investment
In economics, Investment is referred to
as the new expenditure incurred on
addition of capital goods such as
machines , buildings equipments
etc.Greater the level of investment ,
greater the level of income and
employment.Investment is of 3 typesa)Business fixed investment- investment
in fixed investment .i.e.machines, tools
etc.
b)Residential investment- investment in
building of houses.

Investment
Investment can be financial or real. In
financial only the ownership changes but
quantum of capital assets are same.For
example- shares, bonds etc.
In real investment, there is an addition to
the stock of physical capital.
Determinants of investmenta)Expected rate of profit or marginal
efficiency of capital
b)The rate of interest

Consumption
Average propensity to
consume(APC)Average propensity to consume is the
ratio of the amount of consumption(C) to
total income(Y).
APC=C/Y

Where, C= amount of consumption

Y= level of income

Consumption

Marginal propensity to consume-

Marginal propensity to consume is

the ratio of change in consumption to
change in income.

MPC=
Where,

C/ d

C= change in consumption

Y=change in the level of income

Linear Consumption Function

Income
Y
1000
1100
1200
1300
1400
1500
1600

Consumption
C

750
825
900
975
1050
1125
1200

Average
propensity to
consume (C/Y)
750/1000=0.75
825/1100=0.75
900/1200=0.75
975/1300=0.75
1050/1400=0.75
1125/1500=0.75
1200/1600=0.75

Marginal
propensity to
consume C/Y
75/100=0.75
75/100=0.75
75/100=0.75
75/100=0.75
75/100=0.75
75/100=0.75

Consumption Function
Consumption
Function
The whole
schedule
which shows the
consumption at
various

Amount Of
consumptionAmount of
consumption
means the amount
consumed at a
specific
level of income.
For ex-level of

Propensity To Consume
Average
propensity to
consume
APC is the ratio of
the amount of
consumption to
total income.
APC= C/Y

Marginal propensity
to consume
MPC is the ratio of
change in
consumption to the
change in income.
MPC=C/Y

MULTIPLIER EFFECT

Multiplier effect is the relationship

between the income and investment.
Investment is a part of income , an
increase in investment would lead to an
increase in income equal to it.
A rise in income following an increase in
investment induces an increase in
consumption spending.
Thus inference is the increase in income
would lead to increase in investment
depending upon MPC resulting in

MULTIPLIER EFFECT

Multiplier effect is the relationship

between the income and investment.
Investment is a part of income , an
increase in investment would lead to an
increase in income equal to it.
A rise in income following an increase in
investment induces an increase in
consumption spending.
Thus inference is the increase in income
would lead to increase in investment
depending upon MPC resulting in

Unit II

PART II: The Economic Markets

The Product Market & How it Affects India's Growth Potential
The Money Market & How it Behaves
The Capital Market & its Variabilitv
The Money Market & the Role of Central Banking
How does Commercial Banking Effect Industry & Business
The Indian Labor Market & Levels of Unemployment & Inflation
since 1990