Macroeconomics

Definition
Macroeconomics

is the study of the

behavior and performance of the
economy as a whole.
According to P.A Samuelson ,
Macroeconomics is the study of the
behavior of the economy as a
whole. It examines the overall level
of a nations output , employment,
prices and money.

Importance of
macroeconomics
1)

Growing importance of
macroeconomic issues
2) Persistence of macroeconomic
problems
3) Growing complexity of economic
system
4) Need for government intervention
with the market system
5) Use of macroeconomics in business
management

Macroeconomic issues
1)
2)
3)
4)
5)
6)

Growth related issues

Business cycles
Inflation
Unemployment and poverty
Budgetary deficits
International economic issue

Circular flow of income

Circular flow of income

National Income

According to Prof Pigou, The

national dividend is that part of
the objective income of the
community
including
income
derived from abroad, which can
be measured in money

Rules of computing GDP

To

compute the total value of different goods

and services, the national income accounts
use market prices.
Used goods are not included in the
calculation of GDP.
Some goods are not sold in the marketplace
and therefore dont have market prices. We
must use their imputed value as an
estimate of their value. For example, home
ownership and government services.

Intermediate

goods are not counted in

GDP only the value of final goods.
Reason: the value of intermediate
goods is already included in the
market price. Value added of a firm
equals the value of the firms output
less the value of the intermediate
goods the firm purchases.

National income measures

Gross domestic product
Gross domestic product can be defined as
the sum of market value of all final goods
and services produced in a country during
a specific period of time , generally a
year.
GDP includes income earned by the
foreigners in the country and excludes
income earned abroad by the residents.
GDP market price=GDPfc+IT-S

GDP at factor cost and

market price
GDP at factor cost is calculated as the sum
of net value added by different producing
units and the consumption of fixed asset.
( wages+interest+rent+profit+depreciation)
GDPfc=GDPmp-IT+S
GDP at market price include indirect taxes
and exclude the subsidies given by the
government.
GDPmp=GDPfc+IT-S

Components of GDP
Y=C+I+G+NX
C= Consumption by household on
goods and services
I=Investment includes capital
equipment, inventories and structures
G=Spending on goods and services by
the government
NX=Export-Import

Gross national product

The concept of GNP includes the income
of the residents nationals which are
received abroad, and excludes the
income generated locally but accruing
to the non-nationals.
GNP=GDP+Net
abroad

factor

income

from

Net National product

The concept of GNP includes the output
of final consumer and capital goods.
However, a part of capital goods is
used up or consumed in the process of
production of these goods. This is
called depreciation. NNP is obtained
by subtracting depreciation from GNP
NNP=GNP-Depreciation

Net domestic product

When
depreciation
allowance
is
subtracted from GDP ,We get net
domestic product.
NDP=GDP-depreciation

NNP at factor cost or

National income
National income is the total of all
income payment received by the
factor of production
National income=Net National productIndirect Taxes+Subsidies-profits
accruing to the government

Personal income
Personal

income is that income

which is actually received by the
individuals during a year from all
resources.

PI=NNP-(Undistributed

company
profits+Surplus
of
public
undertaking+Rentals of public
property)

Disposable personal
income

Disposable income refers to personal

income of the income earners against
which they do not have any legally
enforceable payment obligations.

DPI=Personal

income-personal direct

taxes
DPI=Consumption+Saving

Nominal and real GNP

GNP

estimated at current prices

is called nominal GNP and GNP
estimated at constant prices is
called real income.
At current
prices

At constant
prices(19992000prices)

1990-91

5,15,032

10,83,572

2006-07

37,90,063

28,64,309

Economic survey 2007-08

GNP Deflator
The

GNP deflator is a factor which is

used to convert nominal GNP into
real GNP. The GNP deflator is the
ratio of price index number(PIN) of a
chosen year to the price index of the
base year.
GNP deflator=PIN of the chosen year

100
Real GNP=Nominal GNP/GNP
Deflator

Calculate
From the following, compute i) real GNP
ii) GNP deflator
Year
PIN

Nominal GNP

Wholesale

199394=100)
2002-03 2284614
2003-04 2531168

166.8
175.9

Methods of measuring
national income

Net output or value added method:

Y=[sales+Self consumption+increase in
stocks]-[Value of intermediate
products+depreciation]
Three Stages:
1) Estimating the gross value of domestic
output in the various branches of
production(P.Q)
2.Determining the cost of material and
services used and also the depreciation of
physical asset.
3. Deducting these costs and depreciation
from the gross value to obtain the net value
of domestic output

Factor income method

National

income= Rent
+Wages+
Interest+
Profit+Depreciation
Total factor income is divided into :
1.

Labour incomes :
a) wages and salaries paid to the residents
of the country including bonus and
commission and social security payments
b) supplementary labour income including
employer contribution to social

Factor income method

Security and employee welfare funds
and direct pension payment to retired
employees
c) supplementary labour incomes in
kind free health and education, food
and clothing.
2) Capital incomes:
a. dividends
b. royalties
c profits of government enterprises

method
d) net interest paid out by commercial
banks
e) net rent from land building
f) undistributed before tax profits of
corporation
g) Interest on bonds and saving deposits
3)Mixed income: farming enterprises , sole
proprietorship, other profession including
legal and medical practices, trading and
transport etc.

Expenditure method
We

obtain the gross national

product at market prices by
adding
up
the
personal
expenditures,
gross
private
domestic investment, net foreign
investment
and
government
purchases of goods and services.

Y=C+I+G+X-M

GNP break-up by different

methods

Value added
method

Expenditure
method

Income method

Agriculture
250

Consumption exp
630

Wages and salaries

400
Corporate profits
250

Industry
350

Gross investment
210

Rental income
80
Interest income
100

Service sector
400

Govt purchase
160

NY
830
Add:
Indirect taxes less
subsidies
90
Add:

National income statistics

Year

200708

2008-09 2009-10 2010-11 2011-12

GDP(Mark 498709
et prices) 0

5630063

6457352

7674148

8912178

Growth
Rate (%)

12.9

14.7

18.8

16.1

GDP(facto 389663
r cost
6
2004-05
prices)

4158676

4507637

4885954

5222027

Growth
rate

6.7

8.4

8.4

6.9

40775

46117

53331

60972

16.1

9.3

Per capita 35825

net
national
income
(factor
cost)

Sectoral distribution of
Indias NI
Agriculture

Industry

Service

1950-51

53.1

16.6

30.3

1990-91

29.6

27.7

42.7

2010-11

14.5

27.8

57.7

2011-12

13.9

27.0

59.0

Household consumption
exp

550 billion

Govt consumption exp

250 billion

Gross fixed capital formation

100 billion

Depreciation

150 billion

Indirect taxes

160 billion

Subsidies

40 billion

Exports

200 billion

Imports

250 billion

Net Income from abroad

150 billion

Compute
i) GDP at market price
ii)GDP at factor price
iii)GNP