Macro Economics

Macro Economics

1. MACRO-ECONOMICS

2. MACRO-ECONOMICS Macroeconomics looks at the economy as an organic whole. Macro-economics studies economic aggregates such as: total output, total demand, aggregate income, total savings, total investment, total employment , rise and fall in general price level, interest rates.

3. Macro-economics

4. Macro-economics Macroeconomics is the study of what is happening to the economy as a whole, the economy-in-the-large , the macro-economy . Macroeconomists' principal tasks: to try to figure out why overall economic activity rises and falls: the value of production, total incomes, unemployment, inflation, Intermediate variables like interest rates, stock market values, and exchange rates--that play a major role in determining the overall levels of production, income, employment, and prices.

5. Macro-economics Versus Micro-economics

6. Macro-economics Versus Micro-economics By itself macroeconomics is only half of economics. For more than half a century economics has been divided into two branches, macroeconomics and microeconomics. Macroeconomists examine the economy in the large, focusing on feedback from one component of the economy to another, and studying the total level of production and employment . Micro-economists study the markets for single commodities, examining the behaviour of individual households and businesses. They focus on how competitive markets allocate resources to create producer and consumer surplus, as well as on how markets can go wrong .

7. Macro-economics Versus Micro-economics These two groups of economists differ in their view of how markets work. Micro-economists assume that imbalances between demand and supply are resolved by changes in prices. Rises in prices bring forth additional supply, and falls in prices bring forth additional demand, until supply and demand are once again in balance. Macroeconomists consider the possibility that imbalances between supply and demand can be resolved by changes in quantities rather than in prices. That is, businesses may be slow to change the prices they charge, preferring instead to expand or contract production until supply balances demand.

8. Macro-economics Versus Micro-economics

9. Macro-economics Versus Micro-economics In every generation, economists attempt to integrate microeconomics and macroeconomics by providing " Micro-foundations ." But no one believes that the bridge between microeconomics and macroeconomics has yet been soundly built. Economists are divided between those who think that the failure to successfully integrate the two branches is a flaw that urgently needs to be corrected, and those who think it is a regrettable but minor annoyance.

10. Macro-economics Versus Micro-economics

11. Macro-economics

12. Macro-Economy Indicators There are S ix key indicators of economic activity Six Key Indicators Real Gross Domestic Product The unemployment rate The inflation rate The interest rate The level of the stock market The exchange rate.

13. Macro-Economy Indicators

14. Real Gross Domestic Product The first two are directly and immediately connected to people's material well-being . The other four are indicators and controls that profoundly influence the economy's direction . Real GDP " Real" means that this measure corrects for changes in the overall level of prices. " Gross" means that this measure includes the replacement of worn-out and obsolete equipment and structures as well as completely new investment

15. Real Gross Domestic Product " Domestic" means that this measure counts economic activity that happens in the country , whether or not the workers are legal residents and whether or not the factories are owned by national companies “Product" means that real GDP measures the production of final goods and services. It includes consumption goods ( things that consumers buy, take home or take out, and consume) and investment goods ( things like machine tools, buildings , highways , and bridges , that boost the country's capital stock and productive capacity). It also includes government purchases: things that the government (acting as our collective agent) buys and uses. Real GDP divided by is an imperfect measure of how well the economy produces goods and services that people find useful--the necessities , conveniences, and luxuries of life. It says nothing about the relative distribution of the nation's economic product. It measures market prices, not user satisfaction , it is an imperfect measure of material well-being.

16. Real Gross Domestic Product

17. The Unemployment Rate The number of unemployed people divided by the total labor force The unemployment rate is the best indicator of how well the economy is doing relative to its productive potential.

18. The Inflation Rate A third key economic indicator is the inflation rate A very high inflation rate--more than 20 percent a month, say--can cause massive economic destruction, as the price system breaks down and the possibility of using profit- and-loss calculations to make rational business decisions vanishes. Such episodes of hyperinflation are among the worst economic disasters that can befall an economy. Strangely, moderate inflation rates--a little more than 10 percent a year, say--are highly unsettling to consumers and business managers. Moderate inflation should not seriously compromise consumers', investors', and managers' ability to determine the best use of their financial resources or to calculate profitability. Yet all these groups are strongly averse to it. Politicians in the industrialized economies have discovered that if they fail to preside over low and stable inflation rates then they are likely to lose the next election.

19. The Inflation Rate

20. The Interest Rate Though economists speak of "the" interest rate, there are actually many different interest rates applying to loans of different durations and different degrees of risk. The different interest rates often move up or down together so that economists speak of the interest rate , referring to the entire complex of different rates. But interest rates do not move in concert all the time. The causes of variations in the yield curve , which describes the pattern of interest rates, are an important part of macroeconomics. Whenever interest rates are low--that is, when money is "cheap"--investment tends to be high , because businesses find that a wide range of possible investments will generate enough cash to pay the interest on borrowed money, repay the principal of the loan, and still produce a profit.

21. The Stock Market The level of the stock market is the key economic indicator you hear about most often you hear about it every single day unless you try hard to avoid the news . The level of the stock market is an index of expectations for the future. When the stock market is high, investors expect economic growth to be rapid, profits to be high, and unemployment to be relatively low.

22. The Stock Market

23. The Exchange Rate The sixth and last key economic quantity is the exchange rate. The nominal exchange rate is the rate at which the money of different countries can be exchanged one for another . The real exchange rate is the rate at which the goods and services produced in different countries can be exchanged one for another. The exchange rate governs the terms on which international trade and investment take place . When the domestic currency is appreciated , its value in terms of other currencies is high. Foreign-produced goods are relatively cheap for domestic buyers, but domestic- made goods are relatively expensive for foreigners. In these circumstances imports are likely to be high; exports are likely to be low. When the domestic currency is depreciated, the opposite is the case. Domestically-made goods are cheap to foreign buyers . Thus exports are likely to be high. But domestic consumers' and investors' power to purchase foreign-made goods is limited. Thus imports are likely to be low.

24. The Exchange Rate

25. Economy And Basic Economic Activities An economy is the system of earning livelihood (Brown). An economy is just a group of people dealing with one another as they go about their lives. Another more common definition: Economy is a system of four basic economic activities such as : production, distribution, consumption and investment of goods and services. Production is transformation of inputs into output/finished products. It is creation or addition of utilities. We can not produce matter. Matters are free gift of nature. We make them more useful by transforming them into finished goods. Consumption is use of goods and services. It is destruction or decrease in utility in a particular commodity. Investment also called captain formation is the production of new capital goods . It is addition to existing capital stock of a society or economy. Distribution is the sharing of produced goods and services among the various individuals that comprises a society.

26. Circular Flow (Two Sector Model)

27. Classification of Goods and Services

28. Some Basic Concepts Consumption Goods: Consumption Goods are goods and services used directly by individuals/households for satisfaction of wants. Capital Goods/investment goods: Investment/capital goods are goods used in the manufacture of other goods. These are goods used for future/further productive activities such as roads, buildings, roads and bridges, transport equipments Intermediate goods: Intermediate goods are goods that have to pass through further production process or meant for resale during an accounting year. These are goods meant neither for consumption nor for investment. e.g. Raw materials , fuels, electricity etc. Intermediate goods are not considered in the calculation of national income. Final goods: Final goods consists of consumption goods and investment goods. Final goods are considered in the calculation of national income.

29. Some Basic Concepts

30. Some Basic Concepts Concepts of Capital formation or investment: GROSS DOMESTIC CAPITAL FORMATION : Gross Domestic capital formation is value of newly produced capital goods during an accounting year. Thus, Gross Domestic Capital Formation = Gross Domestic Fixed Capital formation + Change in stock Where, gross domestic fixed capital formation is the value of newly produced fixed capital goods i.e. assets within the country such as: roads, buildings, roads and bridges, transport equipments machineries and equipments. Change in stock is the change in stock of inventories of raw materials, finished and semi-finished goods lying with the producers at the end of accounting year NET DOMESTIC CAPITAL FORMATION = Gross Domestic Capital Formation– Depreciation Where, Depreciation or Consumption of Fixed Capital is decrease in the value of fixed capital assets due to normal wear and tear out.

31. GROSS DOMESTIC CAPITAL FORMATION

32. Some Basic Concepts Export : Export is s ale of goods and services to foreign countries. Import : Import is purchase of goods and services from foreign countries. Net Export: = Export – Import Net factor income from Abroad (NFIA) = factor income received from abroad – factor income paid to abroad. Direct Taxes: Direct Taxes are taxes imposed on income and capital. Indirect taxes: Indirect taxes are Taxes imposed on goods and services. Subsidies : Subsidies are economic grants provided to certain cover up the losses suffered when cost of production is more than the market prices. Net Indirect Tax = Indirect Tax – Subsidies Transfer payments or non-factor income: Transfer payments are payments received without contributing anything to production process e.g. unemployment benefits, old-age benefits, taxes, windfall profits from speculation activities say lottery , pocket money, gifts etc.

33. Some Basic Concepts

34. Some Basic Concepts Factor Income: Factor incomes are the incomes generated and earned by the owners of factors of production. These includes wages, rents, interest, profits etc.

35. Factor Income

36. Some Basic Concepts Producing Sector of the Economy : In order to determine the output of the economy , the economy is classified into three broad industrial sectors such as primary sector , secondary sector and tertiary sector. Primary sector includes Agriculture Mining and quarrying Fishing and Animal Husbandry Secondary Sector which includes o Construction Manufacturing Tertiary sectors which includes o Transportation, communication, storage and other public utilities Trade Hotels and restaurants Banking , insurance and finance o Professions and business services including accounting; software development; data processing services; business and management consultancy ; architectural, engineering and other technical consultancy; advertisement and other business services real estate and Ownership of dwellings Public administration and defence Other services including education, medical and health, religious and other community services, legal services, recreation and entertainment services

37. Producing Sector of the Economy

38. Concept Of National Income The value of aggregate output produced by different sectors during a given time periods . In real terms—it is the flow of goods and services produced in an economy in a particular period a year .

39. Concept Of National Income

40. Concepts Associated with National Income

41. Concepts Associated with National Income Distinction between Gross National Product and Gross Domestic Product – Gross National Product (GNP) is different from Gross Domestic Product (GDP) in following respects : (a) GNP refers to the total market value of all the final goods and services produced in a country During a given year, plus net factor income from a broad . But GDP refers to the total market value of all the goods and services produced in the given year With in the domestic territory of the country . (b) GNP includes all income earned by the country in abroad (including foreign investments). But GDP does not include the income earned by the country from abroad .

42. Concepts Associated with National Income

43. Concepts Of National Income  

44. Concepts Of National Income

45. Gross National Product (GNP) at market price: Gross National Product at market price is total money value of all final goods and services produced annually in a country plus net factor income from abroad.   Thus, GNP at Market price = GDP at Market price + NFIA = C + I g + G + (X-M) + NFIA Where, NFIA is net foreign income from abroad Net Domestic Product (NDP) at market price: Net Domestic Product at market price is the money value of all final goods and services produced within the country after providing for depreciation. Algebraically, NDP at market = GDP at Market price – Depreciation =C + I g + G + (X-M) – D = C + ( I g – D )+ G + (X-M) = C + I n + G + (X-M) Here , D is deprecation I n is net domestic capital formation or investment

46. Gross National Product (GNP)

47. Net National Product (NNP) at market price: Net National Product at market price is the money value of all final goods and services of a country after providing for depreciation. Thus, NNP at Market price= GNP at market price – Depreciation = NDP at market price + NFIA = C + Ig + G + (X-M) + NFIA – D = C + ( Ig – D )+ G + (X-M) + NFIA = C + I n + G + (X-M) + NFIA Here, D is deprecation I n is net domestic capital formation or investment

48. Net National Product (NNP) at market price

49. Domestic Factor Income or Net Domestic Product at Factor Cost Domestic Factor Income or Net Domestic product at factor cost is the sum total factor income generated and earned by suppliers/owners of factors of production within the domestic territory of country during a year. Domestic Factor Income or NDP at factor cost = Wages and salaries in kind and cash + contribution to social securit y + Rents including imputed rents + royalties + Interests + undistributed Profits + dividends + Mixed incomes of self-employed

50. Domestic Factor Income or Net Domestic Product at Factor Cost National Income (NI) or NNP at Factor Cost : National Income (NI) or NNP at Factor Cost is the sum total factor income generated and earned by suppliers/owners of factors of production in a country during a year. National income or NNP at factor cost = Domestic Factor Income + Net factor income from abroad = Wages and salaries in kind and cash + contribution to social security + Rents including imputed rents + royalties + Interests + undistributed Profits + dividends + Mixed incomes of self-employed + Net factor income from abroad

51. Relationship between NDP at market price and NDP at factor Cost Had there been no government intervention in the economy, both NDP at market price NDP at factor Cost would have been equal to each other. As the government interferes with the economy through imposition of indirect taxes on goods and services, and provision of subsidies to productive enterprises, these cause market prices of output to be different from the factor income resulting from it. Hence, there arises difference between NDP at market price and NI (NDP at factor cost). In accounting sense, NDP at factor cost - subsidies = NDP at market price – indirect taxes NDP at factor cost = NDP at market price – indirect taxes + subsidies Similarly, GDP at factor cost = GDP at market price - indirect tax + subsidies NNP at factor cost = NNP at market price - indirect tax + subsidies GNP at factor cost = GNP at market price – indirect taxes + subsidies

52. Measurement Of National Income There are three alternative ways of estimating National Income of a country. Broadly it may be viewed from income side, output side and expenditure side .

53. Measurement Of National Income

54. Method Of Measurement Of National Income

55.   Value added Method or Product Method of Measuring National Income Value added method adds up valued added by all productive sectors of the sectors of the economy annually. It measures final money value of all goods and services produced in a country during a year.   The mains steps involved in value method are as follows: Step I: Identification and classification of production units located within the economic territories into three distinct industrial sectors on activity basis such as: primary, secondary and tertiary sectors. Final value of goods and services produced by these sectors are measured.   Step II: Estimation of Value Added by each production units in the industrial sector. For this the following information are collected   Value of output Intermediate consumption   Now, valued added = Value of Output – Intermediate consumption    

57. Value added Method or Product Method of Measuring National Income

58. Income Method of Measuring National Income Income Method sums up all the factor incomes earned by suppliers /owners of factors of production annually. Factor of productions are engaged in production process and remunerated for their contribution. The mains steps involved in production method are as follows: Step I: Identification and classification of production units located within the economic territories into three distinct industrial sectors on activity basis such as: primary, secondary and tertiary sectors.   Step II: Classification of factor income earned by each factor separately in different sector of the economy. Factor incomes includes income from work which includes wages and salaries in kind, contribution to social security income form ownership which includes rents, royalties and interests Income from control of property i.e. profits which includes dividends and undistributed profits mixed incomes of self employed net factor income from abroad ( NFIA)

59. Step III: Estimation of National Income. Factor incomes paid out by each industrial sector are ascertained. Summation of factors income paid out by all the industrial sectors NDP at factor cost. By adding NFIA to NDP at factor cost, we arrive at national income.   i.e. NDP at factor cost Domestic Factor income= wages and salaries in kind and cash + contributions to social security + rents including imputed rents + royalties + interests + dividends + undistributed profits + mixed incomes Adding NFIA with NDP at factor cost, we arrive at NNP at factor cost or national income. i.e. NDP at factor cost + NFIA = NNP at factor cost or National Income

60.   Final Expenditure Method of Measuring National Income Final Expenditure Method sums up expenditure incurred by different economic units on final output (final goods and service) of the economy annually. The mains steps involved in final expenditure are as follows: Step I: Identification and classicisation of economic units into household sector , producer sector, government sector and rest of the world sector. Step II: Classification of final expenditure. Final expenditure are classified as Final consumption expenditure by household sector Gross domestic capital formation by producer sector Government final expenditure Net exports =Export –Import

61.   Step III: Estimation of Gross Domestic Expenditure (GDE) and Gross National Expenditure (GNE). Final expenditures are summed up to arrive at GDE . GDE is equivalent to GDP at market price. Thus, GDE = GDP at market price = Private final consumption expenditure + Gross domestic private capital formation + Government final expenditure + Net Exports Adding net factor income from abroad (NFIA) to GDE, we arrive at GNE or GNP at market price. That i.e. , GNE = GNP at market price = GDE + NFIA

62. Final Expenditure Method of Measuring National Income

63. Usefulness of National Income estimates It shows how the production is changing, to output and the effects of government policies and programmes . In analyzing the relation between input of one industry and the output of the other . It reveals the distribution of income among economic units . Changes of tastes and fashion are revealed which help business men in deciding what to Produce or for whom to produce . The national income quantum indicates the ability of a country to pay its share for international purpose e.g. membership of IMF or World Bank .

64. Usefulness of National Income estimates

65. Difficulties in Estimating National Income

66. Difficulties in Estimating National Income

67. National Income And Economic Welfare Many things (pollution cost, disseminates of modern urban living, leisure etc.) that contribute to Human welfare are not included in the GNP (Gross National Product ). GNP may not adequately reflect changes in the quality of products . GNP does not measure the quality of life . Increase in the general price level would bring a fall in the economic welfare . If the net National Product has increased on account of more production of capital goods, it will not increase welfare . Welfare also depends upon the distribution of National Income . The unequal distribution of National Income decrease economic welfare .

68. National Income And Economic Welfare

69. References Engineering Economic Analysis –NPTEL http://nptel.ac.in/courses/112107209/ Engineering Economics http://www.inzeko.ktu.lt/index.php/EE Fundamentals of Economics and Management Institutes of Cost Accountants of India www.icmai.in Modern Economics : Dr. H. L. Ahuja Principles for Macro-economics- C Rangarajan

70. Thanks…