Macro Economics Concepts & Importance for Economics

Marco Economics

1. SEMESTER – II Principles of Economics (Macro) DR KINJALKUMAR MISTRI

2. Unit – 1 Introduction to Macro Economics Definition & Nature of Macro Economics Uses of Macroeconomics Scope of Macro Economics Importance of Macro Economics National Income (NI) Accounting Meaning of NI and Circular Flow of NI - Various concepts of NI (GNP, GDP, NNP, and NDP), Personal Income, Disposable Income, Per Capita Income. Methods for measurement of National Income (NI) Problems in the measurement of National Income (NI) Practical : Group Discuss on “Basic Micro & Macro Economics)

3. Introduction Macroeconomics (from the Greek prefix macro- meaning "large" and economics) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole , rather than individual markets. This includes national, regional, and global economies. With microeconomics, macroeconomics is one of the two most general fields in economics.

4. Introduction Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance.

5. Definition Macro is derived from the Greek word “MAKROS” which means large. It is the study of a nation’s economy and its aggregates According to Shapiro , “Macroeconomics deals with the functioning of the economy as a whole” Prof. Ackley defines “Macro Economics deals with economic affairs ‘in the large, it concerns the overall dimensions of economic life. It looks at the total size and shape and functioning of the elephant of economic experience, rather than working of articulation or dimensions of the individual parts.

6. Uses of Macroeconomics It helps generalizing the behavior of and relationship between aggregate economic variables or also called macro variables . Macroeconomics helps government in formulating and implementing appropriate economic policies. Study of macro economics is essential even for the development of micro economics itself.

7. Basic Macroeconomic Concepts Output and Income Unemployment Inflation and Deflation

8. features of Macro Economics  It gives an overall view of the economy It explains the causes of fluctuations in the national income It helps us to study the progress of an economy in investment, total production, total employment, growth etc.

9. features of Macro Economics  It involved the study of the concept of national income, its different elements, methods of measuring and social accounting. It deals with the aggregate demand and aggregate supply that determines the equilibrium level of income, output employment in the economy

10. NATURE OF MACRO ECONOMICS Macro economics is the study of aggregates or averages covering the entire economy, such as total employment, national income, national out put, total investment, total consumption, total savings, aggregate supply, aggregate demand and general price level, wage level and cost structure. In other words, it is aggregative economics which examines the interrelations among the various aggregatives , their determination and causes of fluctuations in them.

11. NATURE OF MACRO ECONOMICS Macro Economics is also known as the theory of income and employment, or simply income analysis. It is concerned with the problems of unemployment, economic fluctuation inflation or deflation, international trade and economic growth. It is the study of the causes of unemployment and the various determinants of employment. In the field of business cycles, it concerns itself with the effect of investment on total output, total income and aggregate employment.

12. NATURE OF MACRO ECONOMICS Macro economics uses which relate them to the economy wide total. Macro economics not only deal with great aggregates and averages of the system as a whole but also attempts to define these aggregates in a useful manner and to examine how they are related and determined.

13. Scope of Macro Economics Theory of National Income Theory of Employment Marco Theory of distribution Economic development Theory of International Trade Theory of Money Theory of Business Fluctuations Theory of General Price Level

14. Importance of Macro economics In Economic Policies In General Unemployment In National Income In Economic Growth In Multi-dimensional Study In Monetary Problems In Business Cycle For Understanding the Behavior of Individual Units Helpful in understanding the functioning of an Economy Balance of Payment

15. Limitations of Macro Economics Danger of excessive thinking in terms of aggregates Aggregate tendency may not affect all sectors equally Indicates no change has occurred Difficulty in the measurement of aggregates The fallacy of composition It ignores the contribution of Individual Units Limited Application

16. NATIONAL INCOME ANALYSIS

17. National Income National income or national product is defined as the total market value of all the final goods and services produced in an economy in a given period of time. There are many concepts of national income which are used by different economists and all of which are inter-related. The total net value of all goods and services produced within a nation over a specified period of time, representing the sum of wages, profits, rents, interest, and pension payments to residents of the nation. It includes income from all the productive sectors such as Agricultural, Industrial and Service Industry.

18. Meaning & Definition of National Income Prof Pigou has defined as “National Income is that part of objective income of the community, including of course income derived from abroad which can be measured in money.” Prof Marshall defined as “The labor and capital of country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds.

19. Circular Flow of NI The circular flow of income and expenditure refers to the process whereby the national income and expenditure of an economy flow in a circular manner continuously through time. The various components of national income and expenditure such as saving, investment, taxation, government expenditure, exports, imports etc.

20. Household Sector The household sector of an economy provides factor services to the firms, government, and the foreign sector for which it received factor payments in return. Besides factor payments, the households also receive transfer payments like old age pensions, scholarships, etc., from the government and foreign sector. The household sector spends its earned income on Payments for goods and services purchased from firms, payments for imports, and tax payments to the government.

21. Firms   The firms receive revenue for the sale of goods and services from the government, households, and foreign sectors. They also receive subsidies from the government to produce goods and services. Besides, the firms make payments for taxes to the government, factor services to the households, and imports to the foreign sector. 

22. Government   The government receives revenue for the sale of goods and services, fees, taxes, etc., from the firms, households, and the foreign sector. It also makes factor payments to households and spends its revenue on transfer payments and subsidies. 

23. Foreign Sector The foreign sector receives revenue for the export of goods and services from firms, households, and the government. It also makes payments to firms and the government for the import of goods and services, and households for the factor services. 

24. Various concepts of NI GNP (Gross National Product.) GDP (Gross Domestic Product) NNP (Net National Product) Personal Income Disposable Income Real Income Per Capita Income

25. GNP (Gross National Product.) GNP is defined as the aggregate market value of all final goods and services including productive assets in an economy produced by the nationals of a country during a particular year. GNP is calculated by multiplying quantities of various goods and services by their market prices and adding them together. Plus we have to add income earned from abroad during the year.

26. Characteristics of GNP Monetary measure Final Goods and services Production during a particular year Production by nationals

27. GDP (Gross Domestic Product) The concept of GDP is similar to GNP. There is no significant difference between the two. As GNP includes incomes received by residents from abroad and excludes income which is produced locally but accrues to the non-residents whereas in case of GDP, it is just the other way round. It includes the incomes produced locally but accruing to non residents and excludes the incomes received from abroad by the residents In short GDP means the value of all final goods and services produced within the geographical boundaries of a country irrespective of whether these goods are produced by nationals or foreigners

28. GDP (Gross Domestic Product) Relationship between GDP and GNP: GNP = GDP + Net factor Income from abroad Where: Net factor Income from abroad = Factor income Received from abroad – Factor income paid abroad

29. NNP (Net National Product) In the production of goods and services during a year we use up or consume some capital, i.e. equipment, machinery etc. The capital goods like machinery wear out or fall in value as a result of their use in production process. This consumption of fixed capital or fall in value of capital due to wear and tear is called depreciation. Net National Product = Gross National Product (GNP) – depreciation,

30. Personal Income Personal Income is defined as the total of income received by persons from all sources. It includes wages and salaries, fees and commissions, bonus, interest, earnings from self-employment and dividends. It also includes transfer income (transfer payments) such as pensions, family allowances, unemployment allowances, sickness allowances, old age benefits etc. Personal Income = NI – Social security contribution – corporate income tax – undistributed corporate profits + transfer payments.

31. Disposable Income Disposable income is that part of total income which the individuals are free to spend. A part of personal income actually received is transferred to government by way of direct taxes such as income tax, professional tax etc. Only that part of money which remains with the income earners after payment of these taxes is the actual amount available for spending. Thus disposable income is equal to Personal Income minus direct taxes. Disposable Income = Personal Income – Direct Personal Taxes (including taxes, fines and other compulsory payments)

32. Real Income Real Income of an individual consists of the goods and services that he purchases with his money income. It can be understood as the purchasing power of the individual measured in terms of goods and services. Real Income depends on prices. It rises inversely with the price level. Money income being constant Real income can change according to rises and decline of the prices.

33. Per Capita Income The term per capita income refers to the income per head of population. It is the average income of the individuals of a country in a particular year. Thus per capita income can be calculated by dividing National Income of a particular year by the actual size of population of that particular year. National Income Per Capita Income = ------------------------ Population

34. Methods of Measuring National Income Since factor income arise from production of goods and services and since incomes are spent on goods and services produced national income can be measured by following three methods Product Method or Output Method (Production Method) Income Method Expenditure Method

35. Product Method or Output Method (Production Method) the output method or production method considers the value of goods and services produced during a year in a country. The output method consists of following four stages. Calculating Domestic Output Value of Intermediate Goods/Services and Depreciation Calculating Net Domestic Output Adjustment for income from Abroad

36. Product Method or Output Method (Production Method) Y = (P-D) + (S-T) + (X-M) + (R-P) Where, Y = Total Income P = Total value of final production D = Depreciation allowances S = Subsidy T = Indirect Taxes X = Exports M = Imports R = Receipts from abroad P = Payments made abroad

37. Income Method The income method considers the income earned by the factors of production in the process of producing/ delivering goods and services. It is also called National Income at factor cost. Here income earned by all factors of production is summed up. Following are the various incomes to be included while calculating National Income.

38. Income Method Wages and Salaries. Compensation of employees. Supplement income like employer’s contribution to social security. Dividends Undistributed corporate profits Earnings of self employed population Interest Rent Surplus of public enterprises Net income from abroad

39. Income Method Y = (W+I+R+) + (X-M) + (R-P) Where, Y = Total Income W = Wages I = Interest R = Rent = Profits X = Exports M = Imports R = Receipts from abroad P = Payments made abroad.  

40. Expenditure Method Under this method, we estimate the disposal of income on the purchase of final goods and services. It includes (a) Personal consumption expenditure of households. (b) The gross private domestic investment i.e. business spending On capital goods. (c) The net foreign investment i.e. net spending by foreign Nationals and firms for the country’s goods and services. (d) Government purchases of goods and services.

41. Expenditure Method Y = (C+I+G) + (X-M) + (R-P) Where, Y = Total Income C = Consumption I = Investment G = Government services X = Exports M = Imports R = Receipts from abroad P = Payments made abroad

42. Difficulties in Measurement of National Income Non-monetized transactions Illiteracy Incomplete occupational specialization Lack of adequate data Value of inventories Calculation of depreciation Problem of double counting Illegal activities

43. Group Discuss on “Basic Micro & Macro Economics https://youtu.be/hTqmT7Lr_us