macro economics unit 1 for bcom bba students

Introduction
Indicators
Gross domestic product
GDP, GNP, NDP, NNP
National Income and calculations (basic)
Unemployment- causes and types
Phillips curve

1. WHAT IS MACROECONOMICS ? Macroeconomics is the branch of economics that studies the behavior and performance of an economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product and inflation. The study of macroeconomics is critical for assessing the economy’s overall performance in terms of national income.  Indicators of Macroeconomics include GDP growth rate, consumer price index, interest rate, unemployment, foreign exchange rate, Balance of payments (BOP) Compiled by Henna Punjabi 1

2. Indicators of Macroeconomics 1. Gross Domestic Product (GDP) Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health. 2. Consumer price index Consumer price index is referred to as that index that is used in calculating the retail inflation in the economy by tracking the changes in prices of most commonly used goods and services. Compiled by Henna Punjabi 2

3. Indicators of Macroeconomics 3. Interest Rate In macroeconomics, interest rate is the percentage of the principal amount that a lender charges a borrower as interest. It's a key factor in the economy and has far-reaching consequences.  Interest rates are closely linked with inflation. There is a difference between nominal interest rates and real interest rates. The real interest rate per year is equal to nominal interest rate (per year) minus inflation rate (per year). For example, imagine an economy with a 10% inflation rate. In this economy, if a lender gives an entrepreneur a $1,000 loan with 12% interest rate, 10% of the money that the borrower pays back in interest is effectively zeroed out due to inflation and the real interest rate ends up being 2%. Compiled by Henna Punjabi 3

4. Indicators of Macroeconomics 4. Unemployment Unemployment refers to a situation where a person actively searches for employment but is unable to find work. Unemployment is considered to be a key measure of the Unemployment is a key economic indicator because it signals the ability (or inability) of workers to obtain gainful work and contribute to the productive output of the economy. More unemployed workers mean less total economic production . lth of the economy.  Compiled by Henna Punjabi 4

5. Indicators of Macroeconomics 5. Foreign Exchange Rate Foreign Exchange Rate is defined as the price of the domestic currency with respect to another currency. The purpose of foreign exchange is to compare one currency with another for showing their relative values. Foreign exchange rate can also be said to be the rate at which one currency is exchanged with another or it can be said as the price of one currency that is stated in terms of another currency. Compiled by Henna Punjabi 5

6. Indicators of Macroeconomics 6. Balance of Payments The balance of payments (BOP) is the method by which countries measure all of the international monetary transactions within a certain period. Compiled by Henna Punjabi 6

7. Microeconomics & macroeconomics Interdependence of Microeconomics and Macroeconomics Economics is a single subject and its analysis is not possible by splitting it into two watertight compartments. In simple terms, microeconomics and macroeconomics are not independent of each other. Instead, they have so much common ground between them. It means that Microeconomics and Macroeconomics are interdependent. Microeconomics depends on Macroeconomics By analyzing the behavior of a group of people, the Law of Demand came into existence. The general price level prevailing in the economy has a great influence on the price of a commodity. Macroeconomics depends on Microeconomics National Income of an economy is the sum total of individual units’ incomes of the country. Aggregate Demand of an economy depends on demand of its individual household. Compiled by Henna P. 7

8. Differentiate between Micro-economics and Macro-economics Compiled by Henna P. 8 Microeconomics Macroeconomics Meaning Microeconomics is the branch of Economics that is related to the study of individual, household and firm’s behaviour in decision making and allocation of the resources. It comprises markets of goods and services and deals with economic issues. Macroeconomics is the branch of Economics that deals with the study of the behaviour and performance of the economy in total. The most important factors studied in macroeconomics involve gross domestic product (GDP), unemployment, inflation and growth rate etc. Area of study Microeconomics studies the particular market segment of the economy Macroeconomics studies the whole economy, that covers several market segments Deals with Microeconomics deals with various issues like demand, supply, factor pricing, product pricing, economic welfare, production, consumption, and more. Macroeconomics deals with various issues like national income, distribution, employment, general price level, money, and more.

9. Differentiate between Micro-economics and Macro-economics Compiled by Henna P. 9 Microeconomics Macroeconomics Business Application It is applied to internal issues. It is applied to environmental and external issues. Scope It covers several issues like demand, supply, factor pricing, product pricing, economic welfare, production, consumption, and more. It covers several issues like distribution, national income, employment, money, general price level, and more. Significance It is useful in regulating the prices of a product alongside the prices of factors of production ( labour , land, entrepreneur, capital, and more) within the economy. It solves the major issues of the economy like deflation, inflation, rising prices (reflation), unemployment, and poverty as a whole. Limitations It is based on impractical assumptions, i.e., in microeconomics, it is presumed that there is full employment in the community, which is not at all feasible. It has been scrutinized that the misconception of composition’ incorporates, which sometimes fails to prove accurate because it is feasible that what is true for aggregate (comprehensive) may not be true for individuals as well.

10. Gross Domestic Product Gross domestic product  (GDP) is the standard measure of the value of final goods and services produced by a country for a year. Gross Domestic Product or GDP is referred to as the total monetary value of all the final goods and services produced within the geographic boundaries of a country, during a given period (usually a year). Simply put, it is the market value of all the final goods and services produced within a nation within a year. Final goods and services are produced for their final user and not for further production. GDP includes goods and services produced by foreign businesses in India. GDP does not include goods and services produced by Indian citizens or businesses functioning abroad. The calculation of GDP can be done on annual basis. Compiled by Henna Punjabi 10

11. Gross Domestic Product GDP is measured in domestic currencies. Gross Domestic Product is one of the most important indicators of the economic status of a country. GDP or Gross Domestic Product is referred to by the economists as the size of an economy. GDP is used by businesses and economists to determine the economic performance of the economy as a whole. A rising GDP is an indicator that the economy is expanding and the people are spending their money, which shows an economy that is growing stronger. High GDP also helps investors in taking better investment decisions. GDP is regarded as the most important of the indicators that are used by economists all over the world for determining the growth of an economy. It takes into account the total production of the country during a year. It serves as a major factor that is used for determining the development of the economy and a very important parameter for estimating the performance of an economy. Compiled by Henna Punjabi 11

12. Gross Domestic Product Components of GDP include : Consumption Expenditure (C) Investments (I) Government Expenditures (G) Net Exports (Exports – Imports) Therefore, GDP = C + I + G + X Compiled by Henna Punjabi 12

13. Gross National Product Gross national product (GNP) refers to the total value of all the goods and services produced by the residents and businesses of a country, irrespective of the location of production. GNP takes into account the investments made by the businesses and residents of the country, living both inside and outside the country. It also takes into account the value of the products produced by the industries of the domestic origin . GNP does not take into consideration the incomes earned by the foreign nationals in the country or any products produced by a foreign company in the given country. GNP is considered as an important economic indicator by economists. It is used by them for finding solutions to the economic issues such as poverty and inflation. When income is calculated on the basis of per person irrespective of the location, GNP becomes a much more reliable factor than GDP. Compiled by Henna Punjabi 13

14. Gross National Product Components of GNP include : Consumption Expenditure (C) Investments (I) Government Expenditures (G) Net Exports (Exports – Imports) Net Income from Abroad Therefore, GNP = C + I + G + X + NIFA Compiled by Henna Punjabi 14

15. NET DOMESTIC PRODUCT (NDP) The net domestic product is defined as the net value of all the goods and services produced within a country’s geographic borders. It is considered a key indicator of economic growth of a country. The net domestic product (NDP) is calculated by subtracting the value of depreciation of capital assets of the nation such as machinery, housing, and vehicles from the  gross domestic product (GDP) . The NDP also takes into account the other factors such as obsolescence and complete destruction of the asset. The depreciation is also referred to as capital consumption allowance. If the gap between the GDP and NDP is narrower or smaller, then it is considered good for an economy. Also, it indicates economic balance. However, a wider gap between the GDP and NDP shows an increase in the value of obsolescence. Such an increase along with deterioration of the capital stock value indicates economic stagnation. The formula for NDP can be expressed as follows: NDP = GDP – Depreciation Where, NDP = Net domestic product GDP = Gross domestic product Depreciation = Depreciation of capital assets such as equipment, vehicles, housing, and more Compiled by Henna Punjabi 15

16. NET NATIONAL PRODUCT (NDP) Net national product or NNP is the market value of all the finished goods and services that are produced by citizens of a nation, living domestically and internationally during a year. Net national product is also referred to as the value that is obtained by subtracting depreciation from the gross national product (GNP). Net national product considers all the goods, products and services that are manufactured by the country’s citizens, irrespective of their location, or in other words, net national product considers products that are produced domestically and also from overseas. NNP is one of the important metrics for determining the actual growth of a nation. It measures how much the country is able to consume in a given period of time. When the net national product (NNP) of a country declines or falls, then the businesses consider moving to industries that are deemed to be recession-proof. In case there is a rise in net national product, then the businesses shift their focus on industries that are consumer led, such as travel and sales in order to generate more sales The depreciation that is calculated refers to the wear and tear of the capital assets and the depreciation of human capital is observed when there is workforce turnover. The extent of workforce turnover helps in understanding the resources that will be required to be spent by the companies in order to find new employees. The net national product can be calculated by the following formula : NNP = GNP – Depreciation Compiled by Henna Punjabi 16

17. GDP AT FACTOR COST AND MARKET PRICE By Henna

18. GDP at factor cost measures the money worth of output produced within a country's domestic constraints in a year as received by the factors of production. To obtain  GDP at market price,  indirect taxes were added and subsidies were deducted from factor cost. GDP at market price = GDP at factor cost + Indirect Taxes – Subsidies by Government Gross Domestic Product (GDP) at factor cost  is GDP at market prices minus net indirect taxes (Indirect Taxes – Subsidies). The money value of output produced within a country's domestic limits in a year, as received by the factors of production, is measured by GDP at factor cost. What is GDP at Factor Cost and Market Price ?

19. What is GDP at Factor Cost and Market Price ? Factor cost:  It is the total cost of all the factors of production consumed or used in producing a good or service. Market price:  Market price is the price at which a product is sold in the market. It includes the cost of production in the form of wages, rent, interest, input prices, profit, etc. It also includes the taxes imposed by the government and deducts the subsidies provided by the government for the producers.

20. National Income National income is referred to as the total monetary value of all services and goods that are produced by a nation during a period of time. In other words, it is the sum of all the factor income that is generated during a production year. National income serves as an indicator of the nation’s economic activity. It can be calculated by three methods such as income method, value-added method, and expenditure method. Income method is mainly based on the incomes generated by the factors of production such as labour and land. The expenditure method is based on investment and consumption, while the value-added method is mostly based on the value added to a product during the stages of production. Formula for National Income = C + G + I + X + F – D Where, C denote the consumption G denote the government expenditure I denote the investments X denote the net exports (Exports subtracted by imports) F denote the national resident’s foreign production D denote the non-national resident’s domestic production Compiled by Henna Punjabi 20

21. What is the importance of National Income? Setting Economic Policy : National Income indicates the status of the economy and can give a clear picture of the country’s economic growth. National Income statistics can help economists in formulating economic policies for economic development. Inflation and Deflationary Gaps : For timely anti-inflationary and deflationary policies, we need aggregate data of national income. If expenditure increases from the total output, it shows inflammatory gaps and vice versa. Budget Preparation : The budget of the country is highly dependent on the net national income and its concepts. The Government formulates the yearly budget with the help of national income statistics in order to avoid any cynical policies. Standard of Living : National income data assists the government in comparing the standard of living amongst countries and people living in the same country at different times. Defense and Development : National income estimates help us to bifurcate the national product between defense and development purposes of the country. From such figures, we can easily know, how much can be set aside for the defense budget. Economic policy : Economists use national income to help create fiscal plans for economic progress. Governments use national income to set tax rates and infrastructure spending. Central banks use national income to set and adjust monetary policy. Economic development : National income provides a good overview of a country's economic development. Economists use national income to track the health of an economy and forecast future growth. Inflation and deflation : National income statistics are used to implement effective anti-inflation and deflation strategies. Budgeting : The government uses national income information to create the annual budget.  Compiled by Henna Punjabi 21

22. Mcq Test Compiled by Henna Punjabi 22

23. CONSUMER PRICE INDEX BY HENNA

24. Consumer Price Index This is the index of prices of a given basket of commodities which are bought by the representative consumer. CPI is generally expressed in percentage terms. We have two years under consideration – one is the base year, the other is the current year. We calculate the cost of purchase of a given basket of commodities in the base year. We also calculate the cost of purchase of the same basket in the current year. Then we express the latter as a percentage of the former. This gives us the Consumer Price Index of the current year vis-a-vis the base year. The consumer price index or CPI is a metric that is used to measure inflation. To be specific, CPI measures retail inflation by collecting data on the prices of goods and services that are consumed by the retail population of the country. CPI meaning refers to an increase in the price level of a selected basket of goods and services over a select period of time. It is worth noting that many commodities have two sets of prices. One is the retail price which the consumer actually pays. The other is the wholesale price, the price at which goods are traded in bulk. These two may differ in value because of the margin kept by traders. Goods which are traded in bulk (such as raw materials or semi-finished goods) are not purchased by ordinary consumers. Like CPI, the index for wholesale prices is called Wholesale Price Index ( WPI ).

25. What is included in CPI ? The Consumer Price Index (CPI) tracks changes in the prices of a basket of goods and services commonly purchased by households, including food, beverages, housing, apparel, healthcare, and transportation. Here's a more detailed breakdown: Food and Beverages: This category includes items like breakfast cereal, milk, coffee, chicken, wine, full-service meals, and snacks. Housing: This includes rent of primary residence, owner's equivalent rent, utilities, and bedroom furniture. Apparel: This category includes men's shirts and sweaters, women's dresses, baby clothes, shoes, and jewelry. Healthcare: This includes medical care costs. Transportation: This includes costs related to fuel, public transport, and vehicle maintenance.

26. Calculation of Consumer Price Index For example, let us take an economy which produces two goods, rice and cloth. A representative consumer buys 90 kg of rice and 5 pieces of cloth in a year. Suppose in the year 2000 the price of a kg of rice was Rs 10 and a piece of cloth was Rs 100. So the consumer had to spend a total sum of Rs.10 × 90 = Rs.900 on rice in 2000. Similarly, he spent Rs.100 × 5 = Rs.500 per year on cloth. Summation of the two items is, Rs.900 + Rs.500 = Rs.1,400. Now suppose the prices of a kg of rice and a piece of cloth has gone up to Rs.15 and Rs.120 in the year 2005. To buy the same quantity of rice and clothes the representative will have to spend Rs 1,350 and Rs.600 respectively (calculated in a similar way as before). Their sum will be, Rs.1,350 + Rs.600 = Rs.1,950. The CPI therefore will be ( 1,950 ÷ 1,400) × 100 = 139.29.

27. Consumer Price Index

28. MACRO ECONOMICS UNEMPLOYMENT BY HENNA

29. What is Unemployment ? Unemployment is another social evil. In economics when we refer to the term unemployment, we mean involuntary unemployment, that is, a person is looking for work but not able to find a job. A person who is not looking for a job cannot be considered as unemployed. There are periods when we quit a job and look for another. At any point of time, certain fraction of workers is between jobs – such unemployment is transitory. However, there are time periods when unemployment rate is quite high. Unemployment is bad on two counts, viz., ( i ) it results in loss of income for the unemployed, and (ii) there is wastage of valuable human resources. It is generally observed that there is a trade-off between inflation and unemployment, at least in the short run. If the government wants to decrease the rate of unemployment, the economy has to tolerate a higher rate of inflation. Similarly, if the government wants to control inflation, the rate of unemployment may increase. There is considerable debate on the relationship between inflation and unemployment; and there is much difference among economists on the relationship between the two. Compiled by Henna Punjabi 29

30. What is unemployment? Unemployment denotes a situation when an individual who has attained the working age is willing to work but cannot find a job. Unemployment is defined as the condition of someone who has the operational capability and is actively looking for a job but cannot secure any job opportunity. An unemployed person, must be an active participant within the  labor force , wants a job, does not currently have one, and have actively looked for work within the past four weeks. Unemployment statistics are analyzed and gathered by the labor offices of the government in affluent nations. These statistics are regarded as the key indicator of the nation's economic health. However, statistical differences and unemployment trends among diverse groups within the population are reviewed to reveal the economic trends. However, the statistics act as the possible governmental action bases. The formal definition of unemployment is that unemployment occurs when an individual who is a labor force participant is actively looking for employment but fails to secure any employment opportunity. Unemployment is also referred to as joblessness. The government defines the workforce as including both unemployed and the employed. Moreover, unemployment is the occurrence that occurs when an individual has the functional ability and willingness to work but cannot find employment. Compiled by Henna Punjabi 30

31. CAUSES OF UNEMPLOYMENT Technological change whereby there is the invention of the workforce-saving technologies in some firms leading to the decline in demand for some forms of labor. This is because the machines will replace the labor force. Hence, hindering the creation of new employment opportunities. Reduced geographical nobilities in which an individual encounters challenges in shifting to other regions searching for employment opportunities. Changes within the workforce gear difficulties for employees to learn new skills applicable within the industry. Reduction of the labor force as a result of reduced demand for goods and services. Thus inhibiting the generation of new employment opportunities. Structural changes within the economy, for instance, the decline of the coal mines firms due to inadequate competitiveness, rendered affluent coal miners unemployed. Compiled by Henna Punjabi 31

32. EFFECTS OF UNEMPLOYMENT Unemployment has significant social, economic, and psychological consequences for individuals and society. Below are some key effects: 1. Economic Effects Lower Income & Poverty: Unemployed individuals face financial struggles, leading to a decline in their standard of living. Reduced Economic Growth: High unemployment reduces consumer spending, slowing economic growth and business expansion. Increased Government Spending: Governments spend more on unemployment benefits, welfare programs, and job support services. Compiled by Henna Punjabi 32

33. EFFECTS OF UNEMPLOYMENT 2. Social Effects Increased Crime Rates: Unemployment is linked to higher crime rates, as people may turn to illegal activities for survival. Strain on Public Services: Rising unemployment increases demand for healthcare, housing assistance, and food aid. Family & Community Stress: Joblessness leads to strained relationships, family conflicts, and social instability. 3. Psychological Effects Mental Health Issues: Unemployment contributes to stress, anxiety, depression, and low self-esteem. Loss of Motivation & Skills: Long-term unemployment can lead to a decline in skills and motivation, making it harder to re-enter the workforce. Social Isolation: Many unemployed individuals experience loneliness and withdrawal from social activities. Compiled by Henna Punjabi 33

34. PHILLIPS CURVE What Is the Phillips Curve? The Phillips curve is an economic theory that inflation and unemployment have an inverse relationship. The Phillips curve states that unemployment and inflation and have an inverse relationship; lower unemployment is associated with higher inflation and vice versa. Understanding the Phillips curve in light of consumer and worker expectations shows that the relationship between inflation and unemployment may not hold in the long run. Compiled by Henna Punjabi 34

35. PHILLIPS CURVE The concept behind the Phillips curve states the change in unemployment within an economy has a predictable effect on price inflation. The inverse relationship between unemployment and inflation is depicted as a downward sloping, convex curve, with inflation on the Y-axis and unemployment on the X-axis. Increasing inflation decreases unemployment, and vice versa. Alternatively, a focus on decreasing unemployment also increases inflation, and vice versa. Compiled by Henna Punjabi 35

36. PHILLIPS CURVE The concept behind the Phillips curve states the change in unemployment within an economy has a predictable effect on price inflation. The inverse relationship between unemployment and inflation is depicted as a downward sloping, convex curve, with inflation on the Y-axis and unemployment on the X-axis. Increasing inflation decreases unemployment, and vice versa. Alternatively, a focus on decreasing unemployment also increases inflation, and vice versa. Compiled by Henna Punjabi 36

37. Compiled by Henna Punjabi 37

38. Compiled by Henna Punjabi 38 The Phillips curve relates the rate of inflation with the rate of unemployment. The Phillips curve argues that unemployment and inflation are inversely related: as levels of unemployment decrease, inflation increases. The relationship, however, is not linear. Graphically, the short-run Phillips curve traces an L-shape when the unemployment rate is on the x-axis and the inflation rate is on the y-axis. The Phillips curve shows the inverse trade-off between inflation and unemployment. As one increases, the other must decrease. In this image, an economy can either experience 3% unemployment at the cost of 6% of inflation, or increase unemployment to 5% to bring down the inflation levels to 2%.

39. Compiled by Henna Punjabi 39 The Phillips curve shows the trade-off between inflation and unemployment, but how accurate is this relationship in the long run? According to economists, there can be no trade-off between inflation and unemployment in the long run . Decreases in unemployment can lead to increases in inflation, but only in the short run. In the long run, inflation and unemployment are unrelated. 

40. rate of unemployment, the economy has to tolerate a higher rate of inflation. Similarly, if the government wants to control inflation, the rate of unemployment may increase. There is considerable debate on the relationship between inflation and unemployment; and there is much difference among economists on the relationship between the two. Compiled by Henna Punjabi 40