Macroeconomic

1. Concepts of Macroeconomics:-
Definition of Macroeconomics
Concepts of National Income Measurement
Macroeconomics:
Macroeconomics is concerned with the
analysis of the behaviour of the
economic system in totality.

2. Macroeconomics…..
Macroeconomics is concerned with the behaviour
of the economy as a whole with booms and
recessions , the economy’s total output of goods
and services, the growth of output, the rates of
inflation and unemployment, the balance of
payments and exchange rates. (Dournbusch &
Fischer)
Macroeconomics deals with both long run
economic growth and the Short Run Fluctuations
that constitutes the business cycle.

3. Macroeconomics….
Subject Matter of Macroeconomics:
• Determination of National Income or Circular
Flow of Income
• General Price Level and Inflation
• Business Cycle
• Stagflation
• Economic Growth
• Balance of Payment and Exchange Rate

4. National Income Accounting
Factors of Production:
• Land
• Labour
• Capital
• Organisation
Prices for Factors of Production:
• Rent
• Wage
• Interest
• Profit

5. National Income Accounting
Circular Flow
Labour, Land, Capital, Organization
Wages ,Rent, Interest, Profit
Business &
Firms
Consumption Expenditure
Flow of Goods and Services
Households

6. Circular flow of income
• The circular flow of income is a way of
representing the flows of money between the
two main groups in society producers(firms)
and consumers(households). These flows are
the part of fundamental process of satisfying
human wants.

7. National Income Accounting
Circular Flow of Income in a Two Sector Economy:
Sectors are:
• Households: Are the suppliers of Factors of Production i.e Land, Labour,
Capital & organisation or Entreprenuership. Households creates Real Flows
to the Business Firm For Production of Goods and Services. Households
are the Receiver (Consumer) of Goods & Services produced by the
Business Firms
• Business Firms: Business firms provide Money Flows in terms of price for
the factors of production. That means they pay Wages for Labour,Rent for
Land, Interest for Capital and Profit for Entrepreneurial ability or
Organisation. Business Firms produce Goods and Services for the
Households for their consumption.

8. National Income Accounting
Here we see that Money Flows from Business Firms to
Households as
Factors Payment then
Money Flows from Households to Business firm for
purchase/Consumption or receiving of Goods &
services produced by the Business Firms.
This is the Circular flow of Money or Income in between
the considered two sectors of an economy .
It is a Simplified Circular Flow of Income with an
assumption that all income which the households
receives they spend it on consumer goods and services.

9. National Income Accounting……

10. Circular Flow of Income
• The Circular Flow of Income shows how
different units in an economy interact. It
shows how household consumption is a firm’s
income, which pays for labor and other factors
of production, and how those firms provide
households with income. The Circular Flow of
Income demonstrates how Economists
calculate national income or Gross Domestic
Product.

11. Circular flow of income
• The household sector is made of people who
have unlimited wants. The household sector is
responsible for consumption and expenditure.
• The Firm Sector includes businesses and
institutions that undertake the risk of
combining scarce resources to produce goods
and services. This sector buys capital goods
with investment and pays for the factors of
production.

12. Three Sector Model of Circular flow of
Income

13. Three Sector Model of Circular Flow of
Income
The three-sector model adds the government sector to the
two-sector model.Thus, the three-sector model includes (1)
households, (2) firms, and (3) government. It excludes the
financial sector and the foreign sector. The government
sector consists of the economic activities of local, state and
federal governments. Flows from households and firms to
government are in the form of taxes. The income the
government receives flows to firms and households in the
form of subsidies, transfers, and purchases of goods and
services. Every payment has a corresponding receipt; that
is, every flow of money has a corresponding flow of goods
in the opposite direction. As a result, the aggregate
expenditure of the economy is identical to its aggregate
income, making a circular flow.

14. Four sector Economy
• The circular flow model in four sector economy
provides a realistic picture of the circular flow in an
economy. Four sector model studies the circular flow in
an open economy which comprises of the household
sector, business sector, government sector, and foreign
sector.
• The foreign sector has an important role in the
economy. When the domestic business firms export
goods and services to the foreign markets, injections
are made into the circular flow model. On the other
hand, when the domestic households, firms or the
government imports something from the foreign
sector, leakage occurs in the circular flow model.

15. Four sector Economy

16. Four sector economy
• The circular flow of income in four sector
economy can be explained by the flowing
diagram:
• From the viewpoint of the circular flow of
income, each sector has dual roles to play in the
economy; while a sector receives certain
payments from other sectors, it pays back to
those sectors as well. The circular flow of income
in different sectors can be expressed as follows: