Macroeconomics in a nutshell especially for students of JNAFAU

1. Date:13.06.18
Introduction to Economics
Macro Economics

2. Circular Flow of
Money
✤ It is assumed that the household sector
spends the entire income received
from the business sector on buying goods
and services produced by the latter.
✤ The business firms keep their
production exactly equal to
their sales, and there are no changes
in their inventories.
✤ The business sector does not
keep any undistributed money
as reserve. The money it receives by
selling goods and services to the
household sector is fully spent in making
payments as rent, wages, interest and
profits to the household sector.
Savings,
Taxes
Capital,
investment
Foreign Market
Two sector

3. The five sector model
©

4. Aggregate Demand
Aggregate demand is generated as income is transferred to spending as a
result of the circular flow of income.
✤ Income is spent on consumer goods and services ©
✤ spending on capital goods by firms (I)
✤ Spending is also generated by government when it allocates resources to public goods,
merit goods and income transfers, such as pension benefits
✤ Finally, there is 'net overseas spending', which is overseas spending on an economy's
exports of goods and services, less what the economy spends on importing goods and
services.
AD = C + I + G + (X – M)

5. AD and Price
level
✤ Trade effect- Increase in domestic
prices encourages imports and makes
exports less competitive. AD falls
✤ Liquidity- Rise in prices lowers
liquidity of HH and banks. AD falls
✤ Wealth effect- Rising interest rates
tend to reduce corporate profits and
reduce share values - again creating a
negative wealth effect. A lower price
level will, of course, have the reverse
effect, that is to create a positive
wealth effect on AD.
The AD curve slopes down
because the components of AD
are inversely related to the price
level

6. Aggregate Supply
Aggregate supply (AS) is defined as the total
amount of goods and services (real output)
produced and supplied by an economy’s
firms over a period of time. It includes the
supply of a number of types of goods and
services.
✤ Private Consumer Goods- HH consumption
✤ Capital goods- Firms consumption
✤ Public and Merit goods- Govt consumption
✤ Goods for Overseas Market- Foreign consumption

7. Macro Economic Policy
Macro Economics
Macro Economic Theory
Macro Economic theory is used to
construct models of the entire
economy at a national or regional
level
Macro-economic models also help
the economist understand how the
separate components of the macro-
economy are related.
✤ Macro-economic policy refers to how
governments and other policy makers
compensate for market failures in order
to improve economic performance and
well-being.
✤ Policy Objectives
✤ sustainable economic growth and
development,
✤ stable prices and
✤ full employment.

8. Macro Economic Problems

9. Inflation and deflation
✤ Inflation is broadly understood as the general rise in the prices
of goods and services year on year, inflation is a more complex
phenomena associated with the money supply and currency
values.
DEFLATION Demand pull inflation Cost push inflation

10. Unemployment
✤ Cyclical unemployment exists when individuals lose
their jobs as a result of a downturn in aggregate demand
(AD).
✤ Demand Deficient Unemployment- This is caused by a
lack of aggregate demand, with insufficient demand to
generate full employment.
✤ Structural Unemployment occurs when certain industries
decline because of long term changes in market condition

11. Poverty
✤ The alleviation of poverty is increasingly seen as a fundamental economic objective.
✤ Poverty creates many economic costs in terms of
✤ the opportunity cost of lost output,
✤ the cost of welfare provision, and
✤ the private and external costs associated with exclusion from normal economic
activity. These costs include the costs of unemployment, crime, and poor health.
✤ In addition, the poor have little disposable income, and so cannot spend and
generate income for firms and jobs for other individuals.

12. Equity
✤ Equity means fairness or evenness, and achieving it is
considered to be an economic objective.
✤ for most economists, equity relates to how fairly income and
opportunity are distributed between different groups in society.
✤ The opposite of equity is inequality. Inequality may exist as
✤ Inequality of income
✤ Inequality of Opportunity

13. Policy instruments
✤ Monetary policy
✤ Fiscal policy

14. Monetary
RBI
Fiscal
Government of India
METHODS
These methods maintain and
control the total quantity or volume
of credit or money supply in the
economy.
✤ Selling govt bonds in open
market to increase money supply
✤ Fixing credit % for every sector
through banks to make sure of
credit availability
Fiscal policy deals with the
taxation and expenditure
decisions of the government.
These include, tax policy,
expenditure policy, investment
or disinvestment strategies and
debt or surplus management.

15. Monetary Policy
RBI
Fiscal Policy
Government of India
OBJECTIVES
Maintaining price stability
Ensuring adequate flow of credit to the
productive Sectors of the economy to
support economic growth
Rapid economic growth
Balance of payment equilibrium
Full employment
Equal income distribution
Increase in capital formation.
Degree of Growth
To achieve desirable price level.
To achieve desirable consumption
level.
To achieve desirable employment
level.
To achieve desirable income
distribution.

16. Counting National Income
✤ National income is the total value a country’s final output of
all new goods and services produced in one year.
Understanding how national income is created is the starting point
for macroeconomics.
✤ In accounting terms, only the value of final output is
recorded. To avoid the problem of double counting, only the value
of the final stage, the retail price, is included, and not the value
added in all the intermediate stages

17. GNP
✤ Based on Nationality
Gross National Product Gross Domestic Product
GDP
✤ Based on Geographic Area

18. NNP
Net National Product
National Income

19. References
microeconomicnotes.com
economicsonline.co.uk
̌Macroeconomics Theory and Practice of HL Ahuja.
Monetary and Fiscal Policy by S. Bharathi (slideshare.net)