Basics of Macro Economics

1. Macro Economics
Dr.Sivasubramanian.K
Assistant Professor, Dept. of Economics
Kristu Jayanti College (Autonomous)
Bangalore-560077

2. Meaning & Definition:
According to Blaug, Mark, “Macroeconomics is a branch of economics dealing with the
performance, structure, behavior, and decision-making of an economy as whole rather than
individual markets. This includes national, regional, and global economies”.
“Macro Economics deals with aggregates of output, income, price level, consumption,
investment and savings”
Difference between Micro & Macro Economics
Micro Economics Macro Economics
Micro economics is the study of decisions that people
and businesses make regarding the allocation of
resources and prices of goods and services
Macroeconomics is the field of economics that studies the
behavior of the economy as a whole and not just on specific
companies, but entire industries and economies.
Studies the problems of individual economic units such
as a firm, an industry, a consumer etc.
Studies economic problems relating to an economy viz.
national income, total savings etc.
Studies the problems of price determination, resource
allocation etc
Studies the problems of economic growth, employment and
income determination etc
While formulating economic theories, micro economics
assumes that other things remain constant
Economic variables are mutually inter-related
independently
Micro economic study is what will be the consequence of
increase in salary of an individual will have on his or her
purchasing power
Macroeconomics study what will be the consequence of
higher inflation on growth of the economy or how rise in
gross domestic product will help in generating employment
opportunities.

3. Basic Macro Economic Concepts
Output and Income:
National output is the total value of everything a country produces in a given time
period. Since everything that produced and sold produces income, output and
are usually considered to be equivalent and the two terms are often used
interchangeable.
Output can be measured as total income, or it can be viewed from the production
and measured as the total value of final goods and services. Macroeconomic output
usually measured by Gross Domestic Product.
Unemployment:
The amount of unemployment in an economy is measured by the unemployment
rate, the percentage of workers without jobs in the labour force. The labour force
only includes workers actively looking for jobs. People who are retired, students are
excluded from the labour force.

4. Types of Unemployment
Structural unemployment occur throughout an economy. Structural unemployment is caused
by shifts in the economy, improvement in technology and workers' lack of requisite job skills,
which makes it difficult for workers to find employment
Frictional unemployment is a type of unemployment. It is sometimes called
search unemployment and can be based on the circumstances of the individual. It is time
between jobs when a worker is searching for a job or transitioning from one job to another
Cyclical unemployment: When the economy enters a recession, many of the jobs lost are
considered cyclical unemployment. For example, during the Great Depression, the
unemployment rate surged as high as 25%.
Seasonal unemployment occurs when people are not working because their jobs only exist at
some times of the year. Agricultural and construction workers are examples of this type of
unemployment.
Voluntary unemployment is defined as a situation where the unemployed choose not to
a job at the going wage rate
Involuntary unemployment occurs when those who are able and willing to work at the going
wage rate do not get work.
Demand deficient unemployment occurs when there is insufficient demand in the economy

6. Demand-pull inflation is asserted to arise when aggregate demand in an economy
outpaces aggregate supply. It involves inflation rising as real gross domestic product rises
and unemployment falls, as the economy moves along the Phillips curve. This is
described as "too much money chasing too few goods."
Inflation
A general price level increase across the entire economy is above the full employment
level as called inflation. It can be measured by price indexes. Inflation can occur when
an economy becomes overheated and grows too quickly. (Too much of money
chasing too few goods)

7. Cost-Push Inflation
Cost-push inflation occurs when overall prices increase (inflation) due to
increases in the cost of wages and raw materials. Higher costs of
production can decrease the aggregate supply (the amount of total
production) in the economy. Since the demand for goods hasn't changed,
the price increases

8. Deflation
In economics, deflation is a decrease in the general price level of goods and
services. Deflation occurs when the inflation rate falls below 0% (a negative inflation
rate). Inflation reduces the value of currency over time, but deflation increases it.
Business Cycle:
The business cycle, also known as the economic cycle or trade cycle, is the downward
and upward movement of gross domestic product (GDP) around its long-term growth
trend. The length of a business cycle is the period of time containing a single boom
contraction in sequence

9. Aggregate Demand and Aggregate Supply:
The aggregate demand–aggregate supply model is a macroeconomic model that explains
price level and output through the relationship of aggregate demand and aggregate supply

10. Concept of National Income:
National income means the value of goods and services produced by a country during a financial year. Thus, it
is the net result of all economic activities of any country during a period of one year and is valued in terms of
money. The National Income is the total amount of income accruing to a country from economic activities in a
years time. It includes payments made to all resources either in the form of wages, interest, rent, and profits.
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and
services produced within the domestic territories of a country in a specific time period, often annually.
GDP = C + I + G + (X – M)
GDP at Market Price: it includes the final value of goods and services also includes indirect taxes and
excludes the subsidies given by the government.
GDP at factor cost: is the money value of goods and services based on the cost involved in the process of
production
GDP at Factor Cost= GDP at Market Prices-indirect taxes+subsidies

11. Gross National Product (GNP)
GNP is aggregate final output of citizens and businesses of an economy in a year
GNP=GDP+NFIA (Net Factor Income from Abroad)
NFIA= difference between income received from abroad for rendering factor services and
income paid towards services rendered by foreign nationals in the domestic country.
NDP
Net Domestic Product= GDP-Depreciation
Net National Product (NNP)
GDP-Depreciation+NFIA or GNP-Depreciation
Per Capita Income (PCI)
Per Capita Output
(PCO)

12. Significance of Macro Economics
1. It helps to understand the problems faced by the various countries
2. To understand the functioning of economic system
3. Helps in formulation of economic policies
4. It assists in dealing with the problem of allocation of goods and services
5. It helps in understanding the business cycle
6. It helps in analyzing the effects of inflation and deflation
7. It helps to analyze the GDP and economic growth of any nation
Economic growth
An increase in the production of economic goods and services, compared from one
period of time to another. It can be measured in nominal or real (adjusted for inflation)
terms

13. Limitations and Demerits of Macro Economics
1. No importance to Individual Units. Under macro economics, in
comparison to individual units, a group of units is given more
importance.
2. Again, macroeconomics suffers from excessive thinking in terms of
aggregates, as it may not be always possible to have the homogeneous
constituents.
3. It may, however, be remembered that macroeconomics deals with such
aggregates as aggregate consumption, saving, investment and income, all
composed of heterogeneous quantities. Money is the only measuring rod.
But the value of money itself keeps on changing, rendering economic
aggregates immeasurable and incomparable in real terms. As such, the
sum or average of heterogeneous individual quantities loses their
significance for accurate economic analysis and economic policy
4. Difficulty in Measuring Aggregates.

15. The consumption function refers to income consumption relationship. It
is a “functional relationship between two aggregates, i.e., total
consumption and gross national income.” Symbolically, the relationship
is represented as, C= f (Y), where С is consumption, Y is income, and f
is the functional relationship. Thus the consumption function indicates a
functional relationship between С and Y, where С is the dependent and
Y is the independent variable, i.e., С is determined by Y. This
relationship is based on the ceteris paribus (other things being equal)
assumption, as such only income consumption relationship is
considered and all possible influences on consumption are held constant

16. Technical Attributes of the Consumption Function
The consumption function has two technical attributes or properties: (i) the
average propensity to consume (APC), and (ii) the marginal propensity to consume
(MPC).
Average Propensity to Consume
“The average propensity to consume may be defined as the ratio of consumption
expenditure to any particular level of income.” It is found by dividing consumption
expenditure by income, or APC = C/Y, where C = Consumption and Y = Income. It is
expressed as the percentage or proportion of income consumed
Marginal Propensity to Consume
“The marginal propensity to consume may be defined as the ratio of the change in
consumption to the change in income or as the rate of change in the average
propensity to consume as income changes.” It can be found by dividing change in
consumption by a change in income, or MPC = DC/DY, where D denotes change
(increase or decrease), C = Consumption and Y = Income.