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Macroeconomics e content
1. Circular Flow of Income
Shri Ramswaroop Memorial University, Barabanki, 225003
Dr Veena Singh, Assistant Professor ,Faculty of Commerce & Economics ,
Institute of Management, Commerce &Economics
E-Mail : Veenasingh.imce@srmu.ac.in
Prof.(Dr) Alka Singh ,Dean, commerce and economics
E-Mail:-dean.comandeco@srmu.ac.in
2. Macro Economics
ο½ Macroeconomics is a branch of economics field that studies
how the aggregate economy behaves.
ο½ In macroeconomics, a variety of economy-wide phenomena
is thoroughly examined such as, inflation, price levels, rate
of growth, national income, gross domestic product and
changes in unemployment
ο½ Useful to estimate National Income and Per Capita Income
3. National Income (N.I.)
ο½ N.I. Is the aggregate money value of goods and services
produced in a country during a particular year
ο½ It is the money value of all economic activities of a nation in
a given year
ο½ Economy is in equilibrium when income = output =
expenditure
4. National Income (N.I.)
ο½ Economic Activities in National Income
ο½ Production
ο½ Exchange
ο½ Consumption
ο½ Distribution
ο½ Above Decisions are based on Economic Agents
ο½ Households
ο½ Firm
5. National Income (N.I.)
ο½ Household
ο½ Owners of Factors of Production
ο½ Receive Income by supplying Services of Factors to Firms
ο½ Firms
ο½ Businesses who decide what, where, how and for whom to
produce to goods and services
ο½ Receive Income by selling their output to household
6. Aspects of Circular Flow of N.I.
Real Flow
ο½ Movement of Factor
services from household
to firms
ο½ Movement of Goods &
Services from firms to
Households
Money Flow
ο½ Movement of money as
payment for factor
services from firms to
households
ο½ Movement of money as
payment for goods &
services from household
to firms
7. Circular Flow of N.I.
ο½ Closed Economy
ο½ Two Sector Economy (Without Savings)
ο½ Two Sector Economy (With Savings)
ο½ Three Sector Economy
ο½ Four Sector Economy / Open Economy
8.
9. Closed Economy β Without Savings
ο½ Assumptions
ο½ 2 Sectors only β Household and Firms
ο½ Household owns Factors of Production
ο½ Household receives payment for service of factors of production
ο½ Production Activities take place in Firms Only
ο½ Both Household and Firms have ZERO Savings
ο½ No Govt Operations or International Trade
11. Closed Economy β With Savings
ο½ Assumptions
ο½ 2 Sectors only β Household and Firms
ο½ Household owns Factors of Production
ο½ Household receives payment for service of factors of production
ο½ Production Activities take place in Firms Only
ο½ No Govt Operations or International Trade
13. Closed Economy β With Savings
ο½ Savings are leakage from the circular flow of economy
ο½ Households save a part of their income in form of Bank Deposits
or financial investments etc.
ο½ Firms borrow money from banks or financial institutions thus
converting household savings into real investments
ο½ Thus savings is injected back in economy in the form of
investment
ο½ When savings are made circular flow of income is disturbed due
to leakage but is restored as real investments are made on
account of injection
16. Four Sector Model (Firms, Household,
Govt & External Sector)
ο½ Savings, Taxes, Imports are leakages and Investment, Govt
expenditure and exports are injections
ο½ Circular Flow of Economic Activities among 4 sector shows
that there will be equilibrium in all sectors when
ο½ Savings = Investments
ο½ Govt Expenditure = Taxes
ο½ Exports = Imports
17. Four Sector Model (Firms, Household,
Govt & External Sector)
ο½ To measure Circular Flow in various economies there are
various stages as follows
ο½ Production Stage β Measured by Value of Output
ο½ Income Stage β Measured by Earned Factor Income
ο½ Spending Stage β Measured by Extent of total expenditure
18. Importance of Circular Flow of Income
ο½ Gives Clear Picture of Economy
ο½ Smooth Functioning of Economy
ο½ Guidance in Restoration of Equilibrium
ο½ Helps to Find Leakages
ο½ Highlights importance of Policies (Fiscal & Monetary
Policies for equality in income & expenditure)
ο½ Comprehensive Study of Economyβs Performance