macro economics part 1 notes

1. Module – 1:- MACROECONOMICS
Introduction to Economics:-
Economics is one of those words that can be seen regularly in the newspapers and on TV news shows. Most people
have some vague idea of what the word economics means and in subsequent paragraphs an attempt has been
made to describe Economics and its few concepts.
Economics is the social science studying the production, distribution and consumption of goods and services. It is a
complex social science that spans from mathematics to psychology. At its most basic, however, economics considers
how a society provides for its needs. Its most basic need is survival; which requires food, clothing and shelter.
The term economics comes from the Ancient Greek oikonomia, "management of a household, administration"
from oikos, nomos, "custom" or "law", hence "rules of the house (hold)".
Economics has been studied since sixteenth century and is the oldest of the social studies. Most of the business
disciplines arose in attempt to fill some of the institutional and analytical gaps in the areas with which economics
was particularly well suited to examine. The subject matter examined in economics is the behavior of consumers,
businesses, and other economic agents, including the government in them production and allocation processes.
Therefore, any business discipline will have some direct relation with the methods or at least the subject matter
with which economists deal.
So, Economics is the study of the allocation of scare resources to meet unlimited human wants.
In other words, economics is the study of human behavior as it pertains to the material well-being of people (as
either individuals or societies).
Adam Smith, generally known as the father of Economics defined Economics as ‘science of wealth’.
Robert Heilbroner describes economics as a "Worldly Philosophy."
It is the organized examination of how, why and for what purposes people conduct their day-today activities,
particularly as relates to the production of goods and services, the accumulation of wealth, earning incomes,
spending their resources, and saving for future consumption. This worldly philosophy has been used to explain most
rational human behavior.
Economics is best described as the study of humans behaving in response to having only limited resources (scare
resources) to fulfill unlimited wants and needs. Scarcity refers to the limited resources in an economy.
The concept of Economics has been changing during different stages of developing Economics as subject. The
different stages are as follows:-
1. Wealth Concept:- During the eighteenth and the early part of nineteenth century, classical economists, such as
Adam Smith, J.B. Say and Walkar defined Economics as the science of wealth. Adam Smith systematized the concept
in the form the book which was entitled as ‘‘an enquiry into the nature and cause of the wealth of nations.’’ These
economists stated that Economics is related to and concerned with wealth.
1 BY: VIKRAM.G.B
Lecturer, P.G Dept of Commerce
Vivekananda Degree College, Bangalore-55

2. Excessive emphasis on wealth enabled the businessmen and industrialists to amass wealth by any means, whether
fair or foul. Social reformers like Thomas, Carlyle, John Ruskin, Charles Dickens and William Morris reacted sharply
to the wealth concept of Economics. They branded Economics as a dismal science, gospel of Mammon and science
of bread and butter etc. Wealth concept of Economics was bitterly criticized, because it assumed wealth as an end
of human activities. If it is accepted in life, there will be no place for love, affection, sympathy and patriotism.
2. Welfare Concept:- According to this concept, Economics is not the science of wealth but it is concerned with
human welfare. It studies and emphasizes wealth as a means of satisfying human wants, not as an end of human
activities. Marshall was the pioneer of welfare thought. According to him, ‘‘Political Economy or Economics is the
study of mankind in the ordinary business of life. Thus it is on the one side a study of wealth and on the other, and
more important side a part of the study of man.’’ The important feature of welfare concept is Economics is the
science of human welfare.
Welfare concept was also criticized by the pioneers of ‘Scarcity Concept’. According to these economists, it will be
an injustice to the subject, if it is restricted to ordinary business of life, concerned with economic activities and
related to human welfare only.
3. Scarcity Concept:- The profounder of this concept was ‘Lionel Robbins’. According to him, ‘‘Economics is the
science, which studies human behaviors as a relationship between ends and scarce means which have alternative
uses.’’ The important features of this concept are:
(i) Economics is a positive science. (ii) Economics is the study of human behavior. (iii) Our wants are unlimited.
(iv) Our resources are limited/scarce. (v) Resources can be put to alternative uses.
According to this approach certain universal truth are regarded as the basis of economic problems. Every individual
and economy has unlimited wants and scarce means to satisfy these wants. Inability to satisfy unlimited wants with
limited resources creates the problems of choice making i.e., fixing priority of wants to be satisfied. As resources can
be put to alternative uses, we will have to take decision as to which specific want should be satisfied with particular
means. In this way, choice making or decision making is the means of tackling all these economic problems.
4. Development Concept:- Scarcity concept explains the presence of economic problems. It is concerned with the
positive aspect of the subject. The profounder of this concept is Professor Samuelson, who presented the growth-
oriented definition of Economics. According to him, ‘‘Economics is the study of how man and society choose, with or
without the use of money to employ scarce productive resources, which could have alternative uses, to produce
various commodities over time and distribute them for consumption now and in the future among various people
and groups of society.
The important features of this concept may be summarized as under:
(i) Problem of choice making arises due to unlimited wants and scarce means. (ii) Wants have tendency to increase
in the modern dynamic economic system. (iii) Economics is not concerned with the identification of economic
problems but it should also suggest ways and means to solve the problems of unemployment, production, inflation
etc. (iv) Economists should also suggest how the resources of the economy should be distributed among various
individuals and groups.
(v) Economists should also point out the plus and minus points of different economic systems.
Economics can be classified into two general categories.
(1) Microeconomics and
(2) Macroeconomics.
2 BY: VIKRAM.G.B
Lecturer, P.G Dept of Commerce
Vivekananda Degree College, Bangalore-55

3. Microeconomics is concerned with decision-making by individual economic agents such as firms and consumers.
In other words, microeconomics is concerned with the behavior of individuals or groups organized into firms,
industries, unions, and other identifiable agents.
Macroeconomics is concerned with the aggregate performance of the entire economic system. Unemployment,
inflation, growth, balance of trade, and business cycles are the topics that occupy most of the attention of students
of macroeconomics.
Macroeconomics may be defined as that branch of economic analysis which studies the behavior of not one
particular unit, but of all the units combined together. Macroeconomics is a study in aggregates.
Scope/Field of Macroeconomics:-
The scope/field covered by macroeconomics may be set forth below:-
 Theory of Income, Output and Employment with its two constituents, namely the theory of consumption
function and the theory of investment function. The theory of business cycles is also a part and parcel of the
theory of income, output and employment.
 Theory of Prices with its constituents of the theories of inflation, deflation and reflation.
 Theory of Economic growth dealing with the long-run growth of income, output and employment as applied
to developed and underdeveloped countries.
 Macro Theory of Distribution dealing with the relative shares of wages and profits in the total national
income.
Importance of Macroeconomics:- The growing popularity of macroeconomics naturally raises the question:
why should we go in for macroeconomics? What is the main justification in having it as a distinct branch of modern
economic theory? Is not microeconomics adequate in itself? Where, then, lies the necessity of macroeconomics?
The argument may at first, appear logical. But, as we shall see, there are several pitfalls in a reasoning of this type. It
is not possible to discover the behavior of the aggregate from the behavior of individual units. But, for the present,
we are concerned with pointing out the main justification of macroeconomics.
As popularity for macroeconomics is growing few of the importance of macroeconomics are listed below:
 The study of macroeconomics becomes indispensable for the formulation and successful execution of govt.
economic policies.
 The study of macroeconomics is indispensable for understanding the working of the economy of a country.
 No science can study its entire field without attempting some sort of aggregative approach.
 The study of macroeconomics is indispensable even for the purpose of building and developing
microeconomics.
 The study of microeconomics can be defended on the ground that it is indispensable for the proper and
accurate knowledge of the behavior-patterns of the aggregate variables.
 Macro economics has afforded an inconsiderable help to govt. all over the world in formulating and
implementing appropriate economic policies.
 The study of macro economics is very important for evaluating the overall performance of the economy in
terms of national income.
3 BY: VIKRAM.G.B
Lecturer, P.G Dept of Commerce
Vivekananda Degree College, Bangalore-55

4.  The popularity of macroeconomics has greatly increased in recent years on account of the fact that it deals
with most of the controversial and challenging issues of the day, namely, Unemployment, inflation, growth,
balance of trade, and business cycles.
Difference between Microeconomics and Macroeconomics:
The difference between Microeconomics and Macroeconomics may be summarized as below:-
1. The word ‘micro’ has been derived from the Greek word ‘micros’ which means small. Microeconomics is the
study of economic actions of individuals and small groups of individuals. On the contrary, macroeconomics is
the study of aggregates. It is the study of the economic system as a whole.
2. The basis of microeconomics is the price mechanism which operates with the help of demand and supply
forces. These forces help to determine the equilibrium price in market. On the other hand, the basis of
macroeconomics is national income, output and employment which are determined by aggregate demand
and aggregate supply.
3. The main objectives of microeconomics on demand side are to maximize utility whereas on supply side is to
maximize profits at minimum cost of production. On the contrary, the main objectives of macroeconomics
are full employment, economic growth, price stability and favorable balance of payment.
4. Microeconomics is based on different assumptions concerned with rational behavior of individuals. On
contrary, macroeconomics bases its assumptions on such variables as the aggregate volume of the output of
the economy.
5. Microeconomics is based on the partial equilibrium analysis which helps to explain the equilibrium
conditions of an individual, a firm or an industry. On the contrary, macroeconomics is based on general
equilibrium analysis which is an extensive study of a number of economic variables and their interrelations
etc.
6. Microeconomics is considered as a static analysis. On the other hand, macroeconomics is considered as a
changing analysis.
Limitations of Macro Economics
Fallacy of Composition:- In Macro economic analysis the “fallacy of composition” is involved, i.e. aggregate
economic behavior is the sum total of the economy of individual activities. But what is true of individuals is
not necessarily true to the fiscal entirely. For instance, savings are a private virtue but a public vice. If total
savings in the economy increases, they may initiate a depression unless they are invested. Again, if an
individual depositor withdraws his money from the bank, there is no risk. But if all depositors simultaneously
do this, there will be a run on the banks and the banking system will be affected adversely.
To Regard the Aggregates as Homogenous:- The main defect in macro analysis is that it regards the
aggregates as homogenous without caring about their internal composition and structure. The average wage
in a nation is the sum total of wages in all professions, i.e. wages of clerks, typists, teachers, nurses etc. But
the volume of aggregate employment depends on the relative structure of wages rather than on the average
wage. If, for instance, wages of nurses increase but of typist rises much aggregate employment would
increase.
4 BY: VIKRAM.G.B
Lecturer, P.G Dept of Commerce
Vivekananda Degree College, Bangalore-55

5. Aggregate Variables may not be Important Necessarily:- The aggregate variables which form the economic
system may not be of much significance. For instance, the national income of a country is the total of all
individual income. A hike in national income does not mean that individual incomes have risen. The increase
in national income might be the result of the increase in the incomes of a few rich people in the nation. Thus
a rise in the national income of this type has little significance from the point of view of the community.
Indiscriminate Use of Macro Economics Misleading:- An indiscriminate and uncritical use of macro
economics in analyzing the complexities of the real world can frequently be misleading. For instance, if the
policy measures needed to achieve and maintain full employment in the economy are applied to structural
redundancy in individual firms and industries, they become irrelevant. Likewise, measures aimed at
controlling general prices cannot be applied with much advantage for controlling prices of individual
products.
Statistical and Conceptual Difficulties:- The measurement of macro economics concepts involves a number
of statistical and conceptual complexities. These problems relate to the aggregation of micro economic
variables. If individual units are almost similar, aggregation does not present much difficulty. But if micro
economic variables relate to dissimilar individual units, their aggregation into one aggregation into one
macroeconomic variable may be incorrect and hazardous.
National Income:-
National Income is defined as the sum total of all the goods and services produced in a country, in a particular
period of time. Normally this period consists of one year duration, as a year is neither too short nor long a period.
National product is usually used synonymous with National income.
In estimating national income, only productive activities are included in the computation of national income. In
addition, only the values of goods and services produced in the current year are included in the computation of
national income. Hence, gain from resale is excluded but the services provided by the agents are counted. Similarly,
transfer payments are excluded as there is income received but no good or service produced in return. However,
not all goods and services from productive activities enter into market transactions. Hence, imputations are made
for these non-marketed but productive activities eg imputed rental for owner-occupied housing. Thus, national
income refers to the market value or imputed value of additional goods and services produced and services
performed in the current period.
Alfred Marshall in his ‘Principle of Economics’ (1949) defines National income as “The labor and capital of a country,
acting on its natural resources, produce annually a certain net aggregate of commodities, material and immaterial,
including services of all kinds…..and net income due on account of foreign investments must be added in. This is the
true net National income or Revenue of the country or the national dividend.”
Irving Fisher defined national income as “The national dividend or income consists solely of services as received by
the ultimate consumers, whether from their material or from human environments. Thus, a piano or an overcoat
made for me this year is not a part of this year’s income, but an addition to capital. Only the services rendered to me
during this year by these things are income.”
5 BY: VIKRAM.G.B
Lecturer, P.G Dept of Commerce
Vivekananda Degree College, Bangalore-55

6. Basic Concepts in National Income:-
> Gross Domestic Product (GDP):- Gross Domestic Product is the market value of the final goods and services
produced within the domestic territory of a country during one year inclusive of depreciation.
Gross Domestic product (GDP) refers to the total value of goods and services produced within the geographical
boundary of a country before the deduction of capital consumption.
> GDP at Constant Prices and Current Prices:- If the domestic product is estimated on the basis of the prevailing
prices, it is called GDP at current prices.
If the GDP is measured on the basis of some fixed prices, that is prices prevailing at a point of time or in some base
year, it is known as GDP at constant or real gross domestic product.
> GDP at Factor Cost and GDP at Market Price:- GDP at factor cost is estimated as the sum of net value added by
different producing units and the consumption of fixed capital, we can also estimate GDP as the sum of domestic
factor incomes and consumption of fixed capital.
GDP at Market Price is estimated by deducting the value of intermediate consumption from the value of output
produced by all the producers within the domestic territory of a country. In other words, it is estimated as the sum
total of gross value added at the market price.
> Net Domestic product (NDP):- Net Domestic Product refers to the total value of goods and services produced
within the geographical boundary of a country after the deduction of capital consumption.
Net Domestic Product at market price is the market value of final goods and services produced by all the producers
in the domestic territory of a country during an accounting year exclusive of consumption of fixed capital. It is equal
to the net value added at market price
> Gross National Product (GNP):- Gross National Product refers to the total value of goods and services produced by
productive factors owned by residents of the country both inside and outside of the country before the deduction of
capital consumption.
GNP at market price is sum total of all the goods and services produced in a country during a year and net income
from abroad. GNP is the sum of Gross Domestic Product at Market Price and Net Factor Income from abroad.
> Net National Product (NNP):- Net National Product refers to the total value of goods and services produced by
productive factors owned by residents of the country both inside and outside of the country after the deduction of
capital consumption.
> NNP at Factor Cost:- Net National Product at factor cost is also called as National income. Net National Product at
factor cost is equal to sum total of value added at factor cost or net domestic product at factor cost and net factor
income from abroad.
6 BY: VIKRAM.G.B
Lecturer, P.G Dept of Commerce
Vivekananda Degree College, Bangalore-55

7. > Private Income:- Central Statistical Organization defines Private Income as “the total of factor income from all
sources and current transfers from the government and rest of the world accruing to private sector” or in other
words the private income refers to the income from socially accepted source including retained income of
corporation.
> Personal Income:- Prof. Peterson defines Personal Income as “the income actually received by persons from all
sources in the form of current transfer payments and factor income.”
Personal income is that income which is actually received by the individuals or households in a country during the
year from all sources.
> Disposable Personal Income:- Prof. Peterson defined Disposable Income as “the income remaining with
individuals after deduction of all taxes levied against their income and their property by the government.”
Disposable Income refers to the income actually received by the households from all sources. The individualcan
dispose this income according to his wish, as it is derived after deducting direct taxes.
7 BY: VIKRAM.G.B
Lecturer, P.G Dept of Commerce
Vivekananda Degree College, Bangalore-55

8. 8 BY: VIKRAM.G.B
Lecturer, P.G Dept of Commerce
Vivekananda Degree College, Bangalore-55