INTRODUCTION TO MACROECONOMICS

1. ECONOMICS
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2. INTRODUCTION
TO
MACROECONOMICS
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John Mayard Kaynes
(1883 – 1946)
FATHER OF MACROECONOMICS

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 Macroeconomics is the study of the economy
as a whole. It is also called Aggregate Economics
or Income Theory.
 The word macro comes from the Greek wo-
rd Makros which means large.
 Macroeconomics is also known as Aggreg-
ate economics or Income theory

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 Macroeconomics deals with aggregates like
GNP , total employment , total savings and
investment , general price level.
 The words micro and macro were coined by
Ragnar Frisch in 1933.
o John Mayard Keynes - The General Theory
Of Interest and Money – (1936 ) , The Economic
Consequences of the Peace (1919)
o Supply creates it own demand - JB Say

6. EMERGENCE
OF
MACROECONOMICS
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 Before Keynes, economic thinking feat was
dominated by classical economics. Classical
economist believed in, and stood for, laissez-
faire.
 Laissez-faire is an economic philosophy of
free-market capitalism that opposes government
intervention.
 Classical ideas of full employment and auto -
matic functioning of the economy were proved
wrong by the Great Depression of 1930s

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 It started in the USA in 1929 and then
spread to other countries. Many is in banks
went bankrupt, leading-to credit crisis and
economic contraction. Unemployment shot up
from 3% in 1929 to 25% in 1933. The U.S.
economy contracted by 33% during this period.
 This necessitated a new interpretation and
analysis in macroeconomics. Keynes filled this
gap with his work, ‘ The General Theory Of
Interest and Money '. Thus macroeconomics
emerged and became popular.

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SECTORS OF ECONOMY
oFirms
oHousehold
oGovernment
oExternal sector

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A Closed Economy
A closed economy is an economy which has no
economic relations with other countries of the
world! In such an econo my imports, exports,
foreign investment, foreign borrowings and lendings
do not happen.
An Open Economy
An economy which has economic relations with
other countries of the world is called an open
economy.

11. CIRCULAR FLOW
OF INCOME
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 The circular flow means the unending flow of
production of goods and services, income, and
expenditure in an economy.
 Circular Flow of Income in a Simple
Economy.
 There are only two sectors in the economy -
households and firms.
 Households gives factors of production they
own, namely land, labour, capital, and
entrepreneurship to firms .

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 Firm reward the owners of the factors of
production in the form of rent, wages, interest,
and profit .
 Households spend their entire income on
consumption. Nothing is saved.
 Firms sell their entire output to the
households.
The economy is a closed economy without
government.

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o Reward given by the production units is called factor
payments. Rewards received by the owners of the factors
of production is called factor income. Factor payment
and factor income are one and the same.
Real Flows Money Flows
The flow in the form of goods
and services from one sector to
another
The flow of money from firms to
households and from households
to firms.
Factors of production (land,
labour, capital and organisation)
Factor payments (rent, wages,
interest and profit)
Goods and services Price of goods and services

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Measurement Of
National Income

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 National income is the sum total of the money
value of all final goods and services produced in a
country during a financial year (April 1st to March
31st).
There are three methods of measuring of
national income. They are:
(1) Product method
(2) Income method
(3) Expenditure method.

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1. Product Method or Value added Method
o Under this method the aggregate of the value
of goods and services produced is calculated by
adding all the final goods and services produced
by each production unit in the economy in a
given period of time usually, a year .
o Value added or gross value added(GVA) =
Gross value of output(Q) - Value of
intermediate consumption (Z)

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2 . Expenditure Method
o The method of calculating National Income on
the basis of the final expenditure on domestic
product is called expenditure method or outlay
method. Under this method, GDP is calculated by
adding the final expenditure of household, firms,
government and the rest of the world .
o GDP = C + I + G + (X-M)

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3. Income Method
o Under income method GDP is calculated by
adding together all the factor income received
by the owners of factors of production, such as
land, labour, capital and entrepreneurship in the
domestic economy in the form of wages, rent,
interest and gross profit .
o GDP = W + R + In + P

21. SOME INDICATORS
OF
MACROECONOMICS
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KEEP IN MIND
1) Difference between National product and
Domestic product is NFI.
2) Difference between Gross product and Net
product is Depreciation.
3) Difference between market price and factor
price is NIT.

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(1)Gross Domestic Product (GDP)
Gross domestic product is the total money value
of all final goods and services produced in the
domestic territory of a country in a year.
(2) Gross National Product (GNP)
Gross National Product is defined as the sum of
GDP and net factor income from abroad (NFI).

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(3) Net National Product (NNP)
Net National Product is the total money value of all
final goods and services produced by a country in a
year less depreciation.
(4) Net Domestic Product (NDP)
Net Domestic Product is the total money value of
all final goods and services produced in the
domestic erritory of a country less depreciation.

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