Marco Economics

1. SEMESTER – II
Principles of Economics (Macro)
DR KINJALKUMAR MISTRI

3. UNIT – 1
INTRODUCTION TO MACRO ECONOMICS
 Definition & Nature of Macro Economics
 Uses of Macroeconomics
 Scope of Macro Economics
 Importance of Macro Economics
National Income (NI) Accounting
 Meaning of NI and Circular Flow of NI - Various concepts of NI
(GNP, GDP, NNP, and NDP), Personal Income, Disposable
Income, Per Capita Income.
 Methods for measurement of National Income (NI)
 Problems in the measurement of National Income (NI)
Practical : Group Discuss on “Basic Micro & Macro Economics)

5. INTRODUCTION
 Macroeconomics (from the Greek prefix macro-
meaning "large" and economics) is a branch of
economics dealing with the performance,
structure, behavior, and decision-making of an
economy as a whole, rather than individual
markets.
 This includes national, regional, and global
economies. With microeconomics,
macroeconomics is one of the two most general
fields in economics.

6. INTRODUCTION
 Macroeconomists study aggregated indicators such
as GDP, unemployment rates, and price indices to
understand how the whole economy functions.
 Macroeconomists develop models that explain the
relationship between such factors as national
income, output, consumption, unemployment,
inflation, savings, investment, international trade
and international finance.

7. DEFINITION
 Macro is derived from the Greek word “MAKROS”
which means large.
 It is the study of a nation’s economy and its aggregates
 According to Shapiro, “Macroeconomics deals with the
functioning of the economy as a whole”
 Prof. Ackley defines “Macro Economics deals with
economic affairs ‘in the large, it concerns the overall
dimensions of economic life. It looks at the total size and
shape and functioning of the elephant of economic
experience, rather than working of articulation or
dimensions of the individual parts.

8. USES OF MACROECONOMICS
 It helps generalizing the behavior of and
relationship between aggregate economic variables
or also called macro variables.
 Macroeconomics helps government in formulating
and implementing appropriate economic policies.
 Study of macro economics is essential even for the
development of micro economics itself.

10. BASIC MACROECONOMIC CONCEPTS
 Output and Income
 Unemployment
 Inflation and Deflation

11. FEATURES OF MACRO ECONOMICS
 It gives an overall view of the economy
 It explains the causes of fluctuations in the
national income
 It helps us to study the progress of an economy in
investment, total production, total employment,
growth etc.

12. FEATURES OF MACRO ECONOMICS
 It involved the study of the concept of national
income, its different elements, methods of
measuring and social accounting.
 It deals with the aggregate demand and aggregate
supply that determines the equilibrium level of
income, output employment in the economy

13. NATURE OF MACRO ECONOMICS
 Macro economics is the study of aggregates or
averages covering the entire economy, such as
total employment, national income, national out put,
total investment, total consumption, total savings,
aggregate supply, aggregate demand and general
price level, wage level and cost structure.
 In other words, it is aggregative economics which
examines the interrelations among the various
aggregatives, their determination and causes of
fluctuations in them.

14. NATURE OF MACRO ECONOMICS
 Macro Economics is also known as the theory of
income and employment, or simply income
analysis. It is concerned with the problems of
unemployment, economic fluctuation inflation or
deflation, international trade and economic growth.
 It is the study of the causes of unemployment and
the various determinants of employment.
 In the field of business cycles, it concerns itself
with the effect of investment on total output, total
income and aggregate employment.

15. NATURE OF MACRO ECONOMICS
 Macro economics uses which relate them to the
economy wide total. Macro economics not only deal
with great aggregates and averages of the system
as a whole but also attempts to define these
aggregates in a useful manner and to examine how
they are related and determined.

16. SCOPE OF MACRO ECONOMICS
 Theory of National Income
 Theory of Employment
 Marco Theory of distribution
 Economic development
 Theory of International Trade
 Theory of Money
 Theory of Business Fluctuations
 Theory of General Price Level

17. IMPORTANCE OF MACRO ECONOMICS
 In Economic Policies
 In General Unemployment
 In National Income
 In Economic Growth
 In Multi-dimensional Study
 In Monetary Problems
 In Business Cycle
 For Understanding the Behavior of Individual Units
 Helpful in understanding the functioning of an
Economy
 Balance of Payment

18. LIMITATIONS OF MACRO ECONOMICS
 Danger of excessive thinking in terms of
aggregates
 Aggregate tendency may not affect all sectors
equally
 Indicates no change has occurred
 Difficulty in the measurement of aggregates
 The fallacy of composition
 It ignores the contribution of Individual Units
 Limited Application

19. NATIONAL INCOME ANALYSIS

20. NATIONAL INCOME
 National income or national product is defined as the
total market value of all the final goods and services
produced in an economy in a given period of time.
 There are many concepts of national income which are
used by different economists and all of which are inter-
related.
 The total net value of all goods and services produced
within a nation over a specified period of time,
representing the sum of wages, profits, rents, interest,
and pension payments to residents of the nation.
 It includes income from all the productive sectors such
as Agricultural, Industrial and Service Industry.

21. MEANING & DEFINITION OF NATIONAL INCOME
 Prof Pigou has defined as “National Income is that
part of objective income of the community, including
of course income derived from abroad which can be
measured in money.”
 Prof Marshall defined as “The labor and capital of
country acting on its natural resources produce
annually a certain net aggregate of commodities,
material and immaterial including services of all
kinds.

22. CIRCULAR FLOW OF NI
 The circular flow of income and expenditure refers
to the process whereby the national income and
expenditure of an economy flow in a circular
manner continuously through time.
 The various components of national income and
expenditure such as saving, investment, taxation,
government expenditure, exports, imports etc.

24. HOUSEHOLD SECTOR
 The household sector of an economy provides factor
services to the firms, government, and the foreign sector
for which it received factor payments in return.
 Besides factor payments, the households also receive
transfer payments like old age pensions, scholarships,
etc., from the government and foreign sector.
 The household sector spends its earned income on
Payments for goods and services purchased from firms,
payments for imports, and tax payments to the
government.

25. FIRMS
 The firms receive revenue for the sale of goods
and services from the government, households,
and foreign sectors.
 They also receive subsidies from the government to
produce goods and services. Besides, the firms
make payments for taxes to the government, factor
services to the households, and imports to the
foreign sector.

26. GOVERNMENT
 The government receives revenue for the sale of
goods and services, fees, taxes, etc., from the
firms, households, and the foreign sector.
 It also makes factor payments to households and
spends its revenue on transfer payments and
subsidies.

27. FOREIGN SECTOR
 The foreign sector receives revenue for the export
of goods and services from firms, households, and
the government.
 It also makes payments to firms and the
government for the import of goods and services,
and households for the factor services.

29. VARIOUS CONCEPTS OF NI
 GNP (Gross National Product.)
 GDP (Gross Domestic Product)
 NNP (Net National Product)
 Personal Income
 Disposable Income
 Real Income
 Per Capita Income

30. GNP (GROSS NATIONAL PRODUCT.)
 GNP is defined as the aggregate market value of
all final goods and services including
productive assets in an economy produced by
the nationals of a country during a particular
year.
 GNP is calculated by multiplying quantities of
various goods and services by their market prices
and adding them together. Plus we have to add
income earned from abroad during the year.

31. CHARACTERISTICS OF GNP
 Monetary measure
 Final Goods and services
 Production during a particular year
 Production by nationals

32. GDP (GROSS DOMESTIC PRODUCT)
 The concept of GDP is similar to GNP. There is no
significant difference between the two.
 As GNP includes incomes received by residents from
abroad and excludes income which is produced locally
but accrues to the non-residents whereas in case of
GDP, it is just the other way round. It includes the
incomes produced locally but accruing to non residents
and excludes the incomes received from abroad by the
residents
 In short GDP means the value of all final goods and
services produced within the geographical boundaries of
a country irrespective of whether these goods are
produced by nationals or foreigners

33. GDP (GROSS DOMESTIC PRODUCT)
Relationship between GDP and GNP:
GNP = GDP + Net factor Income from abroad
 Where: Net factor Income from abroad = Factor
income Received from abroad – Factor income paid
abroad

34. NNP (NET NATIONAL PRODUCT)
 In the production of goods and services during a year
we use up or consume some capital, i.e. equipment,
machinery etc.
 The capital goods like machinery wear out or fall in
value as a result of their use in production process.
 This consumption of fixed capital or fall in value of
capital due to wear and tear is called depreciation.
 Net National Product = Gross National Product
(GNP) – depreciation,

35. PERSONAL INCOME
 Personal Income is defined as the total of income
received by persons from all sources. It includes wages
and salaries, fees and commissions, bonus, interest,
earnings from self-employment and dividends.
 It also includes transfer income (transfer payments)
such as pensions, family allowances, unemployment
allowances, sickness allowances, old age benefits etc.
 Personal Income = NI – Social security contribution
– corporate income tax – undistributed corporate
profits + transfer payments.

36. DISPOSABLE INCOME
 Disposable income is that part of total income which the
individuals are free to spend.
 A part of personal income actually received is
transferred to government by way of direct taxes such
as income tax, professional tax etc.
 Only that part of money which remains with the income
earners after payment of these taxes is the actual
amount available for spending. Thus disposable income
is equal to Personal Income minus direct taxes.
 Disposable Income = Personal Income – Direct
Personal Taxes (including taxes, fines and other
compulsory payments)

37. REAL INCOME
 Real Income of an individual consists of the goods
and services that he purchases with his money
income. It can be understood as the purchasing
power of the individual measured in terms of goods
and services.
 Real Income depends on prices. It rises inversely
with the price level. Money income being constant
Real income can change according to rises and
decline of the prices.

38. PER CAPITA INCOME
 The term per capita income refers to the income per
head of population.
 It is the average income of the individuals of a country in
a particular year.
 Thus per capita income can be calculated by dividing
National Income of a particular year by the actual size of
population of that particular year.
National Income
 Per Capita Income = ------------------------
Population

39. METHODS OF MEASURING NATIONAL INCOME
 Since factor income arise from production of goods
and services and since incomes are spent on
goods and services produced national income can
be measured by following three methods
1. Product Method or Output Method (Production
Method)
2. Income Method
3. Expenditure Method

41. PRODUCT METHOD OR OUTPUT METHOD (PRODUCTION METHOD)
 the output method or production method considers the
value of goods and services produced during a year in a
country. The output method consists of following four
stages.
 Calculating Domestic Output
 Value of Intermediate Goods/Services and
Depreciation
 Calculating Net Domestic Output
 Adjustment for income from Abroad

42. PRODUCT METHOD OR OUTPUT METHOD
(PRODUCTION METHOD)
Y = (P-D) + (S-T) + (X-M) + (R-P)
 Where, Y = Total Income
 P = Total value of final production
 D = Depreciation allowances
 S = Subsidy
 T = Indirect Taxes
 X = Exports
 M = Imports
 R = Receipts from abroad
 P = Payments made abroad

43. INCOME METHOD
 The income method considers the income earned by
the factors of production in the process of producing/
delivering goods and services. It is also called
National Income at factor cost.
 Here income earned by all factors of production is
summed up. Following are the various incomes to be
included while calculating National Income.

44. INCOME METHOD
 Wages and Salaries.
 Compensation of employees.
 Supplement income like employer’s contribution to
social security.
 Dividends
 Undistributed corporate profits
 Earnings of self employed population
 Interest
 Rent
 Surplus of public enterprises
 Net income from abroad

45. INCOME METHOD
Y = (W+I+R+) + (X-M) + (R-P)
Where, Y = Total Income
 W = Wages
 I = Interest
 R = Rent
 = Profits
 X = Exports
 M = Imports
 R = Receipts from abroad
 P = Payments made abroad.


46. EXPENDITURE METHOD
 Under this method, we estimate the disposal of
income on the purchase of final goods and
services.
It includes
(a) Personal consumption expenditure of
households.
(b) The gross private domestic investment i.e.
business spending On capital goods.
(c) The net foreign investment i.e. net spending by
foreign Nationals and firms for the country’s goods
and services.
(d) Government purchases of goods and services.

47. EXPENDITURE METHOD
Y = (C+I+G) + (X-M) + (R-P)
 Where, Y = Total Income
 C = Consumption
 I = Investment
 G = Government services
 X = Exports
 M = Imports
 R = Receipts from abroad
 P = Payments made abroad

48. DIFFICULTIES IN MEASUREMENT OF NATIONAL INCOME
 Non-monetized transactions
 Illiteracy
 Incomplete occupational specialization
 Lack of adequate data
 Value of inventories
 Calculation of depreciation
 Problem of double counting
 Illegal activities

49. Group Discuss
on
“Basic Micro & Macro
Economics
https://youtu.be/hTqmT7Lr_us