managerial economics notes 10
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Unit 10 Macro Economics And Business Decisions
Structure10.1 Introduction
Objectives
10.2 Basic macro economic concepts
Self Assessment Questions 1
10.3 Macro economic ratios
10.3.1 Consumption income ratio
10.3.2 Index number
10.4 Practical importance of Index number10.5 National income deflators
Self Assessment Questions 2
10.6 Summary
Terminal Questions
Answer to SAQs and TQs
10.1. Introduction to Macro Economics
Macroeconomics is that branch of economics, which deals with the study of aggregative oraverage behavior of the entire economy. In it we study the collective functioning of the whole
economy. It deals with the great aggregates of the economic system rather than with individual parts
of it. It is the study of the entire forest rather than the study of individual trees. Hence, it is called as
Aggregative Economics. It splits up the economy into big lumps for the purpose of the
convenience of the study. Hence, it is called as Lumping Method. It gives a detailed description
about the performance and achievements of different sectors of the economy like agriculture,
industry, export and import etc In it we study how the entire economy reaches the position of
equilibrium. Hence, it is called as General Equilibrium Analysis. It is called as Income theoryas it explains how equilibrium level of national income is determined in an economy. The scope of
macro economics covers the following topics.
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1. The theory of Income and employment with consumption function, saving and investment
function and trade cycles.
2. The general theory of price level, which includes inflation and deflation.
3. The theory of economic growth, development and planning.
4. The theory of macroeconomic distribution, which includes the study of relative shares of rent,
wages, interest and profits in the national income of a country.
In general we study aggregate demand, aggregate supply, aggregate saving and investment,
aggregate income and expenditure, unemployment and poverty problems etc in macro economics.
Managerial economics is a part of micro economics. It is to be noted that a business unit carry on its
business operations in the midst of the society and not in isolation. It has to meet the requirements of
the members of the society. Hence, the knowledge about macro economic environment is very
essential. Macro economic concepts, principles, and policies greatly influence the decision making
process of a firm. Changes in the level of incomes of the people, their purchasing power,
consumption habits, general price level, business fluctuations, government economic policies like
monetary, fiscal, financial, physical, industrial, labor, import and export, foreign capital and
investment etc would certainly affect the decision-making and forward planning of the firm. Therefore,
macro economic background provides a solid basis for the working of a micro unit.
Learning Objectives:
After studying this unit, you should be able to understand the following
1. Know what macro economics is.
2. Analyze basic macro economic concepts.
3. Define important economic ratios.
4. Analyze the importance of macro economic environment on decision making of a business unit.
5. Explain the relationship between macro economics and business management.
10.2 Basic Macro Economic Concepts
1. Variables
A variable is a symbol or quantity which during a specified time period under consideration,
may assume different values or a set of admissible values. It is something that can take on
different values. It is a changing quantity. There are two types of variables. They are
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a. Endogenous variables. In this case, values of a variable are to be determined with in the
system.
b. Exogenous variables. In this case, values of a variable are influenced by outside or external
factors or forces.
There are micro economic variable as well as macro economic variables. Microeconomic variables
deal with the study of individual units. Some of the microeconomic variables are demand, supply,
price, cost etc which deals with only individual units.
On the other hand macroeconomic variables deal with aggregates like gross national product,
national income, consumption function, saving function, investment function, general price level, total
money supply and general level of employment or unemployment in the country etc. These variables
are further divided in to two parts.-
a. Stock variable
A stock variable is a quantity measured at a specific point of time. It may be referred to as a
certain amount or quantity at a specific point of time. For example, we can say that total money
supply in India as on 27-2-2008 is Rs 80,000 crores. Stock variable has time reference. In this case,
both time and quantity is specified in clear terms and there is no ambiguity.
b. Flow variable
A flow variable is a quantity which can be measured in terms of specific period of time and
not at a point of time. For example, GNP during the period 2004-05 is worth of Rs. 90,000 crores. It
is clear that goods and services worth of Rs 90,000 crores is produced in India during the period
covering 2004-05. Thus, flow variable has a time dimension.
2. Ratio variables
Economic variables are measured in terms of ratio variables. A ratio variable expresses
quantitative relationship between two different variables at a certain time. For example,
average propensity to save expresses the ratio of total savings to total income. Similarly, average
propensity to consume expresses the relationship between total consumption to total income. Hence,
Total savings Total Consumption
APS = --------------------- APC = -----------------------
Total income Total Income
These tow examples come underflow ratio. Liquidity ratio shows relationship between liquid assets
and total assets where as Leverage ratio shows value of debts and total assets. Hence,
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Liquid Assets Value of Debts
Liquidity Ratio = ---------------- Leverage Ratio = ------------------
Total Assets Total Assets.
These two examples come understock ratio.
1. Functional variables
Functional variables explain the functional relationship between different variables under
consideration. They are further divided in to two kinds. They are-
a. Dependent variable
A variable is dependent if its value varies as a result of variations in the value of some other
independent variables. In short value of one variable depends on the value of another variable or
variables.
b. Independent variable
In this case, the value of one variable will influence the value of another variable. If a change in one
variable cause changes in another variable, it is called as independent variable. An
independent variable cause changes in another variable.
For example, consumption function explains the relationship between changes in the level of
consumption as a result of changes in the level of income of consumers. It indicates how
consumption varies as income changes. It is expressed as C = f [Y] where C refers to consumption
and Y implies Income of consumers. In this case, consumption is dependent variable and income is
dependent variable.
It is to be noted that functional relationship may be related to either two or more variables. In case of
micro analysis, we explain that D = f [P] where demand depends on price of the commodity
concerned only. Similarly, we can explain that economic development, ED = f [C, L, T ..]. This
implies that economic development depends on several factors like capital, labor, technology etc
5. Functions
Functions suggest that the value of something depends on the value of one or more other
things. There are uncountable numbers of functional relationships in the real world. D = F [P] or S = f
[P] at the micro level and C = f [ Y] or S = f [Y] at the macro level.
6. Constant
A constant is a magnitude or value the quantity of which does not change.
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7. Parameter
A parameter is a quantity which when varies affects the value of another variable.
8. Capital and investment
In the ordinary language, the term capital refers to cash or money held by a person. It is measured at
a point of time. But in economics, it has a wider meaning. It is defined as all man-made aids that
are used for further production of wealth. It includes all kinds of producers goods, inventory of
materials, machine tools, equipments, instruments, factories, dams, transport and communications
etc which are used for further production of goods and services.
The term investment in the ordinary language refers to financial investment. It means purchase of
stocks shares, bonds debentures etc where there is only transfer of titles or rights from one person to
another. The term investment in economics refers to creation of new capital assets or
additions to the existing stock of productive assets. Creation of income-earning assets is called
as investment in economics. Investment is the change in the capital stock over a period of time.
Hence the term capital and investment are used as synonymous words.
9. Ex-post and Ex-Ante
These are the two Latin phrases. It implies before hand and afterwards. Ex-Ante means anything
planned, anticipated, expected or intended. For example, Ex-Ante saving is an amount that the
people intend to save out of their income. Ex-Post refers to actual or realized value. For example,
Ex-Post saving is the exact amount that the people actually save in a particular time period. These
two terms have greater significance in macro economic forecasts. One has to compare the expected
rate of economic growth in a particular year and the actual achieved growth rate in that year. If the
actual growth rate is more or equal to the expected rate, the government assumes that the various
economic policies are in the right direction. On the other hand, if the actual growth rate is less than
expected one, in that case, the government has to modify its economic policies.
10. Equilibrium and disequilibrium
These are the two terms which are frequently used in economic discussions. It is a position where
in two opposing forces tend to balance with each other so that there will be no further
changes. Hence, it is described as a position of rest in general. But in economics, it has a different
meaning. A state of rest implies that the various quantities used in the economic system remain
constant and with the help of these constant quantities, the economy continues to churn over. There
is movement or activity. But his movement is regular, smooth, certain and constant. The equilibrium
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position is free from violent fluctuations, frequent variations and sudden changes. At the point of
equilibrium, an economic unit is maximizing its benefits or gains. Hence, it is described as the
coziest position of an economic unit. Always there will be a tendency to move towards this
equilibrium position.
Disequilibrium on the other hand is a position where in the forces operating in the system is
not in balance. There is imbalance in different forces which are working in the system. Hence, there
are disturbances and disorders in the system.
Generally speaking in microeconomics we make reference to partial equilibrium analysis and in
macro economics general equilibrium analysis. We can explain these two concepts with the help of
two simple examples. When demand for a particular commodity is equal to its supply in the market,
equilibrium price is established at the micro level. Any imbalance between either demand or supply
would create disequilibrium. At macro level, an economy is said to be in equilibrium when aggregate
demand for goods and services is equal to aggregate supply and total investment is equal to total
savings. If aggregate demand is either greater than aggregate supply or aggregate supply is greater
than aggregate demand, it would disturb the equilibrium in the economic system.
11. Economic models
An economic model shows the relationship among different economic variables in a precise
manner. Its purpose is to explain causal relations among different variables in the real world
avoiding all kinds of complexities in order to get a clear picture how an economy operates. It is a
method of analysis which presents an over-simplification of the real world. It is just a precise formal
statement of one or more economic relationships. It is a quantitative hypothesis based on certain
assumptions framed to achieve a set of objectives. An economic model is presented in the form
of a statement, logical statement of economic theory, geometrical form or in mathematical or
statistical equations. Any economic model cannot give a perfect answer to any economic problem. It
can give only a rough solution because we have to make certain assumptions which are not to be
found in real world. Hence, it helps in arriving at a probable conclusion. An economic model is
essentially based on some institutional frame work- a free enterprise economy, a socialist economy
or a mixed economy etc.
A simple demand and supply model is prepared to explain the determination of market price in a
microeconomic model. A macro economic model explains relationships between different macro
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economic variables and their impact on the working of the economy. Harrod-Domar model of
economic growth is one such example for macro economic model.
Self Assessment Questions 1
1. Inventory, Capital stock are Macro ___variables.
2. National Income and output are Macro ___variables.
3. Investment is the ____ in the capital stock over a period of time.
4. _______ means planned and desired whereas ____ means actual or realised value.
5. A variable is __________ if its value varies as a result of variatious in the value if some other
independent variable.
10.3 Macro Economic Ratios
In this section, let us try to understand some of the important macro economic ratios. There are
several macro economic ratios and an attempt is made to explain twelve such macro economic
ratios. The knowledge of these macro economic ratios is indispensable for taking micro economic
decisions by a business firm.
10.3.1 Consumption Income Ratio
Y= C + S. Out of a given income, people can either spend or save or they can only consume without
saving even a small part of income. Hence, C = Y S.
The consumption income ratio explains the relationship between two variables, ie, the amount of
income and amount of consumption. In other words, it tells us about the percentage of
consumption out of a given level of income. It can be expressed as C = f [Y] where C =
consumption, Y = income and f = function. Consumption is an increasing function of income. Higher
the income, higher would be the consumption and vice-versa. There is a direct relationship between
the two. For example, Out of Rs. 100-00 a person can consume Rs. 80-00 and save Rs 20-00. In
this case, the consumption income ratio is 1:08. This ratio helps a businessman to forecast his salesin the market.
2. Saving income ratio
Excess of income over expenditure is saving. The saving function can be easily derived by
subtracting or spending from income. Hence, S = Y C where S= saving, Y = income and f =
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function. It is a function of income. S = f [Y]. It implies that there is a direct relationship between the
two. Higher the income higher would be the savings and vice-versa. The saving-income ratio
indicates the amount of savings made out of a given level of income. In the above example,
saving income ratio is 1:02. The consumption income ratio and saving income ratio would enable a
businessman to plan his production schedule and helps in his sales forecasts.
3. Capital output ratio
There is a close relationship between capital investment and income-growth in any economy.
Capital is regarded as the life-blood of all economic activities and as such it constitutes a major
determinant of economic growth rate in an economy. The volume of investment generally
determines the rate of growth in the real income of the people in an economy.
The concept of capital output ratio explains the relationship between the value of capital
investment and the value of output. It is a ratio of increase in output or real income to an
increase in capital. According to Prof. Rosen, the COR may be defined as the relationship of
investment in a given economy or industry for a given time period to the output of that economy or
industry for a similar time period. It refers to the amount of capital required to produce a unit of
output. When we say that COR is 4:1, it implies that a capital investment of Rs. 4-00 is required to
produce one unit of output. It is to be noted that COR would differ from one sector to another and
even from one industry to another. Generally, it would be higher in case of capital goods industries
and industries using capital intensive techniques of production and lower in case of consumer goods
industries and industries using labor intensive techniques of production. COR depends on several
factors However, a decrease in COR is an indication of economic efficiency and progress of an
economy
4. Capital labor ratio
This ratio indicates the proportion of two factor inputs. It tells us the ratio between the numbers of
laborers required to a given amount of capital invested in any business. The knowledge of this
ratio is very much needed to work out the least cost combination by substituting one factor input to
another. This ratio can be expressed as
K
---------- Where K = capital and L= labor
L
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5. Output-labor ratio
The term productivity in general is defined as a ratio of what comes out of a business to what goes
in to the business, ie, it is the ratio of outcome to the efforts of the business. Hence, productivity
would mean the value of output divided by the value of inputs employed. There are different kinds of
productivity ratios.
Output labor ratio expresses the relationship between the quantity of output produced and
the number of laborers employed for a specific time period. It indicates productivity of labor. It
can be obtained from dividing total output by the number of labourerers employed. Hence,
Total output Q
Output labor ratio = --------------------------------------- or --------
Number of laborers employed L
This ratio widely varies from industry to industry. Labor productivity depends on a number of factors
like capital endowment of labor, quality of labor, organization of work, hours of work, incentives to
work, methods of payments, industrial climate, quality of management and quality of raw materials
used etc. Increase in labor productivity implies increase of the ratio of output to labor. The knowledge
of this ratio would help the management of an organization to the right types of labor in right quantity.
6. Input- Output Ratio
It explains the relationship between two variables, ie, inputs and outputs. Input-output ratio
indicates the quantity of inputs employed and the quantity of outputs obtained. It is also called
as production function in economics. Production is purely physical in nature and as such the ratio
between inputs and outputs is determined by technology, availability of equipments, labor, materials
etc. It can be expressed in the form of a mathematical equation.-
Q = f [ L,N,K --------etc] where Q = quantity of output per unit of time LNK etc are different factor
inputs like land, capital, labor etc which are used in the production process. Thus, the rate of output
is a function of the factor inputs LNK etc, employed by the firm per unit of time. The knowledge of
production function would help a producer to work out the most ideal factor combinations so as to
maximize output and minimize cost.
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7. Value added output ratio.
Value added output is the difference between the value of output produced and the value of inputs
employed. In other words, it is a ratio of increase in the quantity of inputs employed and the
corresponding increase in output obtained. It is very much necessary to find out the difference
between the value of inputs used and output obtained. This will help in taking decision whether to
increase the employment of additional units of factor inputs in the production process.
8. Cash Reserve Ratio.
A commercial bank mobilizes deposits from the general public. The entire amount of deposits is not
kept in the form of cash. Out of his experience, a banker knows that all depositors will not withdraw
their entire deposits on the same day at the same time. Hence, he keeps only a fraction of total
deposits in the form of liquid cash to honor the cheques drawn on demand deposit by the customers.
The remaining excess deposits are used for lending and investment purposes by the bank. Thus,
each commercial bank with a view to make profits follows a customary cash reserve ratio for the
sake of liquidity and safety. The percentage of total deposits which the bank is required to hold
in the form of cash reserves for meeting the depositors demand for cash is called cash
reserve ratio. Thus, CRR indicates the ratio between the liquid cash with that of total deposits of the
bank. For example, if CRR is 20%, in that case for every Rs.100-00 deposits collected, the bank has
to keep 20-00 as cash reserves requirement.
9. Cash income ratio
A bank is a commercial institution based on business principles. Its main objective is to make profits.
This depends on its portfolio management. A bank has to keep adequate amount of cash in order to
meet the requirements of its customers. How much deposits it will keep in the form of liquid cash and
how much money it will lend and invest on various assets will depend on its CRR. This ratio helps the
banker to know his income earning capacity during a financial year. The cash - income ratio tells
us the amount of cash held by a bank in liquid form and the percentage of income earned
during an accounting year through its investments. This ratio gives us information about the
income earning capacity of an institution during an accounting year.
10. Labors share of income
Production is the result of combined and cooperative efforts put in by all the factors of production in
the production process. All factors of production which are involved in this process of production are
entitled to enjoy their respective rewards in the form of rent, wages, interest and profits. If we add all
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factor incomes, then we get national income at factor cost. Hence, NI at factor cost = a sum of total
rent + total wages + total interest + total profits. For example, if national income is Rs. 1000-00, in
that case, the share of rent is Rs. 200-00, the share of wages is Rs. 300-00, the share of capital is
Rs. 150-00 and the share of profit is Rs. 350-00. The labors share of income indicates the
percentage of income earned by labourerers in the form of wages out of total national income
is called as labors share of income. In the above example, the share of laborers income is Rs.
300-00. This ratio gives information about the contribution made by workers in the generation of total
national income of the country. Also it indicates level of wages and their living standards
11. Capitals share of income.
Capital is a very powerful and important input in the production process. Capital is described as the
life-blood of all economic activities. Without adequate capital no economic activity can be
undertaken today. Capital as a factor of production is earning interest as its income in the total
national income generation. The capitals share of income indicates the percentage of income
earned by capital in the form of interest out of total national income is called as capitals
share of income. In the above example, the share of capital in total income is Rs. 150-00. This ratio
gives information about the contribution made by capital in the generation of total national income of
the country. Also it indicates the level of interest rate and the ability of capitalists to earn their income.
12. Lands share of income
Land is one of the primary factors of production. It is a free gift of nature. It is an immovable factor
input. The landlord supply this factor input and earns his income in the form of rent. Lands share of
income indicates the percentage of income earned by the landlord in the form of rent out of
total national income is called as lands share of income. In the above example, the share of
lands income is Rs. 200-00.This ratio gives information about the contribution made by landlord in
the generation of total national income of the country. Also it indicates the level of rent and the ability
of landlords to earn their income.
10.3.2. Index Number
The days of barter are gone. We are living in a monetary economy where every thing is measured in
terms of money. It is to be noted that money by its substance is quite value less or worthless. Its
value to its possessor arises out of its acceptability as a means of payment. Its value to its
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possessors lies in its capacity to purchase other goods and services which are useful in themselves.
Thus, the value of money, the purchasing power of money is derivative.
In a monetary economy, the exchange value of everything is measured by its price expressed in
terms of money. The purchasing power of money depends on the level of prices of goods and
services to be purchased. The lower the price level, the greater would be the value of money and the
higher the level of prices, the lower would be the value of money. There is an inverse relationship
between the two. The value of money is thus inversely related with the general price level. It is to be
noted that prices of all goods and services do not change in a uniform manner. Price of some goods
may rise while price of some other goods may fall. In order to bring an element of uniformity to price
change, the concept of general price level is used. Index number explains this concept.
The value of everything is measured in terms of money because money acts as a measuring rod or
measure of value. But the value of money cannot be measured in terms of money itself. Hence,
economists have developed index numbers to measure the changes in the value of money over a
period of time.
When a number of commodities and their prices at two different periods are arranged in a
tabular form it is called as an index number. Index number is a statistical device by which
changes in prices of the same articles at different periods are calculated and computed. It is to
be remembered that index number helps us to measure only how much value of money has changed
between two different periods of time and not the value money itself.
There are different kinds of index numbers. Some of them are wholesale price index, consumer or
retail price index, cost of living index, wage index numbers and industrial index numbers etc. Out of
them the most important ones are WPI and CPI.
a. Consumers price index
In this case, we include the prices of a basket of consumption goods and services. Generally
speaking, goods and services which are commonly consumed are included in this basket. The goods
and services consumed by consumers widely differ from group to group and place to place. It also
varies as tastes and preferences of consumers change. In order to measure the changes in prices of
consumer goods and services, we take in to account of prices existing at the base year and the
prices in the current year. The formula to calculate CPI is as follows-
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Prices existing at the current year
CPI = ------------------------------------------- X 100
Prices at the base year.
The consumption basket data comes from family budget surveys conducted from time to time and
price data are taken from retail outlets. The base year is changed every few years in order to take in
to account of changes in consumption habits, prices etc in the market. Such updating is required so
that the usefulness is not lost.
In a simple model index number, we have assumed a total weight age of 20 units and each
commodity is given a certain weight according to its influence or importance. To get the index, the
actual price in the base year is reduced to 100, which is multiplied by the approximate weight. For
example, the price of rice in the base year is Rs.50=00 per quintal. The weight assigned to rice is 8
so the index for 1960 will be equivalent to 100 x 8= 800. Similarly the index numbers for other items
is calculated. The simple arithmetic average is used to calculate the index. In 1976, the price of rice
is Rs.125=00 i.e. two and half times the 1960 price, if the 1960 price is 100, then the 1976 price is
equal to Rs.250=00. This is multiplied by the weight to get the index for 1976.
Between 1960 and 1976, the price level has risen by 2.2 times. To state the same thing in a
different manner, what Rs.100 could buy in 1960, Rs 220 can buy in 1976. In 1976 the purchasing
power of money or the value of money has fallen to 45.5% or (100/200 X100) as compared to 1960.
Thus, the fluctuations in prices or the degrees of inflation are measured with the help of index
number of prices.
A MODEL OF WEIGHTED PRICE INDEX NUMBER
Base Year 1960current
Year1976
Articles Weights Price Index Price % Change Index
Rice 8
50.00 per
quintal
100 X 8
=800
125.00 per
quintal 2.5 250 x 8 2000
Wheat 530.00 per
quintal
100 X 5
=500
75.00 per
quintal2.5 250 X 5 1250
Sugar 3 100.00 per 100 X 3 150.00 per 1.5 150 X 3 450
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quintal =300 quintal
Cloth 22.50 per
meter
100 X 2
=200
3.75 per
meter1.5 150 X 2 300
Vanaspathi 1 3.00 per Kg100 X 1
=1006.00 per Kg 2.0 200 X 1 200
Cigarettes 10.40 per
packet
100 X 1
=100
0.08 per
packet2.0 200 x 1 200
Total 202000/100
= 2020
4400/
220
In 1960 G P L 100
In 1976 G P L 220
2.2 times
increased
100/220 X 100
= 45.5 %
Value of money hasfallen by 45.5% between
1960-1976
b. Whole sale price index [WPI]
These index numbers are constructed on the basis of the whole sale prices of certain important
commodities. The items included in WPI are totally different from those included in CPI. The items
included are fertilizers, industrial raw materials, minerals, semi finished goods, machineries etc. It is
an index of prices paid by producers for their inputs. Whole sale prices are published by variousgovernment agencies at regular intervals and are collected for the purpose of calculating variations in
their prices for different periods. The method of calculating WPI is same as that of the CPI.
10.4 Practical Importance Of Index Numbers
1. They help us to measure the level of changes in prices and the value of money over a period of
time.
2. They help us to measure the degree of inflation and deflation enable the government to come out
with suitable price stabilization policies.3. They help us to know the extent of changes in cost of living of different sections of people and
thus help the government to adjust the wages and salaries of workers and avoid strikes and
lockouts.
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4. They help us to know the purchasing power of two currencies and thus help in the determination
of exchange rates of the currencies of two countries.
5. They also help us to know the economic progress achieved in different sectors of the economy
through economic planning.
10. 5 National Income Deflators
National income of a country can be either calculated in terms of Nominal GNP or Real GNP. If we
calculate GNP at current market prices, it is called as Nominal GNP and if we measure GNP at
constant prices, ie, prices prevailing at the base year, it is described as Real GNP. In
economics we give importance to Real GNP rather than Nominal GNP. This is because, GNP at
current prices depicts a misleading picture of economic performance when prices are continuously
rising or falling. For example, if prices are rising and the gross national output is remaining the same,
in that case, the nominal GNP represents an inflated estimate of the national income and creates
false sense of economic growth in the country. In order to avoid this kind of misleading estimates of
national income, the economists use a simple adjustment factor called GNP Deflator or National
Income Deflator to eliminate the effect of rising prices on the GNP and to work out Real GNP at the
price level of the base year.
The GNP deflator acts as an adjustment factor which is used to convert nominal GNP into
Real GNP. The GNP Deflator is the ratio of price index number[PIN] of a chosen year to the price
index number of the base year[ PIN of the base year = 100]. Hence,
PIN of the chosen year
GNP Deflator = ----------------------------------------
100
We can calculate the Real GNP by dividing nominal GNP by the GNP Deflator. This can be
expresses in the following formula.
Nominal GNP Nominal GNP
Real GNP = ------------------------- or Real GNP = ---------------------------
GNP Deflator. PIN cy / 100
Where PIN cy is the price index number of the chosen year.
Application of GNP Deflator
In order to estimate the Real GNP for the year 2005 and 2006, we can make use of GNP Deflator.
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Nominal GNP for the year 2005-06 = Rs. 15, 00,000
WPI for the same year = 120
Base year PIN = 100.
Given the data, GNP Deflator for the year 2005-06
GNP deflator for the year 2005-06 = 120 = 1.2
100
1.2 is the GNP Deflator for the 2005-06. We can now calculate real GNP for 2005-06 as follows
Real GNP for 2005-06 = Rs 15,00,000 = Rs 12,50,000
1.2
Deflator can also be calculated for GDP, NDP or NNP etc.
Self Assessment Questions 2
1. ________ the statistical device, which indicates relative changes of a variable over a period of
time.
2. A flow variable is a quantity which can be measured in terms of specific period of time and not at
a __________.
3. ________ is an index of prices paid by producers for their inputs.
4. ________ tells us the percentage of consumption out of a given level of income.
5. When a number of commodities and their prices at two different periods are arranged in a tabularform, it is called as ______________.
10.6 Summary
Unit 10 helps us to understand various macro economic concepts. The knowledge of these
fundamental concepts is very essential to take several practical decisions by a business unit. A
business unit may be a micro unit but macro economic environment is of great importance in the
present day competitive world. Macro economic concepts provide the working knowledge to business
managers. Apart from them, 12 macro economic ratios help them to understand the relationshipbetween different macro economic variables and their application in day to day business. Index
numbers help us to measure the degree of price changes or inflation and deflation and points out the
different price stabilization policies to be taken by the government in advance. National income
deflator helps us to know the actual value of either GDP or GNP during a given period of time. All
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Sikkim Manipal University 278
these concepts help in business planning and business forecasting and take appropriate decisions
well in advance.
Terminal Questions
1. Given a brief note on stock and ratio variables.
2. Explain the concepts of function, constant, export and ex-anti and equilibrium and disequilibrium.
3. Discuss any four macro economic ratios.
4. Explain either consumers weighted price index or whole sale price index with suitable illustration.
5. Examine the concepts national income deflator with its application.
Answer to Self Assessment Questions
Self Assessment Questions 1
1. Stock
2. Flow
3. Change
4. Ex-ante Ex-post
5. Dependent
Self Assessment Questions 2
1. Index number
2. Point of time.
3. Wholesale price Index
4. Consumption income ratio
5. Index number
Answer to Terminal Questions
1. Refer to unit 10.2 .
2. Refer to unit 10.2
3. Refer to unit 10.3
4. Refer to unit 10.3.2 a & b5. Refer to unit 10.6
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