eeb 2014

Macroeconomics

Macro is the concept of aggregates.

Macro economics is the study of aggregates or the study of economic phenomena at aggregate level.

It deals with variables such as total income of a country or nation, total volume of output, consumption level, savings and investments, employment levels and general price levels. Macroeconomics studies how the large aggregates such as total employment, national product or national income of an economy and the general price levels determined . Thus macroeconomics is the study of aggregates.

Macro economic concepts

Stock and flow variables-Stock variables are measured at a given point of time.Flow variables are measured over aperiod of time.macro stock variables are total money supply,total bank deposits, debts, inventory etc.The flow variables include national income and output, wages , investment.Stocks are expressed in rupees and flows are expressed in rupees per month, rupees per year.

Macro economic concepts

Equillibrium-A state of balance between two opposite forces.or a situation in which economic forces as they exist at the time have no tendency to change.Equilibrium can be of two types partial and general equilibrium.Partial is confined to a sector or market and everything is kept constant in the economy.General equilibrium indicates equilibrium in all sectors or marketsof the economy simultaneously.

ECONOMIC GROWTH

Economic growth is dependent on two essential elements-Aggregate demand

Aggregate supply

ECONOMIC GROWTH

Aggregate Supply-

With the available inputs like labour, capital and technology available economy produces certain volume of outputs measured by GDP(Gross Domestic Product).The capacity normally increase with time as the supplies of inputs grow. The country or economy expand its productive capacity which leads to higher living standard.

ECONOMIC GROWTH

Aggregate Demand-

It is the actually utilized capacity of the country or economy to produce. The aggregate demand should be in line with economys capacity to produce.

ECONOMIC GROWTH

Outcome of Aggregate supply and Aggregate Demand-

The ideal aggregate demand and supply leads to stabilization.If the balance disturbs it leads to multiple cycles of boom and doom in business.If there is inadequate growth of aggregate demand it can lead to unemployment and if there is excessive growth of aggregate demand it can lead to inflation.

ECONOMIC GROWTH

Outcome of Aggregate supply and Aggregate Demand-

The ideal aggregate demand and supply leads to stabilization.If the balance disturbs it leads to multiple cycles of boom and doom in business.If there is inadequate growth of aggregate demand it can lead to unemployment and if there is excessive growth of aggregate demand it can lead to inflation.

Objectives Of Macroeconomics

Rapid but smooth economic growth

Low unemployment

Low inflation

Goal Of Economic Growth

Growth policy:

Ensuring that the economy sustains a high long run growth rate of potential GDP.Stabilization policy:

keeping actual GDP reasonably close to potential GDP in the short run, so the society is not affected by high unemployment and high inflation

National Income

National income of a country can be defined as the total market value of all final goods and services produced in the economy in a year.

Meaning of national income-

NI measures the market value of annual output in monetary terms.

For calculating NI accurately all goods and services produced in any given year must be counted only once .

National income= National Product= National expenditure

National Income of the country

There are three measures of national Income Of a country:-A) The sum of values of all final goods and services produced.B)The sum of all incomes , in cash and kind, accruing to factors of production in a year.C) The sum of consumer's expenditure , net investment expenditure and government expenditure on goods and services.There are three major activities of nation's economy:- production, distribution and expenditure.

Circular income flow in two sector economy

Consumption Expenditure

HouseholdBusinessFirmsFactor payments

Wages,rent, Interest, profits

Labour capital,land and enterprise

Consumption Expenditure

Flow of goods and services

Circular flow of Income

If the economy is considered to have only two agent Household and firm.

Firms are required to produce goods. For production firms require services of production Factors. Factors of production are paid the rewards for their contribution in the form of wages, rent, interest and profits. In return the firms give goods to society . The household then consumes the goods by paying the price for it.

Circular income flow with saving and investment



Expenditure on goods and services

Financial Market

Saving Investment Identity in National Income accounts

In calculation of national Income the consumers who save and the business firms who invest are identical or always equal to investments.

In a simple economy the value of output produced which is denoted by Y is equal to the value of output sold.Eq-1

Where, C= consumption expenditure, I =Investment expenditure

Y =C+ I

Saving Investment Identity in National Income accounts

The unsold outputs leads to increase in the inventories of goods and increase in inventory of goods is treated as part of investments.

National income can be represented in terms of savings and consumption.Eq-2

Thus from Eq-1,2-Or subtracting Consumption from both sides-

Thus in two sector economy, savings= Investments

Y =C+SC+I= Y =C+SI=S

Circular income flow in three Sector economy with government sector



Consumption expenditure on goods and services

Financial Market

Government

Wages ,Salaries

Govt purchaseof goods

NetTax PaymentsNetTax PaymentsNetTax Payments

Circular Money flow with Government

Total expenditure flow in the economy is the sum of consumption expenditure (c), investment expenditure (I)& Govt expenditure (G). Thus-

Total expenditure (E)=C+I+G.(i)Total Income (Y) received is allocated to Consumption (c), Savings (S) & taxes (T ). Thus

Total Income (Y)= C+S+T ..(ii)Since E=Y, C+I+G= C+S+T or I+G= S+T ,Or G-T=S-I

Circular Money flow in four sector open economy

National income= C+I+G+X (Where X is net exports, X-M)

Since NI can be either consumed, saved or paid as taxes to government we have,

C+I+G+X = C+S+T or

I+G+X= S+T

Thus sum of private investments (I), Govt. expenditure (G)& net exports (X) is equal to sum of savings and tax revenue.

Circular income flow in three Sector economy with government sector



Consumption expenditure on goods and services

Financial Market

Government

Wages ,Salaries

Govt purchaseof goods

NetTax PaymentsSavings

Investment

Foreign Countries

Foreign remittances

Export of manpower

Receipts from exports

Payment for imports

Net Tax Payments

CONCEPT OF NATIONAL INCOME AND NATIONAL PRODUCT

In two sector economy the NP= NI

National =product

Value of final Goodsand Servicesproduced=

Wages+Rent+Interest+profits=NATIONAL INCOME

CONCEPT OF NATIONAL INCOME AND NATIONAL PRODUCT

Other than two sector economy the NI is not equal to National product.

The reasons for the above said equation is-

No assumptions of depreciation fund

No subsidy grants.

No indirect taxes.

Components of national Income

GNPGross National Product

NNPNet National Product

GDPGross Domestic Product

NDPNet Domestic Product

NI- National income

PIPersonal income

DI Disposable Income

Gross National Product

GNP has following components:Value of final consumer and services produced in a year and consumed by household is denote by consumption (C)

Value of new capital goods produced and addition to the inventories of goods such as raw material, unfinished goods and consumer goods produced but not sold during a year. This is called gross private investment (I)

Value of output of general government which is taken to be equal to the value of purchases of goods and services by the Govt denoted by (G)

Net exports which is equal to exports minus imports denoted by (X)

Net factor income from abroad.

Net Factor Income

Net factor income from abroad is the difference between factor income received from abroad by residents of parent company for rendering factor services in other countries on the one hand and the factor incomes paid to the foreign residents for factor services rendered by them in the domestic territory on the other hand.

Net Factor Income

Net factor income earned from abroad hasthree components.Net compensation of employees

Net income from property i.e. rent, interest and income from entrepreneurship (that is profit and dividends)

Net retained earnings of the resident companies working in foreign countries.

Gross Domestic Product

Gross Domestic Product is the money value of all final goods and services produced by Residents as well as non residents in the domestic territory of a country but does not include net factor income earned from abroad.

GDP= GNP- net factor Income from abroad

orGDP = C+I + G+X

Net National Product

NNP or National income at market prices is the market value of all goods and services after providing depreciation.

NNP= GNP- Depreciation

Net Income At Factor Cost

National income or national income at factor cost = NNP at market prices Indirect taxes + subsidies.

Net Income At Factor Cost

National income or national income at factor cost = NNP at market prices Indirect taxes + subsidies.

Personal Income

Personal Income is the sum of all incomes actually recd by all individuals or household during a given year.

PI= NI undistributed corporate profit- social security contributions- corporate taxes+ Transfer payments.

Disposable Income

DI= personal Income personal taxes.OrPersonal disposable income = consumption +savings

Disposable Income

DI= personal Income personal taxes.OrPersonal disposable income = consumption +savings

CONSUMPTION & INVESTMENT

CONSUMPTION

Aggregate demand consists of two parts-Consumption

Investment

Consumption function- It relates to the amount of consumption to the level of income. When the income of the community rises consumption also rises.The consumption rises in response to a given increase in income depends upon marginal propensity to consume.

Investment

In economics, Investment is referred to as the new expenditure incurred on addition of capital goods such as machines , buildings equipments etc.Greater the level of investment , greater the level of income and employment.Investment is of 3 types-a)Business fixed investment- investment in fixed investment .i.e.machines, tools etc.b)Residential investment- investment in building of houses.c) Inventory investment-Investment in stocks and raw material.

Investment

Investment can be financial or real. In financial only the ownership changes but quantum of capital assets are same.For example- shares, bonds etc.In real investment, there is an addition to the stock of physical capital.Determinants of investment-a)Expected rate of profit or marginal efficiency of capitalb)The rate of interest

Consumption

Average propensity to consume(APC)- Average propensity to consume is the ratio of the amount of consumption(C) to total income(Y).

Where, C= amount of consumption Y= level of income

APC=C/Y

Consumption

Marginal propensity to consume-

Marginal propensity to consume is the ratio of change in consumption to change in income.

Where, C= change in consumption Y=change in the level of income

MPC= d C/ d Y

IncomeYConsumptionCAverage propensity to consume (C/Y)Marginal propensity to consume

1000110012001300140015001600750825900975105011251200750/1000=0.75825/1100=0.75900/1200=0.75975/1300=0.751050/1400=0.751125/1500=0.751200/1600=0.75

-75/100=0.75 75/100=0.7575/100=0.7575/100=0.7575/100=0.7575/100=0.75

C/YLinear Consumption Function

Consumption Function

Consumption Function

The whole schedulewhich shows the consumption at various levels of income.

Amount Of consumption-Amount of consumption means the amount consumed at a specific level of income.For ex-level of income is 1200 crores and consumption is 900 cr.

Propensity To Consume

Average propensity to consume

APC is the ratio of the amount of consumption to total income.APC= C/Y

Marginal propensity to consume

MPC is the ratio of change in consumption to the change in income.MPC=C/Y

MULTIPLIER EFFECT

Multiplier effect is the relationship between the income and investment.

Investment is a part of income , an increase in investment would lead to an increase in income equal to it.

A rise in income following an increase in investment induces an increase in consumption spending.

Thus inference is the increase in income would lead to increase in investment depending upon MPC resulting in multiple increase in consumption.

MULTIPLIER EFFECT

Multiplier effect is the relationship between the income and investment.

Investment is a part of income , an increase in investment would lead to an increase in income equal to it.

A rise in income following an increase in investment induces an increase in consumption spending.

Thus inference is the increase in income would lead to increase in investment depending upon MPC resulting in multiple increase in consumption.

Unit II

PART II: The Economic Markets The Product Market & How it Affects India's Growth Potential The Money Market & How it Behaves The Capital Market & its Variabilitv The Money Market & the Role of Central Banking How does Commercial Banking Effect Industry & Business The Indian Labor Market & Levels of Unemployment & Inflation since 1990

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eeb 2014

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