managerial economics notes 10

7/28/2019 Managerial Economics Notes 10

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Macro Economics And Business Decisions Unit 10

Sikkim Manipal University 262

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


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.


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.


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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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


1. Stock

2. Flow

3. Change

4. Ex-ante Ex-post

5. Dependent


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

managerial economics notes 10

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