unit i be macroeconomics

7/28/2019 Unit I BE Macroeconomics

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What is macroeconomics?
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What is macroeconomics?

Macroeconomics considers the performance of the economy asa whole.

We try to understand changes in

The rate of economic growth

The rate of inflation

Unemployment

Our trade performance with other countries

Macroeconomics also includes an evaluation of the relative

success or failure of government economic policies


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Introduction to Macroeconomics

Microeconomics examines the behavior of individual

decision-making unitsbusiness firms and households.

Macroeconomics deals with the economy as a whole; it

examines the behavior of economic aggregates such asaggregate income, consumption, investment, and the overall

level of prices.

Macroeconomics deals with the functioning of the economy

as a whole.


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The Components of

the Macroeconomy

Everyones

expenditure is

someone elses

receipt. Every

transaction musthave two sides.


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The economy is made up offour sectors sometimes calledeconomic agents:

Households who receive payments (income) for their services (eglabour and land) and use this money to buy the output of firms (ieconsumption or household spending).

Firms who use land labour and capital to produce goods andservices for which they pay wages rent etc (income) and receivepayment (expenditure)

Government (also known as the public or state sector) and

International eg consumers buying overseas products (M) andForeigners buying UK products (X)


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The main objectives of government

economic policyThe key elements of the Government's strategy are:

1. Delivering macroeconomic stability (a very broad macroeconomicaim)

2. Meeting the productivity challenge (an important supply-sidetarget)

3. Increasing employment opportunity for all (a labour marketobjective)

4. Ensuring fairness for families and communities (commitment toequity)

5. Protecting the environment (green economics has amacroeconomic dimension)


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Concepts of Macro Economics

Inflation

Business cycle

Employment & unemployment

National income (GNP)

Stagflation

Exchange rates

Balance of payment

Economic Growth


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Inflation is a monetary phenomenon characterized by high prices i.e. falling

value money or in simple words inflation refers to a rapid rise in price level ,

which causes a decline purchasing power of money

The business cycle is the periodic but irregular up-and-down movements in

economic activity, measured by fluctuations in real GDP and other

macroeconomic variables

Employment &unemployment is an important macroeconomic variables .

The unemployment rate is the percentage of the labor force that isunemployed. The unemployment rate is a key indicator of the economys

health. The existence of unemployment seems to imply that the aggregate labor

market is not in equilibrium.


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National income is the value of all final goods and services

produced in a country in a year GNP/GDP shows the performance of

the economy in a year and determine the overall living standard of

the economy of a country, aggregate demand and aggregate supply

of the product

Stagflation occurs when the overall price level rises rapidly(inflation) during periods of recession or high and persistent

unemployment (stagnation)

Exchange Rates at which the currencies of two nations are

exchanged for each other and transactions in foreign market are

carried out

Balance of payment is the difference between export and import

over the net result of foreign trade and gives a true picture as to

where the country stands in international trade

Economic growth can be measured by an increase in countrys GDP


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Nature of Macro Economics

Macroeconomics studies economy as whole. It deals with

national income or national output , aggregate consumption ,

investment, demand, price, employment etc

Macro economies studies all phases of business cycle

It study the short period of time

It deals with real income

It serves as a guide for decision making

It plays crucial role of investment decision

Its laws and theories based on experience which serves as

guideline to the present day politician


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1.Theory of National Income:-Macroeconomics studies the concept of nationalincome, its different elements, methods of its measurement and social

accounting.

2.Theory of Employment:-It studies the problems of employment and

unemployment. There are different factors which determine employment. Theyare like effective demand, aggregate demand, aggregate supply, total

consumption ,total savings and total investment etc.

3.Marco Theory of distribution:-There are macro economic theories of

distribution. These theories try to explain how the national output is distributed

among the factors of production.

4.Economic development:-UDC's are blessed with mass poverty and low per

capita income curve for economic development. Economic development is a

long run process. In it, we analyze the problems and theories of development.

Scope of Macroeconomics


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5.Theory of International Trade:-It also studies principles determining trade among

different countries. Tariff's protection and free-trade polices fall under foreign trade.

6.Theroy of Money:- Changes in demand and supply of money effect level of

employment. Therefore ,under macro economics functions of money and theories

relating to money are studied.

7.Theory of Business Fluctuations:-It also deals with the fluctuations in the level of

employment, total expenditure, general price level.

8.Theory of Genral Price Level:-A continuous rise in the price level is called inflation.

It distorts production. It increases inequalities in the distribution of income and wealth.

The common man is injured by inflation. Deflation is the opposite of inflation. The

general price level falls continuously. Output and employment levels fall. Macro

economics provides explanation for the occurrence of inflation and deflation.

Scope of Macroeconomics


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Importance of Macroeconomics

Helpful in understanding the functioning of an economy

Study of national income

Formulation of economic policy

Study of trade cycle Changes in general price level

Economic growth

International comparison

Economic planning

Helpful in understanding Macro Economic Paradoxes


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Macroeconomics is useful in several ways. Some of them are discussed under

the following headings:

a. To understand the working of economy:-Macroeconomics gives birds eye

view of the economic world. It helps in understanding how the

macroeconomic variables behave in the aggregate. Study of the national

income, aggregate output, gross saving and output, national expenditure is

very essential to understand the working of the economy.

b. Helpful in formulation of economic policies:-Macroeconomic analysis

provides a sound basis for the formulation ofgovernments economic policy.

The economic policies for the removal of poverty, employment and price

stabilization must be based upon reliable statistics of the aggregate variables.

c. Helpful in controlling economic fluctuations:-Economic fluctuations like

trade cycle, inflation, deflation etc. need to be handled appropriately in

appropriate period to correct them. This will give a finite direction to the

economy. For this the knowledge of macroeconomics is essential.


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d. Helpful in international comparisons:-Only macroeconomic variables like

national income, total output, aggregate demand, and consumption

behaviour and investment patterns of different countries can be easily

compared. Macroeconomics provides the necessary information for this.

e. National Income:-National income is the barometer that scales the growth

of a country. It analyses the overall performances of the economy within a

given period of time and allow us to compare that performance with the post.

National income, basically, is an aggregate concept.

Thus, macroeconomics studies about the problems of unemployment,

inflation, economic instability and economic growth. It also enriches our

knowledge of functioning of the whole economy by studying the behaviour ofnational income, output, investment, saving, and consumption.


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Limitations of Macro Economics

Fallacy of Composition

In Macro economic analysis the fallacy ofcomposition is involved, i.e.

aggregate economic behaviour is the sum total of the economy of

individual activities. But what is true of individuals is not necessarily true

to the fiscal entirely. For instance, savings are a private virtue but a public

vice. If total savings in the economy increases, they may initiate a

depression unless they are invested. Again, if an individual depositorwithdraws his money from the bank, there is no risk. But if all depositors

simultaneously do this, there will be a run on the banks and the banking

system will be affected adversely.


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Limitations of Macro Economics To Regard the Aggregates as Homogenous

The main defect in macro analysis is that it regards the aggregates ashomogenous without caring about their internal composition and structure. The

average wage in a nation is the sum total of wages in all professions, i.e. wages

of clerks, typists, teachers, nurses etc. But the volume of aggregate employment

depends on the relative structure of wages rather than on the average wage. If,

for instance, wages of nurses increase but of typist rises much aggregate

employment would increase.

Statistical and Conceptual Difficulties

The measurement of macro economics concepts involves a number of statistical

and conceptual complexities. These problems relate to the aggregation of micro

economic variables. If individual units are almost similar, aggregation does not

present much difficulty. But if micro economic variables relate to dissimilar

individual units, their aggregation into one aggregation into one macro

economic variable may be incorrect and hazardous.


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Limitations of Macro Economics

Aggregate Variables may not be Important Necessarily

The aggregate variables which form the economic system may not be of muchsignificance. For instance, the national income of a country is the total of all

individual income. A hike in national income does not mean that individual

incomes have risen. The increase in national income might be the result of the

increase in the incomes of a few rich people in the nation. Thus a rise in the

national income of this type has little significance from the point of view of thecommunity.

Indiscriminate Use of Macro Economics Misleading

An indiscriminate and uncritical use of macro economics in analysing the

complexities of the real world can frequently be misleading. For instance, if the

policy measures needed to achieve and maintain full employment in theeconomy are applied to structural redundancy in individual firms and industries,

they become irrelevant. Likewise, measures aimed at controlling general prices

cannot be applied with much advantage for controlling prices of individual

products.


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Economic Growth & Development

Economic development is a broaderterm than economic growth

Economic growth usually means the growth in production of an

economy i.e countrys real output of goods & services or the product

per capita

Economic development implies progressive changes in socio-

economic structure of a country. It includes other factors such as

literacy health, child mortality rate, equality, regional balance,

infrastructure


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Economic Growth is a narrower concept than economic development. It is

an increase in a country's real level of national output which can be caused by

an increase in the quality of resources (by education etc.), increase in the

quantity of resources & improvements in technology or in another way

an increase in the value of goods and services produced by every sector of the

economy. Economic Growth can be measured by an increase in a country's

GDP (gross domestic product).

Economic Growth
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Features of Economic Growth

1. Rise in output by mobilizing resources and raising their

productivity

2. Supply of capital raises effective demand which in turn

induce business activity

3. Rate of increase in per capita income

4. Increase in accumulation of capital, technologicalimprovement

5. Full employment


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Economic development is a normative concept i.e. it applies in the context of

people's sense of morality (right and wrong, good and bad). The definition of

economic development given by Michael Todaro is an increase in living

standards, improvement in self-esteem needs and freedom from oppression as

well as a greater choice. The most accurate method of measuring development

is the Human Development Index which takes into account the literacy rates &

life expectancy which affects productivity and could lead to Economic

Growth. It also leads to the creation of more opportunities in the sectors of

education, healthcare, employment and the conservation of the environment. It

implies an increase in the per capita income of every citizen.

Economic Development
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Features of Economic Development

1. Changes in socioeconomic structure

2. Economic development involves a steady decline in the agriculture

share in GDP& corresponding increase in share of industries , trade ,

banking , construction & services

3. It implies changes in technological and institutional organization of

production and distributive pattern of income

4. It helps in human resource development & thus raises productivity

level

5. It reduces social tension & thereby create congenial environment for

business


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Economic Development vs Economic Growth Economic Growth does not take into account the size of the informal

economy. The informal economy is also known as the black economy which is

unrecorded economic activity. Development alleviates people from low

standards of living into proper employment with suitable shelter.

Economic Growth does not take into account the depletion of natural

resources which might lead to pollution, congestion & disease. Development

however is concerned with sustainability which means meeting the needs of

the present without compromising future needs. These environmental effectsare becoming more of a problem for Governments now that the pressure has

increased on them due to Global warming.

Economic growth is a necessary but not sufficient condition of economic

development.


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Economic Development Economic Growth

Concept: Normative concept Narrower concept than economic

development

Scope: Concerned with structural changes

in the economy

Growth is concerned with

increases in the economy's

output

Growth: Development relates to growth of

human capital indexes, a decrease

in inequality figures, and

structural changes that improvethe general population's quality of

life

Growth relates to a gradual

increase in one of the

components of Gross Domestic

Product: consumption,government spending,

investment, net exports


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Economic Development Economic Growth

Implicati

on:

It implies changes in income,

saving and investment along with

progressive changes in socio-economic structure of

country(institutional and

technological changes)

It refers to an increase in the real

output of goods and services in

the country like increase theincome in savings, in investment

etc.

Measure

ment:

Qualitative.HDI(Human

Development Index), gender-

related index (GDI), Human

poverty index (HPI), infant

mortality, literacy rate etc.

Quantitative. Increase in real

GDP. Shown by PPF.

Effect: Brings qualitative and quantitative

changes in the economy

Brings quantitative changes in

the economy


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Growth & Development in Indian Economy

In the case of the Indian economy economic growth is not enough; we

need economic development. We need better health of people, education for

all, reduction in inequality among sections of people and regions, reduction

in infant mortality rate (IMR), access to drinking water for all, etc.

The government has to devise policies and allocate government

expenditure so that these facilities are available to all. Thus the additional

income generated in the economy reaches the backward regions and the

poorer sections of society. To achieve economic development we need

economic growth. In a stagnant economy, where there is no economic

growth, realization of economic development is difficult.


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Measurement of the level of economic development is difficult, because itdoes not depend upon a single factor. There are a number of indicators of

economic development. These indicators could be quite varied and too

many.

For economic growth given the per capita GDP along with annual

growth rates of some of the economies. In order to make comparison

possible we have given these figures in a comparable form . We can see

that Indian economy is not comparable to developed economies. The per

capita GDP in India is much lower than in developed countries.

However, it has a higher growth rate compared to others. Note that

some of the countries have very low GDP per capita and have

experienced decline in it over time (see, Nigeria and Tanzania)

Indicator for measurement of Growth &

Development in Indian Economy


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Indicator for measurement of Growth &

Development in Indian Economy

Economic Development Apart from low per capita income India is far below

the developed economies in terms of development indicators. Some of these

indicators are consumption of electricity, literacy rate, access to safe drinking

water, empowerment of women, etc. United Nations Development Programme

(UNDP) brings out a 'human development index' by combining several indicators

of development such as life expectancy, education, per capita income, and

empowerment of women. According to Human Development Report 2001,

India ranks 1 15 out of 162 countries in terms of human development index .A

positive feature of the Indian economy is that it is not stagnant; it is developing.

It is one of the fastest growing economies in the world. There have been

improvements in life expectancy literacy and availability of infrastructure

unit i be macroeconomics

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