CLASS 12 ''Basic concept of MACROECONOMICS (CHAPTER 7)''

PART B: MACROECONOMICS

CHAPTER 7: BASIC CONCEPT OF MACROECONOMICS

Macroeconomics and its Concept:

The term Macro is obtained from Greek Word “Makros” which means broad or large. Macro Economics may be defined as that branch of Economic Analysis which studies broad or big or large or macro economic variables such as National Income, National Output and others.

According to K. E. Boulding,

“Macroeconomics deals not with Individual Quantities as such but with aggregate of these Quantities, not with Individual Incomes but with National Income, not with Individual Prices but with Price level, not with Individual Output but with National Output”

-         K. E. Boulding

Macroeconomics attempts to examine the aggregate Economic Variables and therefore it is also known as “Aggregative Economics”. The concept of Macroeconomics can be presented by following schedule:

 

 

 

 

 

Macroeconomics attempts to present the picture of Theory of Income and Employment and therefore it is also known as “Income Theory”. Macroeconomics is classified into three categories:

a. Macro Statics

b. Comparative Macro Statics

c. Macro Dynamics

Differences between:

Microeconomics The term Micro is derived from Greek Word Mikros which means tiny or small.	Macroeconomics The term Macro is derived from Greek Word Makros which means big or  broad or large.
Microeconomics studies Individual Economic Unit as Individual’s Income, Price of a Comm- -oddity and others.	Macroeconomics studies broad econom- -ic variables as National Income, Natio- -nal level of Employment and others.
Microeconomic theories are based on assumpt- -ion of full employment of resources.	Macroeconomic theories are based on Assumption of parital employment of Resources.
Microeconomics basically focuses on Product And Factor Pricing and therefore Microecono Mics is also known as Price Theory.	Macroeconomics focuses on Income Employment Generation and therefore It is also known as Income Theory.
Allocation of Resource among different factors Of production can be described as the case of Microeconomics.	Economic Development is the case of Macroeconomics.
Microeconomics is related with the process of Distributing money value of a commodity At micro level of different factors of producti- -on.	Macroeconomic theory is related with Distributing National Income and Nati- -onal Production among different sec- -tors of a country.

 

 

 

Closed Economy:

The concept of closed economy was developed by famous British Economist J.M. Keynes.

When National Income of a country is managed through consumption expenditure (C), Investment expenditure (I) and Government expenditure (G) then such National Income structure of an economy is represented as Closed Economy. Closed Economy is classified into two main categories:

1. Two Sector Economy:

When aggregate Income (Y) of a country splits into aggregate consumption expenditure (C) and aggregate investment expenditure (I) then such structure is known as Two Sector Economy.

Symbolically,

Y = C+I

Where, C = a+bY i.e. a = Autonomous Consumption, b = slope (Rate of change in consumption due to change in Income)

2. Three Sector Economy: (Y = C+I+G)

When aggregate income of a country splits into components of aggregate consumption expenditure (C), aggregate investment expenditure (I) and government expenditure (G) then such economic structure of a country is known as Three Sector Economy.

Symbolically,

Y = C+I+G

Two Sector and Three Sector Economy are technically described as Closed Economy.

Open Economy:

When aggregate income (Y) of a country splits into components of  aggregate consumption expenditure (C), aggregate investment expenditure (I) and government expenditure (G) and net income from abroad (X-M) or foreign trade sector (X-M) then such economic structure of a country is analyzed as four sector economy also known as Open Economy because it is connected with export-import (X-M) management of rest of the countries of the world.

Symbolically,

Y = C+I+G+(X-M)

In fact, open economy is a realistic approach commonly observed in developed and developing countries of the world.

Differences Between:

Closed Economy	Open Economy
1. Narrow Concept	1. Broad Concept
2. Applicable in Domestic Economy	2. Applicable in Domestic and  Foreign Economy
3. Measurement of Domestic Economic Growth	3. Indicator of Economic Development
4. Applicable in Particular Economy	4. Applicable in Global Economy

 

MACROECONOMIC VARIABLES:

1. National Income: The monetary value of goods and services produced in an economy during the period of one year is known as National Income. While estimating National Income the raw product and intermediate product are not included in estimation of National Income. The monetary value of final product is only included, accounted and evaluated in the estimation of National Income. The income obtained from abroad by a country is also included in the estimation of National Income. The components of National Income are listed as follows:

a.Gross Domestic Product (GDP):The monetary value of goods and services produced in an economy during the period of one year is known as Gross Domestic Product. While estimating GDP the monetary value of final product in only included. The deprecation value is not subtracted from GDP. GDP focuses on final products of following three sectors as mentioned below:

1. Products of Primary Sector (Agricultural Sector)

2. Products of Secondary Sector (Industrial Sector)

3. Products of Tertiary Sector (Service Sector)

Symbolically,

GDP = C+I+G

Where, C = Aggregate Consumption, I = Aggregate Investment and G = Government Expenditure

GDP only shows economic strength of a country.

b. Gross National Product (GNP):The monetary value of goods and services produced in an economy during the period of one year is called GDP. When net income from abroad or net trade balance or difference between export and import i.e. X-M is added to GDP then such a concept is known as GNP. The monetary value of final product is only included in the estimation of GNP. The products of following four sectors are included, accounted and evaluated in the estimation of GNP and they are:

1. Products of Primary Sector

2. Products of Secondary Sector

3. Products of Tertiary Sector and

4. Net Income from Abroad (X-M)

Symbolically,

GNP = C+I+G+ (X-M)

c. Net National Product/Net National Income:When net income from abroad i.e. (X-M) is added to GDP then such a concept is known as GNP. When depreciation value is subtracted from GNP then such a case is known as NNP/NNI. Net National Income is the true or actual income of a country.

Symbolically,

NNP = C+I+G+(X-M) – Depreciation

NNP is also technically known as NIatMP i.e. National Income at Market Price.

d. National Income at Factor Cost: When deprecation value is subtracted from GNP then the remaining amount of National Income is known as NNP. The value of indirect tax like sales tax, excise duty, custom tax, VAT and others are subtracted from NNP to obtain NIatFC. Likewise, the value of subsidy is added to NNP to obtain the value of NIatFC.

Symbolically,

NIatFC = NNP – Indirect taxes+ Subsidy

e. Personal Income (PI):It is the total income received by individuals and households of a country from all possible sources before direct taxes. Personal Income can be expressed as follows:

Personal Income = National Income – Corporate Income taxes – Undistributed Corporate Profits – Social Security Contributions – Transfer Payments

f. Disposable Income (DI): The income left after the payment of direct taxes from personal income is called Disposable Income. It is the actual income which can be spent on consumption by individuals and families. It can be expressed as follows:

Disposable Income = Personal Income – Direct Taxes

Disposable Income can be restates as under:

Disposable Income = Consumption Expenditure + Savings

g. Per Capita Income (PCI):The average income of individuals of a country is called Per Capita Income. PCI is calculated as under:

Per Capita Income = Natioanl Income

        Total Population

 

2. National Output: It is the "quantity of goods or services produced in a given time period, by a firm, industry, or country", whether consumed or used for further production.

3. Unemployment: It is a basic humanitarian problem all over the world. When people are willing to work but they are not getting opportunity to work then such a case is known as Unemployment. In developing countries Unemployment is commonly found which causes to increase magnitude of poverty in the society. In fact, Unemployment and poverty are complementary to each other which causes to damage economic development of the country.

Types of Unemployment:

1. Voluntary Unemployment: In every society there are some people who are unwilling to work at prevailing wage rate. Jobs are available for them but they do not want to accept them. Such type of unemployment is known as Voluntary Unemployment.

2. Frictional Unemployment: When some workers are temporarily out of work while changing jobs then it is called Frictional Unemployment.

3. Casual Unemployment: In certain industries where workers are employed on a day to day basis, there are chances of unemployment occurring due to short term contracts which are terminable at any time. Such type of unemployment is known as Casual Unemployment.

4. Seasonal Unemployment: There are some industries where production activities are seasonal in nature. These industries offer employment for a certain period of time in a year after which these people become unemployed. Such type of unemployment is known as Seasonal Unemployment.

5. Structural Unemployment: Structural unemployment may take place due to structural changes in the economy such as decline in demand for production, disinvestment and reduction in manpower requirements.

6. Technological Unemployment: It is a type of structural unemployment which takes place as a result of technological advancement. Eg. Due to introduction of new machinery some workers tend to be replaced by machines.

7. Cyclical Unemployment: Cyclical unemployment is caused due to trade cycles especially recessionary and depressionary phase. Now since trade cycle cannot be permanent so cyclical unemployment due to deflation remains only as a short term phenomenon.

8. Chronic Unemployment: When unemployment tends to be a long term feature of a country then it is called Chronic Unemployment. Its causes are lack of resources, its underutilization, high population growth, primitive state of technology, low capital formation etc.

9. Disguised Unemployment: Disguised Unemployment refers to a situation in which removal of some workers will not affect the volume of total output. Here there are unproductive employed worker in any occupation which is not clearly visible. Disguised unemployment is also known as Concealed Unemployment.

4. National Employment:A wide variety of employment created and provided by a national employer, business, charity, company, government, nonprofit organization, public sector organization, private sector organization, service provider or voluntary sector organization in various areas of a nation for a national population.

5. Inflation: It is defined as sustained or continuous rise in the general price level of goods and services in the economy. When prices of almost all goods and services increase in economy, the value of money decreases and it causes Inflation. Inflation leads to increase in cost of living leading to fall in standard of living of mass people. Thus, during Inflation value of money decreases i.e. price level increases.

According to Crowther, ‘ Inflation is a state in which the value of money is falling i.e. prices are rising’

Types:

1. Demand Pull Inflation: If inflation arises due to excess demand for goods and services over limited quantity supplied, it is called Demand Pull Inflation.

2. Cost Push Inflation: Increase in general price level of goods and services in the economy due to increase in cost of production is called Cost Push Inflation.

6. Deflation:Deflation is opposite of Inflation. It is defined as sustained or continuous fall in general price level of goods and services in the economy. When prices of all the goods and services decrease, value of money or purchasing power of money increases it is called Deflation. Deflation is worse than Inflation because it may discourage producers and investors reducing employment.

According to Crowther, ‘ Deflation is the state of economy where value of money is rising or prices are falling’

7. Economic Growth: An increase in the capacity of an economy to produce goods and services is called Economic Growth. It means sustained increase in national income or per capita income over a long period of time.

According to M.P. Todaro and S.C. Smith. ‘Economic Growth is a steady process by which the productive capacity of an economy increases overtime to bring about rising levels of national output an income’

8. Trade Cycle:The periodic occurrence of boom and depression (slump) one after another in business and economic sector of a country is known as Business Cycle. The British Economists called it Trade Cycle. The different phases are:

a. Depression

b. Recovery

c. Prosperity (Full Employment)

d. Boom

e. Recession