Macroeconomics

Nature & Scope

Basic Concepts
What Is Economics?

Study of those activities that involves production

& exchange among people

Study of mankind in the ordinary business of life
Science of choice (using scarce resources) Economics is what economists do

Basic Concepts
Father Of Economics- Adam Smith In 1776 he wrote a famous book - Wealth Of

Nations, this is where economics as an academic subject took off.

Basic Concepts
Any Society faces 3 economic problems: What commodities to produce in what quantities &

when?
How shall the goods be produced(technological

factor)
For whom shall it be produced?

Basic Concepts
All the 3 problems of Economics arise out of use of scarce resources to satisfy human needs. Resources in Economics Natural Resources OR in economics- LAND All human resources mental /physical- LABOUR Tools, machinery, plant & equipments which helps in production-CAPITAL These are called factors of production.

Basic Concepts
Microeconomics
Microscopic view of the

Macroeconomics
Macroscopic/bigger view

economy Study of particular individual prices, individual incomes, individual consumption, individual investment, particular firm etc.

of the economy Study of price level as a whole, national income, total consumption, total investment, entire industry etc.

Basic Concepts
Relation of Microeconomics & Macroeconomics INTERDEPENDENCE(Macro is dependent on Micro)

Microeconomics deals with individual levels & we know that individual added together makes aggregate. That implies if we add all micros we get a macro. So, both microeconomics & macro economics are interdependent. Eg: Individual consumption added together gives total consumption of the economy

Basic Concepts
Relation of Microeconomics & Macroeconomics INTERDEPENDENCE(Micro is dependent on Macro)
At firm level the main motive is profit maximization.

Profit is the reward for uncertainty bearing.

Uncertainty is created as a result of TOTAL

DEMAND(Macroeconomic Concept).

Basic Concepts
Difference in Approach of both Microeconomics &

Macroeconomics
What is true for an individual at Micro Level may not hold

true for the economy at the Macro Level Eg: An individual is richer by saving more & spending less. But if all individuals save more & spend less then the nation becomes poor/national income falls. This is called PARADOX OF THRIFT

Macroeconomics
Scope Of Macroeconomics

1. Problems relating to determination and fluctuation of the level of income & employment for the economy as a whole. 2. Problems relating to the determination & changes of the general price level. 3. Problems relating to the allocation of resources between consumer goods & capital goods. 4. Problems relating to the relation between international trade & the levels of employment, prices & income in the economy.

Macroeconomics
Scope Of Macroeconomics

5. Problems relating to the fluctuations in the general level of money wages & prices 6. Problems relating to the general level of interest rates. 7. Problems relating to the economic activities of the government & their effect on the levels of income & employment. 8. Problems relating to the rate of growth of the productivity capacity of the economy.

Importance of Macroeconomics
1. A credible tool for judging the performance of the
economy. It is judged by GNP(Gross National Product)

What is GNP?
Gross National Product is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad), minus income of non-residents located in that country. Basically, GNP is the value of what's produced by a country's residents, no matter where they live.

Importance of Macroeconomics
2. Useful to the government for formulating appropriate policies(monetary, fiscal). 3. Useful for the business firms, for estimating the level of economic activity. Also, for efficiently running their business the firm requires information on the economic environment which macroeconomics provide. 4. To find out the material well being of an economy. Mainly given by the size & distribution of the national income.This is the domain of Welfare Economics where macroeconomics play an important role.

Welfare implications
Some Important Implications
Financial globalization Income determination in an open economy Providing help in govt. budgetary measures In determining the trade pattern between two countries In study of Inflation Determining the optimal interest rate

Determining the full utilization of reaources.

Concept Of National Income

What is National Income?

Those incomes which accrue due to participation in the production process are included in the national income total How does one participate in the production process? By supplying different factors of production (Land,Labour,Capital) Land, Labour, Capital are called the primary factors of production Rent, Wage, Interest are the factor incomes. After payments are made the surplus left is the profit.

Concept Of National Income

Therefore income in the participation of the production

process may take 4 forms: 1. Rent 2. Wage 3. Interest 4. Profit Thus National Income = Sum of all (Rent+Wage+Interest+Profit)

Concept Of National Income

When we talk about National Income, 2 types of

receipts are excluded from the discussion: 1.Transfer Payment Eg: Beggar 2. Capital Gains Eg: Selling of asset which has appreciated in value & thus realising his gain.

Concept Of National Income

National Income can be measured by :

1. GNP 2. NNI 3. NNP 4. GDP

Concept Of National Income

GDP

GDP is the market value of everything produced

within a country
GDP (gross domestic product) is "the total market value of

goods and services produced within the borders of a country, regardless of the nationality of those who produce them. Eg: Value of goods produced by foreign-owned businesses on U.S. land would be part of GDP of U.S.

Concept Of National Income

GNP

GNP (gross national product) is the total market value

of goods and services produced by the residents of a country, even if theyre living abroad. So if a U.S. resident earns money from an investment overseas, that value would be included in GNP of U.S. (but not GDP). Therefore, those nations with a high number of foreign investments, the GDP will be notably higher than GNP.