Macro Economics

A Presentation

MEANING
Macroeconomics is the study of aggregates covering the entire economy. Thus, macro-economics is related to study of aggregates like total employment, total output, total consumption, total savings, total investment, national income, aggregate demand, aggregate supply, general price level, etc.

NATURE OF MACRO ECONOMICS: i) DETERMINATION OF NATIONAL INCOME AND

EMPLOYMENT: ~ Macro-economics deals with aggregate demand and aggregate supply that determines the equilibrium level of income and employment in the economy. ~ The level of aggregate demand determines the level of income and employment. ~ Macroeconomics also deals with the problem of unemployment due to lack of aggregate demand. Moreover, it studies the economic fluctuations and business cycles.

 ii) DETERMINATION OF GENERAL PRICE LEVEL: ~ Macroeconomics studies the general level of price

in an economy. ~ It also studies the problem of inflation and deflation. iii) ECONOMIC GROWTH AND DEVELOPMENT: ~ Macroeconomics deals with economic growth and development. ~ It studies various factors that contribute to economic growth and development.

 iv) DISTRIBUTION OF FACTORS OF

PRODUCTION: Macroeconomics also deals with various factors of production and their relative share in the total production or total national income

SCOPE AND SIGNIFICANCE

The importance of macro-economics can be understood from the following points: i) POLICY FORMULATION: ~ Macroeconomics plays a very important role in formulating economic policies. Since Government intervention in economic affairs is indispensable in the present economic scenario, the knowledge of aggregates is of great importance in the framing as well as the implementation of economic policies of the nation.

 ii) BASIS FOR MICROSTUDY:

~ Macroeconomics provides the basis for

microeconomic analysis as the study of aggregates helps to understand and verify the behaviours of individual units. iii) MULTI-DIMENSIONAL STUDY: ~ Macroeconomics has a very wide scope and covers multi-dimensional aspects like population, employment, income, production, distribution, consumption, inflation, etc.

 iv) NATIONAL INCOME:

~ Macroeconomics studies national income accounting

which helps to understand the distribution of income among different groups of people. It is also instrumental in forecasting the level of economic activity. v) SPECIAL GROWTH MODELS: ~ Macroeconomics has been useful in developing special growth models. These growth models are applied for economic development because the economics of growth is, in essence, the study of macroeconomics.

LIMITATIONS OF MACRO ECONOMICS

*LIMITATION: ~ Though macro-economics is essential in economic analysis

and has great practical and theoretical importance, it suffers from certain drawbacks or limitation. These are: i) UNREALISTIC ASSUMPTIONS: ~ Macroeconomics assumes that the aggregates are homogeneous. Such an assumption is, however, unrealistic. ii) GENERAL ECONOMIC WELFARE: ~ Macroeconomics deal with general welfare and disregards the welfare at individual levels though individual welfare forms an important part of economic study.

*CONCLUSION
~ In spite of its limitations, macroeconomics is of

great practical importance and is widely used. ~ It provides practical solution to economic problems. ~ It is complementary to microeconomics and the study of both is vital for proper analysis of economic problems.

Basic Concepts
Stocks and Flows
Equilibrium and Disequilibrium Statics and Dynamics

Stock & Flow Variables

In macroeconomics study, various

variables are used. Some are stock variables and some are flow variables. Variables like money supply, CPI, Foreign exchange reserves, which can be measured at any given point of time are called as stock variable. Whereas variables like GDP, inflation, imports, consumption and investment, which can be measured only over a period of time, are flow variables.

Equilibrium, Disequilibrium,Static & Dynamic Models

Equilibrium reflects balance between the opposing

forces, whereas disequilibrium reflects lack of such balance.

In economic parlance, equilibrium does not mean a

motionless state; rather, here the action is more repetitive in nature. These can be either in the state of equilibrium or disequilibrium at a given point of time.

Economic models consist of stock and flow variables. Models that do not consider the behavior of variables

from one time period to another in an explicit manner are called static models. over different time periods in an explicit manner.

Dynamic models consider the movements of variables

The Circular Flow of Income

Two Sector Economy
Closed Economy Open Economy

Two-Sector Economy (When All Income is Consumed)

Wages and Profits (i.e. income (Y) Rs.1000

AtEquilibrium : Y AD AD C
Household Sector

Productive Sector

Y C

Private Consumption (C) Rs.1000

Closed Economy
Wages and Profits (i.e. income (Y) Rs.1000

AtEquilibrium : Y AD AD C S C I
Household Sector

Productive Sector

InEquilibrium SI

Private Consumptio n (C) Rs.800 Investment Rs.200 Savings (S) Rs.200

Open Economy
Wages and Profits (i.e. income (Y) Rs.1000 Productive Sector Private Consumptio n (C) Rs.800 Household Sector

AtEquilibrium : Y AD Y C I GX C J
Savings (S) Rs.100 Imports (M) Rs.50 Taxes (T) Rs.50

Investment (I) Rs.80 Exports (E) Rs.60 Government Expenditure (G) Rs.60 [Injections (J) Rs.200]

[Withdrawals (W) Rs.200]