rogramme) II Year Economics PAPER : X/ Discipline Course _ MACRO ECONOMICS Study Material : 1 (1-9) Department of Economics Editor : Janmejoy KhuntiaGraduate Course Micro Economics Contents 4: National Income Determination 2 : Determinants of Consumption 3 : Determinants of Investment 4 : Employment and Unemployment 5 : Money 6 : Measures of Money Supply 7 : Money and Prices 8 : Credit Creation Editor : Janmejoy Kihuntia SCHOOL OF OPEN LEARNING UNIVERSITY OF DELHI 5, Cavalry Lane, Delhi-110007LESSON I NATIONAL INCOME DETERMINATION Introduction : From Micro to Macro Economics The second part of Papér i i.e. ‘Micro Economics’ was concerned with the pricing of individual commodities and factors of production. In that part, we studied the behaviour of an individual consumer and an individual producer. We were not concerned with what was happening to the total output of the economy which was taken as given. Our object in Micro Economics was to study the distribution of a given volume of resources among various uses in accordance with the variations in the relative prices of vatious commodities and factors of production. The kinds of questions we tried to answer were : How mich of a certain commodity will be produced and at what price will it sell ? Why is commodity X priced higher than commodity Y? How will the value of a factor be determined in the market ? Which factors will determine its transfer from one area of production to the other ? These problems pertain typically to the realm of micro economics, the branch of economic theory which studies behaviour of individual markets and individual economic units. In what follows, we are going to study ‘Macro Economics’. Literally ‘micro’ in Greek means smail and ‘macro’ means large. So micro-economies is “economics of the small (say one single unit) while macro economics is ‘economics of the large’ (the economy °: a whole). In macro economics, we study (1) the determination of the income and employment levels for the economy as a whole and also fluctuations in these levels and (2) determination of and fluctuations in the general level of prices. In other words, macro economics deals with broad aggregates and averages rather than detailed study of individual market and relative prices. ; It is necessary to emphasize here that the distinction between micro and macro variables cannot always be rigid and the two have to be understood in a relative sense. For instance, output of an industry will be a macro variable looked at from the view point of a single firm in the industry, but the same will be a micro variable when seen with reference to the total output of the economy. ‘The two variables (micro and macro), in fact, represent different degrees of aggregation and their classification as micro or macro can only be with reference to the specific variables or situations in question. SELF-CHECK EXERCISE Remember that the study of the whole (c.g. aggregate output, employment, industry versus firm, general price-level versus a single price, etc.) is Macro whereas study of a part of the whole (e.g. a firm, a consumer, an industry versus the economy, output of a crop versus total agricultural output) is Micro study. Il Tne Context It is important to understand the context in which Keynes wrote his ‘General Theory of Employment, Interest and Money.’ Prior to the Great Depression of 1930's, the prevalent economic theory held that the capitalist economy, while it misbehaved occasionally, had an inbuilt tendency