UNIT 1: INTRODUCTION

Chapter 1: Introduction to Macroeconomics

Microeconomics Vs Macroeconomics
Microeconomics and macroeconomics are the two branches of the study of Economics.

Microeconomics is the study of economic systems on a small scale

as they are applied to an individual, a group, or a company.
It deals with Individual Income, Individual prices, Individual
output, etc.
Its central problem is price determination and allocation of
resources.
Its main tools are demand and supply of a particular
commodity/factor.
It helps to solve the central problem of ‘what, how and for whom’ to
produce. In the economy
It discusses how equilibrium of a consumer, a producer or an
Industry Is attained.

Macroeconomics examines economics on the larger scale. It is the

study of economy as a whole and its aggregates.
It deals with aggregates like national Income, general price level,
national output, etc.
Its central problem is determination of level of Income and
employment.
Its main tools are aggregate demand and aggregate supply of the
economy as a whole.
It helps to solve the central problem of full employment of resources
in the economy.
It is concerned with the determination of equilibrium level of
Income and employment of the economy.
Income is the major determinant of macroeconomic problems.
Goals of Macroeconomic Policy

The three macroeconomic goals of full employment, stability, and economic growth are
widely considered to be beneficial and worth pursuing. Each goal, achieved by itself,
improves the overall well-being of society. Greater employment is typically better than less.
Stable prices are better than inflation.

Macroeconomic policies include taxes, government spending and borrowing, exchange

rate determinants, and monetary and credit rules. The primary goal of
effective macroeconomic policies is to reduce uncertainty and risk in economic decision-
making.

The macroeconomic policy objectives are the following:

(i) Full employment,

(ii) Price stability,

(iii) Economic growth,

(iv) Balance of payments equilibrium and exchange rate stability,

and

(v) Social objectives.

The main policy instruments available to meet macroeconomic objectives are

 Monetary policy –changes to interest rates, the supply of money and credit
and also changes to the value of the exchange rate
 Fiscal policy – changes to government taxation, government spending and
borrowing
 Supply-side policies designed to make markets work more efficiently
Chapter 2: The Circular Flow of Income and Expenditure
The circular flow model demonstrates how money moves through society.

Two Sector Economy

1) Households/Consumers
2) Firms/Businesses

Assumptions:

There are No Savings by the household sectors, as households spend all their income on the
purchase of goods and services.

There are No Inventories as firms are assumed to produce the goods and services just enough to
satisfy the demands of the households.

There are No Retained Earnings by the Firms as they distribute all it earns from the sale of goods
and services.
Elements

Factor income or Factor Payment: Wages, Rent, Interest, and Profits (Firm to Households)

Factor Services: Land, Labour, Capital, and Material (Households to Firms)

Expenditure on Goods and Services or Consumer Expenditure (Households to Firms)

Flow of Goods and Services (Firm to Households)

Withdrawals (Leakages) and injections in the Economy

There types of Withdrawals

Savings

Imports

Taxes

There are three types of Injections

Investment

Government Expenditure

Exports

Three Sector Economy

1) Households/Consumers
2) Firms/Businesses
3) Government
Four Sector Economy

1) Households/Consumers
2) Firms/Businesses
3) Government
4) External Factors (Net Exports)
https://www.businesstopia.net/economics/macro/circular-flow-two-sector-economy

Two Kind of Flows

1) Real Flow: Flow of Factor of Production and Goods and Services

2) Money Flow: Monitory Flows