MACRO ECONOMY

Foundation of Economics

 Economics is derived from the word economy

 Economy: - The wealth and resources of a nation, Especially in terms of the Production and
Consumption of goods and services.
 Economics: - A social science that studies how individuals; households, firms and government,
make choices about allocating scare resources to satisfy their unlimited wants.

Resources/factors of production/inputs

1. land: - common name given to all natural resources in Terms of 3F’s. & 1M.
2. labour: -common name given to all Human resource Three Types skilled; semiskilled;
unskilled.
3. Capital: - Common name given to all man-made productive assets (plants and Machines).
4. Enterprises: - common name given to all enterprising Skills which are the skills possessed by
very few people. about combining the cand labour capital with their risk taking abilities and
starting a new business.
 How does an Economy grow?
 Five sector's of an Economy. 3F’s: - Forest, Fisheries, Farms,
The Circular Flow model of incomes f Expenditure . 1M: - Mines

These are the Productive assets

The Circular - Flow model

The Circular-flow model is a simple way to visually show the Economic transactions that occurs
between households and firms in Economy

Expenditure Income
House Holds
land – Rent
labour – wages
Good & Services
Capital – interest
Enterprise – profit

Firms

Income Expenditure
The Circular Flow
2 sector model: - Household & firms
3 Sector model: - Household, firms & Banks
4 sector model: - Household, firms, Banks & government.
5 sector Model: - Household, firms, Banks, government & Rest of world.

National income (Y) = C+I+G+NX (Exports - imports)

3 leaks: - Saving, Taxes, imports
3 injections: - investment, export, Government Expenditure

5 sectors of the economy: -

Household supply factors of production to farms to which they receive
income they spend their debt income on consumption goods and Services
Hous
ehold
Farms produce goods and services and pay wages profits etc to household’s
farms also invest in plant and equipment

Far
m
Government takes and spend (government expenditure)

Gov
ernment
Bank households deposit their savings with banks and banks lands firms’
money to invest

Bank
The rest of the world import and exports

Rest
of The World
Historical development of the metro economic
thoughts: -
Development of metro economic thought
Four phrases: -
1. Classical economics
2. Keynesian economics
3. Monetary economics
4. Supply side economics

1 2 3 4
1

Classical Economy Keynesian Economy Monetary Economy Supply Side Economy

Classical Economy Classical Economy

1930 1960 1990 Till Date

Say’s Laws
Supply Creates its Own demand

Government in the macro economy: -

There are 3 kinds of policy that the government has used to influence the metro
economic : -
1. Fiscal policy
2. Monetary policy
3. Growth or supply side policies

Fiscal policy: - Refers to government policies concerning taxes concerning Texas

and spending.
Monetary policy: - Consists of tools used by central bank (in India’s case the
reserve Bank) to control and quantity of money and credit in the economy.
Growth policies: - are government policies that focus on restricting aggregate
supply instead of aggregate demand (SEZ) Special Economic Zone. incentive given
to the (EOUs) Export oriented units.