MACROECONOMICS

What is Macroeconomics?
• ECONOMICS is “a social science concerned with description and analysis of
the production, distribution, and consumption of goods and services”. Economics is behavioural
science (study of human behaviour). What will a Rationale customer do?
• Macroeconomics is a branch of the economics that studies how the aggregate economy behaves.
It studies economy-wide phenomena such as inflation, price levels, rate of growth, national
income, gross domestic product and changes in unemployment.
• Microeconomics focuses on smaller factors that affect choices made by individuals and companies.
• HOW ARE BOTH RELATED..???
• Ex -unemployment level in the economy as a whole has an effect on the supply of workers from
which a company can hire.
Macro and Micro…
• When we study- consumption behavior or equilibrium of a consumer, the production pattern &
equilibrium of a firm, the entire analysis is ‘micro’ in nature because……
• we study a UNIT and not the SYSTEM in which it is operating.
• When whole system(economy) is taken into consideration, the analysis is ‘macro’’ in nature
• Unit produced by Maruti Suzuki * Price +
• Unit produced by Hyundai * Price +
• Unit produced by Toyota * Price +
• Unit produced by Honda * Price +
• Unit produced by Tata motors * Price +
• Unit produced by Ford * Price +
• Unit produced by Mahindra * Price +
• Unit produced by Renault * Price +
• ……………………………….+
• ……………………………….+
• Unit produced by XXXXX * Price =
Total Value of Goods Produced by Auto Industry in India in 2017
• Value of Goods & Services Produced by Auto Industry +
• Value of Goods & Services Produced by Manufacturing Industry +
• Value of Goods & Services Produced by Banking Industry +
• Value of Goods & Services Produced by Agricultural Industry +
• Value of Goods & Services Produced by Real Estate Industry +
• Value of Goods & Services Produced by Textile Industry +
• Value of Goods & Services Produced by IT Industry +
• Value of Goods & Services Produced by Pharma Industry +
• Value of Goods & Services Produced by Financial serv Industry +
• ……………………………….+
• ……………………………….+
• Value of Goods & Services Produced by XXXXXXX =

GROSS DOMESTIC PRODUCT OF India in 2017

Gross Domestic Product

GDP is the market value of all the goods and services

produced in an economy.
In a way it is like a price tag of a country and measures
the size of the economy.
How to calculate GDP..???
• GDP = C + I +G + (X - M)

Consumer spending Investment Exports-Imports

Government Spending

• Consumer spending= Consumer spending is the measure of all spending by nation's consumers 
• Investments = made by business
• Government Spending = all government consumption, investment, and transfer payments
• Net Exports= Exports-Imports
GDP is commonly used as an indicator of the economic health of a country, as well as a gauge of a country's standard of
living. 
Circular Flow of Income
( Real Flow) Two Sector Economy

Households Firms
Circular Flow of Income
( Real + Money Flow) in a Two Sector
Economy
Significance of Circular Flow Model

What starts from one variable comes back to it after one

round e.g. (money paid by households for G &S comes back
to it in form of factor incomes.)

Anybody who strives to stop the flow, harms itself, after

sometimes.
Three Sector Economy
The Components of
Macro economy
Everyone’s
expenditure is
someone else’s
receipt. Every
transaction must have
two sides.
Unemployment
Unemployment occurs when a person who is actively searching for employment is unable to find work.
Unemployment is often used as a measure of the health of the economy
Economy cannot be fully employed.
Frictional Unemployment, Cyclical or structural Unemployment
Inflation
Inflation is the in prices of goods and services overtime.
A basket of Fruit costing $100 today might cost $105 next year. Inflation experienced is 5%.
Thus $100 would now be able to buy lesser goods.
Thereby purchasing power.

Thus if you have same salary next year and the inflation is 10%... U become poor…..

Now, Assume your salary increased to and is 2x….. BUT

Salary of everyone else increased to 3x….
Population will be willing to pay higher price for same goods and services lets say up to 3x (never
proportionate) and you will not. You again get poorer.
The role of the central bank is to see that inflation is not too high and the country keeps growing at constant
rate.

If Inflation is bad… Shouldn’t falling prices be good ??

NO. prices or deflation hampers economic growth. Population would assume the prices to fall further and
hold back on spending money.
If CONSUMER SPENDING leads to GDP

Every central thus keeps a target for their inflation.

Ex- U.S inflation target is 1-3%
How does bank control inflation?
How does bank control inflation?
How does bank control inflation?
How does bank control inflation?
How does bank control inflation?
Government Actions