NAME

Zainab Fatima

Enrollment
05-171221-172

Macroeconomics Assignment #1
Sir Zia Ul Qamar
Q1 Difference between Micro and Macroeconomics
 Microeconomics is the study of particular markets, and segments of the economy. It looks at
issues such as consumer behavior, individual labor markets, and the theory of firms.
 Macroeconomics is the study of the whole economy. It looks at ‘aggregate’ variables, such as
aggregate demand, national output and inflation.
Micro economics involves

 Supply and demand in individual markets.

 Individual consumer behavior. e.g. Consumer choice theory
 Individual labor markets – e.g. demand for labor, wage determination.
 Externalities arising from production and consumption. e.g. Externalities
Macroeconomics involves

 Monetary / fiscal policy. E.g. what effect does interest rates have on the whole economy?
 Reasons for inflation and unemployment.
 Economic growth
 International trade and globalization
 Reasons for differences in living standards and economic growth between countries.
 Government borrowing

Q2 Change in economic thoughts after great depression.

Coming more than a century after The Wealth of Nations, this event cannot be counted as the beginning
of economic thought, but it may be accorded status as a pivotal event in the origin of the profession of
economics. It was a reflection of the growth of professionalism in the late nineteenth century.
In the late nineteenth century in America felt themselves to be in a period of massive change. The
established boundaries of economic and social discourse were being breached by new forms of
communication, and new, larger business organizations were growing to take advantage of the wider stage
for their actions. People, particularly upper middle-class articulate people, felt themselves under pressure
by this process. They were oppressed by-or maybe just obsessed with the growth of large business
organizations and the decline of local social and economic units.
Change in thought patterns had two consequences. First, people found it necessary to analyse events in
the context of other events, linked both by history and space (contemporaneous events). Second, people
found it hard to attribute causation in any simple fashion in their interdependent conceptualization.
Economics therefore renounced the emphasis on interdependence and the need to appeal to history and
other social sciences in the analysis of economic events. Economists who did not share this vision,
demoted to the fringes of the profession. The discipline of economics dedicated itself to understanding the
implications of a simple Utilitarian psychology in which people acted consistently.
The Great Depression and the policy response also changed the world economy in crucial ways. Most
obviously, it hastened, if not caused, the end of the international gold standard
In many countries, government regulation of the economy, especially of financial markets, increased
substantially in the 1930s. The United States, for example, established the Securities and Exchange
Commission (SEC) in 1934 to regulate new stock issues and stock market trading practices..
Q3 low supply with increased prices
The law of supply is not a universal principle that applies to all circumstances. There are, in fact,
various important exceptions to the law of supply. Some exceptions to law of supply are given
below:

 Change in business
 Monopoly
 Competition
 Perishable Goods
 Legislation Restricting Quantity
 Agricultural Products
 Artistic and Auction Goods
The primary reasons for this nosedive in real output of LSM are the PKR devaluation, rising energy
costs and higher taxes. The interlinkages between the different structural issues in Pakistan will all
start to make more sense once we complete the ABCs of Pakistan series at Macro Pakistani. For now,
consider this: lack of investment brought down productivity, the real effective value of the PKR kept
decreasing and Pakistani goods became less competitive in international markets. Inefficiencies
within the utilities sector did not allow energy costs for industry to fall, increasing their input costs
and making them even less competitive. Additionally, the revenue starved government continued to
increase taxes on the sector that already pays the most taxes.
As soon as the government started bringing the currency to its fair value, it set off a domino that
revealed the fragilities of our economy.

Q4 Reason behind low share of agricultural sector in GDP

The low share is a result of several factors like
Govermnetal intervention in:
 Labor
 Land
 Credit markets;
And
 Lack of infrastructure
 Small size of land holdings
 Poorly maintained or non existent land records
 Inadequate use of modern technology
 Illiteracy
  Inadequate finance

Q5. Define business cycles and its phases

The economic cycle, also known as a business cycle, refers to fluctuations of the economy
between periods of expansion (growth) and contraction (recession). Factors such as gross
domestic product (GDP), interest rates, total employment, and consumer spending can help to
determine the current stage of the economic cycle.
Business cycle, has four stages: expansion, peak, contraction, and trough.
1. During expansion, the economy experiences relatively rapid growth, interest rates tend
to be low, and production increases. However, the increase in the money supply may
cause inflation to pick up during the economic growth phase.
2. The economy reaches the peak of a cycle when growth hits its maximum rate. At this
economic high-water mark, prices and economic indicators may stabilize for a short
period before reversing to the downside. Peak growth typically creates some imbalances
in the economy that need to be corrected.
3. A contraction occurs through a period of contraction when growth slows, employment
falls, and prices stagnate. If the contraction continues, the recessionary environment may
spiral into a depression.
4. The trough of the cycle is reached when the economy hits a low point, with supply and
demand scraping the bottom before growth eventually begins to recover.
Q6. National income and usefulness of national income estimates

What is national income and explain the usefulness of national income estimates?
National income is an indicator of success of planning in a country. National income data can be
used to describe the relative significance of primary, secondary and tertiary sectors of an
economy. 
Uses of National Income Estimates

1. Indices of Economic Welfare: National income estimates particularly the per capita

income is a very useful indicator of economic welfare. Per capita income, in real terms,
gives a rough idea about the economic welfare of people in a country.
2. Used for Economic Planning: National income estimates are used to determine the
savings and investment potential rate of economic growth of a country. To plan for an
increase in the national income, current levels of national income must be known. This
information is provided if we calculate income estimates.
3. National Income Estimates are also useful as a Basis for Inter-temporal and
International Comparison of Living Standards:
4. Used to Approximate the Potential Demand: Per Capita Income data is used to
estimate demand for various commodities.
5. Helps Policy Makers to Understand the Economic Structure of a Country: The
product approach provides detailed information on the contributions of the various
sectors and sub-sectors of the economy. Data provided by the expenditure approach gives
 an idea about the proportion of income invested, consumed or transferred. Finally, data
provided by the income approach provides information on functional distribution of
income, which is useful for income tax policies.
6. National income estimates are used to determine the subscriptions of nations to
international bodies e.g. IMF, IBRD, UN, ECOWAS etc. to which they belong.

Q7. Distinguish between GDP current, constant price, purpose of real GDP

Many of the statistics in National Accounts are given in both current and constant prices. Current
prices are the prices actually paid. GDP is normally first calculated at current prices. However, in
comparing different years, it is important to know if the economy is really making more, or if we
are just charging more for the same thing.
 Gross domestic product (GDP) at current prices is the sum of gross value added by all
resident producers in the economy plus any product taxes and minus any subsidies not
included in the value of the products.
 Real gross domestic product (GDP) is GDP given in constant prices and refers to the
volume level of GDP. Constant price estimates of GDP are obtained by expressing values
of all goods and services produced in a given year, expressed in terms of a base period.

Real gross domestic product (GDP) is an inflation-adjusted measure that reflects the value of all
goods and services produced by an economy in a given year. Real GDP makes comparing GDP
from year to year and from different years more meaningful because it shows comparisons for
both the quantity and value of goods and services.

Real GDP is calculated by dividing nominal GDP by a GDP deflator.

Countries with larger GDPs will have a greater amount of goods and services generated within
them, and will generally have a higher standard of living. For this reason, many citizens and
political leaders see GDP growth as an important measure of national success, often referring to
GDP growth and economic growth interchangeably. GDP enables policymakers and central
banks to judge whether the economy is contracting or expanding, whether it needs a boost or
restraint, and if a threat such as a recession or inflation looms on the horizon. By accounting for
inflation, real GDP is a better gauge of the change in production levels from one period to
another.