MACRO ECONOMIC ANALYSIS

DR. VISHWANATH KARAD MIT WORLD PEACE UNIVERSITY, PUNE

BACHLOR OF BUSINESS ADMINISTRATION - INTERNATIONAL BUSINESS
SEMESTER II

Unit 1
Introduction
P R O F . M A Y U R E S H S H E N D U R N I K A R
Definition

Macroeconomics is the study of

aggregates or averages covering the
entire economy, such as total
employment, national income, and
general price level.
The term 'macro' was first used in
economics by Ragner Frisch in
1933.

But as a methodological approach

to economic problems, it
originated with the Mercantilists in
the 16th and 17th centuries.

They were concerned with the

economic system.

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 Development
18th century: The Physiocrats adopted it in their Tableau
Economique to show the 'circulation of wealth'

19th century: Malthus, Sismondi, and Marx dealt with

macroeconomic problems.

20th century: Walras, Wicksell, Fisher, and Keynes contributed to the

development of macroeconomic analysis.
 Micro Economics vs.
Macro Economics
Macroeconomics and Microeconomics are two
different branches of economics.

Microeconomics studies the behavior

of individual households, firms, and
industries and deals with relative
prices of goods and services and the
allocation of resources among
competing uses.
Macroeconomics is the study of
the aggregate economy as a
whole and deals with national
output, prices and income.
Scope and
Importance
Macroeconomics Macroeconomics is
01 02
studies the aggregate necessary to
economy, including understand
variables such as individual unit
national income, behavior, as
output, employment, aggregate demand
and price level to and average cost
understand the conditions in the
economy's economy affect
functioning. These individual product
variables can be demand and
analyzed and firm/industry costs.
measured for insight
into economic
problems.
Scope and
Importance
Macroeconomics is Macroeconomics is
03 04
necessary to essential for evaluating
understand the the overall
problem of performance of the
unemployment as it is economy by analyzing
caused by a deficiency national income. It
of effective demand, helps in understanding
and can be solved by the causes of general
raising total overproduction and
investment, output, unemployment and
income, and forecasting economic
consumption. activity, as well as in
understanding income
distribution among
different groups of
people in the economy.
Scope and
Importance
Macroeconomics is
05 06
used to evaluate
resources and
capabilities of an
economy and to plan
for an overall increase
in national income,
output, and
employment to raise
the level of economic
development.
Macroeconomics is
essential for
understanding
monetary problems
such as inflation and
deflation, and for
adopting monetary,
fiscal, and direct
control measures to
counteract their
adverse effects on the
economy. It became
important after the
Great Depression to
analyze causes of
economic fluctuations
and provide remedies.
 Limitations of Macroeconomics
Fallacy of composition
01 Macroeconomics analyzes aggregate economic
behavior, but individual actions may not apply to
the economy as a whole.
Aggregate variables may not be
03 necessarily important
Macroeconomic aggregates such as national
income may not accurately reflect the situation for
individuals and can lead to misleading conclusions.
Statistical and conceptual difficulties
05 Measuring macroeconomic concepts involves
several difficulties, particularly with the aggregation
of microeconomic variables of dissimilar units,
which may lead to inaccurate conclusions.
To regard aggregates as homogenous
02 Macroeconomic analysis often fails to consider the
internal composition and structure of aggregates,
leading to inaccurate conclusions.
Indiscriminate use of
04 macroeconomics misleading
Using macroeconomics uncritically to analyze real-
world problems can be misleading, as policy
measures for full employment or general prices
may not apply to specific unemployment or prices.
Circular
Flow of
Income and
Expenditure
Three
Sector
Circular
Flow
 Three Sectors

Government plays a
Households are the basic key role in all
unit of consumption, they A firm, or producer, economic systems,
make decisions to satisfy uses factors of varying from minimal

their wants with limited production to make interference in

budgets and also own goods/services for capitalist to extensive
factors of production and profit. ownership and
receive income in return. regulation in socialist
systems, with a
balance in mixed
economies.

Economic agents (households, firms, government) make decisions for production, consumption and exchange of
goods/services to satisfy wants in the economy. These activities are interconnected through exchange.
 Households own all factors of production and
sell them to firms to produce goods and
services, exchange happens through financial
flows in reverse direction to real flows. The
1
purchase of goods by consumers is their
expenditure and becomes the revenue of The circular flow between the business
firms, while the expenditure of firms in buying and government sectors is impacted by
resources becomes the income of households. taxes and government expenditures. Taxes
3 paid by businesses are leakages from the
flow, while government purchases,
The circular flow between the household and subsidies, and transfer payments to firms
government sectors is impacted by taxes and are injections into the flow.
government expenditures. Taxes paid by
2
households are leakages from the flow, while
government purchases, transfer payments and
social service spending are injections into the
flow.
Conclusion
The circular flow between household, business and government sectors is
impacted by taxes, government purchases and government deficit or
surplus. Taxes reduce consumption and saving in the household sector,
reduce investment and production in the business sector, but government
purchases and services, subsidies and transfer payments to firms offset
these leakages and create injections in the circular flow. If government
purchase exceeds net taxes, the government will incur a deficit which is
financed by borrowing from the capital market, if net taxes exceed
government purchases the government will have a budget surplus and
reduces public debt and supplies funds to the capital market.
Four
Sector
Circular
Flow
 Three sector circular flow of
income and expenditure
depicts the economic activities
in closed economy.

Foreign The circular flow of money in an

open economy includes exports
as inflows and imports as
Sector leakages. Foreign trade plays a
significant role in this model,
with exports being injections
and imports being expenditures.
This is represented in a
diagram.
 The household sector buys goods imported
from abroad and makes payment for them
which is a leakage from the circular flow of
1
money. They receive transfer payments from
the foreign sector for the services rendered by
them in foreign countries.. Like the households and business sector,
government sector also export and import
goods and services, and lend to and
3
borrow from foreign countries. For all
exports of goods, the government receives
Business sector exports goods and services
payments from abroad.
to foreign countries, receiving payments in
return which injects money into the economy.
2
They also receive payments for investments
made abroad, but also make payments for
imports, which are leakages from the flow of
money.
Conclusion
A four-sector economy consists of households, firms, government, and the
foreign sector. Households provide factor services to other sectors and
receive factor payments and transfer payments in return. Firms receive
revenue for goods and services and make payments for taxes, factor
services, and imports. The government receives revenue and makes
payments for transfer and subsidies. The foreign sector receives revenue for
exports and makes payments for imports. Financial market plays a role in
accumulating savings and investing it as loans to other sectors. The inflows
and outflows of money balance out, completing the circular flow of income.
 THANK YOU !
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TOGETHER
"Well begun is half done" they
said. Indeed. But, learning is
always unending. Just because
the unit one is over here, it does
not mean that you have gained
each and every information
from it. Do not just keep it aside,
rather, start preparing your own
notes for your own betterment.
Wish you all the best!