Jai Shri Krishna

Chapter-1 (Introduction)

Macroeconomics deals with the aggregate economic variables of an economy. It also takes into account various
interlinkages which may exist between the different sectors of an economy. This is what distinguishes it from
microeconomics; which mostly examines the functioning of the particular sectors of the economy, assuming that
the rest of the economy remains the same. Macroeconomics emerged as a separate subject in the 1930s due to
Keynes. The Great Depression, which dealt a blow to the economies of developed countries, had provided Keynes
with the inspiration for his writings. In this book we shall mostly deal with the working of a capitalist economy.
Hence it may not be entirely able to capture the functioning of a developing country. Macroeconomics sees an
economy as a combination of four sectors, namely households, firms, government and external sector.

Chapter -2 (National Income Accounting)

At a very fundamental level, the macroeconomy (it refers to the economy that we study in macroeconomics) can
be seen as working in a circular way. The firms employ inputs supplied by households and produce goods and
services to be sold to households. Households get the remuneration from the firms for the services rendered by
them and buy goods and services produced by the firms. So we can calculate the aggregate value of goods and
services produced in the economy by any of the three methods (a) measuring the aggregate value of factor
payments (income method) (b) measuring the aggregate value of goods and services produced by the firms (product
method) (c) measuring the aggregate value of spending received by the firms (expenditure method). In the product
method, to avoid double counting, we need to deduct the value of intermediate goods and take into account only
the aggregate value of final goods and services. We derive the formulae for calculating the aggregate income of
an economy by each of these methods. We also take note that goods can also be bought for making investments
and these add to the productive capacity of the investing firms. There may be different categories of aggregate
income depending on whom these are accruing to. We have pointed out the difference between GDP, GNP, NNP
at market price, NNP at factor cost, PI and PDI. Since prices of goods and services may vary, we have discussed
how to calculate the three important price indices (GDP deflator, CPI, WPI). Finally we have noted that it may be
incorrect to treat GDP as an index of the welfare of the country.

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 Chapter -3 (Money and Banking)

Exchange of commodities without the mediation of money is called Barter Exchange. It suffers from lack of double
coincidence of wants. Money facilitates exchanges by acting as a commonly acceptable medium of exchange. In
a modern economy, people hold money broadly for two motives – transaction motive and speculative motive.
Supply of money, on the other hand, consists of currency notes and coins, demand and time deposits held by
commercial banks, etc. It is classified as narrow and broad money according to the decreasing order of liquidity.
In India, the supply of money is regulated by the Reserve Bank of India (RBI) which acts as the monetary authority
of the country. Various actions of the public, the commercial banks of the country and RBI are responsible for
changes in the supply of money in the economy. RBI regulates money supply by controlling the stock of high
powered money, the bank rate and reserve requirements of the commercial banks. It also sterilises the money
supply in the economy against external shocks.

Chapter -4 (Determination of Income and Employment)

When, at a particular price level, aggregate demand for final goods equals aggregate supply of final goods, the final
goods or product market reaches its equilibrium. Aggregate demand for final goods consists of ex ante
consumption, ex ante investment, government spending etc. The rate of increase in ex ante consumption due to a
unit increment in income is called marginal propensity to consume. For simplicity we assume a constant final
goods price and constant rate of interest over short run to determine the level of aggregate demand for final goods
in the economy. We also assume that the aggregate supply is perfectly elastic at this price. Under such
circumstances, aggregate output is determined solely by the level of aggregate demand. This is known as effective
demand principle. An increase (decrease) in autonomous spending causes aggregate output of final goods to
increase (decrease) by a larger amount through the multiplier process.

Chapter-5 (Government Budget)

1. Public goods, as distinct from private goods, are collectively consumed. Two important features of public goods
are – they are non-rivalrous in that one person can increase her satisfaction from the good without reducing that
obtained by others and they are non-excludable, and there is no feasible way of excluding anyone from enjoying
the benefits of the good. These make it difficult to collect fees for their use and private enterprise will in general
not provide these goods. Hence, they must be provided by the government.

2. The three functions of allocation, redistribution and stabilisation operate through the expenditure and receipts of
the government.

3. The budget, which gives a statement of the receipts and expenditure of the government, is divided into the revenue
budget and capital budget to distinguish between current financial needs and investment in the country’s capital
stock.

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 4. The growth of revenue deficit as a percentage of fiscal deficit points to a deterioration in the quality of
government expenditure involving lower capital formation.

5. Proportional taxes reduce the autonomous expenditure multiplier because taxes reduce the marginal propensity
to consume out of income.

6. Public debt is burdensome if it reduces future growth in output.

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