Macro Economics

UNIT-I

Ms. Swechchha Jain,

Faculty of Management,

SVIM, Indore

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 Learning Objectives
• The objective of macroeconomic policies is to maximize the level of national income, providing
economic growth to raise the utility and standard of living of participants in the economy.

• There are also a number of secondary objectives which are held to lead to the maximization of income over the
long run: Such as
To understand the meaning of Macro economics

To understand the scope of Macro economics

To understand the importance of Macro economics

To understand the limitations of Macro economics

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 Learning Outcome

On successful completion of this chapter, the students will be able

to:
• Explain the objectives of government macroeconomic policy and describe how they

can be pursued

• Define and measure national income and rates of unemployment and inflation.

• Describe the causes and consequences of inflation and unemployment

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• 'why macro-econ': Central bank and Government budget decisions effect an individual's financial situation.
Knowing what are the stimulators of these decisions can smooth out financial planning. This is where learning
Macro-Economics will help sail your boat.

• 'story-telling': Macro-economics is nothing but an engaging story of how, why and in what way do People,
Government and Central Bank react to economic events. No wonder that the process of learning Macro-
Economics should also be a story. We have done exactly that. By looking into historical events with a magnifying
glass, we elaborate every little concept that literally govern economic decisions.

• 'the big picture': Half knowledge is always dangerous. Everything in macro-economics connects in some way.
Understanding how everything intersect in the bigger picture of things only would assure sound decisions. This
course helps you understand why recession follows boom, or why interest hike trails inflation. We will connect
the dots of major macro-economic concepts.

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 Concept of Macro Economics

• Macroeconomics deals with the economy as a whole. It studies

the behaviour of economic aggregates such as aggregate
income, consumption, investment, andthe over all level of
prices.
• It concerns the overall dimensions of economic life.
• It looks at the total size and shape and dimensions of the
individual parts.
• Macro economics also known as the theory of income and
employment, or simply income analysis.
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 Concept of Macroeconomics contd.........
• It is concerned with the problems of unemployment, economic fluctuations, inflation
or deflation, international trade and economic growth.
1. It is the study of the causes of unemployment, and the various determinants of
employment.
2. In the field of business cycles, it concerns itself with the effect of investment on total
output, total income, and aggregate employment.
3. In the monetary sphere, it studies the effect of the total quantity of money on the
general price level.
4. In international trade, the problems of balance of payments and foreign aid fall within
the purview of macroeconomics analysis.

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 Types of Commodity

1. Consumer Goods
2. Capital Goods
3. Final Goods
4. Intermediate Goods

Types of Consumer Goods

1. Durable Goods
2. Semi-Durable Goods
3. Non-Durable Goods
4. Services

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 Major Concerns of Macro Economics
Aggregate demand

Aggregate Supply

Savings

Inflation/ Deflation

Economic Growth

Unemployment

Trade Cycle

International Trade

Economic Planning (Fiscal Policy/ Monetary Policy)

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 Importance of Macro Economics
• To understand the Working of the Economy- Our main economic problems are related to the behaviour of total
income, output, employment and general price level in the economy. So the study of Macroeconomics variables is
mandatory for understanding the working of the economy.
• In Economic Policies- Modern Govt. especially under developed economies, are confronted with innumerable
national problems. They are the problems of over population, inflation, BOP, general underproduction, etc. So
here the main responsibility of these govt. rests in the regulation and control of overpopulation, general prices,
general volume of trade, general outputs, etc.
• Some complex economic problems-
1. In General unemployment
2. In National Income
3. In Economic Growth
4. In Monetary Problems
5. In Business Cycles
• For Understanding the Behaviour of Individual Units- Demand for individual products depends on aggregate
demand in the economy. Unless the causes of deficiency in aggregate demand are analysed, it is not possible to
understand fully the reasons for a fall in the demand of individual products.
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 Limitations of Macro Economics

• Fallacy of Composition Prof. Boulding calls These

threeDifficulties as
“Macro economic
Paradoxes”which are true
• To Regard the Aggregates as Homogeneous whenapplied to a single
individual but which
are untrue when applied
• Aggregate Variables may not be Important Necessarily to the economic system
as a whole.

• Indiscriminate Use of Macroeconomics Misleading

• Statistical and Conceptual Difficulties

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 Some Important Questions

• What is the Difference Between Micro economics

• and Macro Economics?
• Why to study macro economics?
• What is the subject matter of Macro economics?
• Do you think study of Macro Economic aggregates is
useful for an individual firm? Justify your answer with
appropriate example.
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National Income

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 Learning Outcomes
• To understand various concepts of national income,like GDP,
GNP and NNP.
• To understand the different methods of measuring national
income.
• To understand the importance of national income calculations.
• To understand the difficulties involved in the calculation of
national income.
• Which Factors Affecting national income
• Important Applications of national income
• Some limitations of National Income
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 Concept of National Income

• National income is defined as the money value of all the final

goods and services produced in an economy during an
accounting period of time, generally one year.
• Accounting Year= 1st April-31st March

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Concept of National Income contd.........

GDP

GNP

NDP
National Income
NNP

Per Capita
Income
Desposable
Income

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 GDP (Gross Domestic Product)
• GDP is the sum of money values of all final goods and services produced within the
domestic territories of a country during an accounting year.
GDP= C+I+G+(X-M)

• GDP at market price: includes the final value of goods and services also includes
indirect taxes and excludes the subsidies given by the government.

• GDP at factor cost is the money value of final goods and services based on the cost
involved in the process of production.

• Gross Domestic Product at factor cost = GDP at Market Prices –Indirect Taxes+
Subsidies
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 GNP(Gross National Product)
GNP is the aggregate final output of citizens and businesses of an economy
in a year.
GNP may be defined as the sum of Gross Domestic Product and Net Factor
Income from Abroad (NFIA).
GNP = GDP + NFIA
GNP = C+I+G+(X-M)+NFIA
Net Factor Income from Abroad: difference between income received
from abroad for rendering factor services and income paid towards services
rendered by foreign nationals in the domestic territory of a country.
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NDP (Net Domestic Product) and NNP (Net National Product)
• Net Domestic Product =
GDP-Depreciation
• Net National Product (NNP)=
GDP–Depreciation +NFIA
Or GNP–Depreciation
• Thus NNP is the actual addition to a year’s wealth and is the sum of consumption, expenditure,
government expenditure, net foreign expenditure, and investment, less depreciation, plus net income
earned from abroad.
= C+I+G+(X–M)–Depreciation + NFIA
• NNP at Factor Cost is the sum total of income earned by all the people of the nation, within the
national boundaries or abroad
• It is also called National Income.
• NNP at Factor Cost = NNP at Market Prices –Indirect Taxes+ Subsidies
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 Per Capita Income and Personal Desposable Income
• Per capita income- is the average income of the people of a country in a particular
year.
• Personal income- is the total income received by the individuals of a country from
all sources before direct taxes in one year.
Personal Income = National Income –Undistributed Corporate Profits –
Corporate Taxes – Social Security Contributions + Transfer Payments+ Interest
on Public Debt
• Personal Disposable Income is the income which can be spent on consumption by
individuals and families.
Personal Disposable Income = Personal Income – Personal Taxes
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 RNI (Real National Income)
• It is national income expressed in terms of a general level of prices of a particular
year taken as base.
• In order to find out the real income of a country, a particular year is taken as the base
year when the general price level is neither too high nor too low and the price level
for that year is assumed to be 100. Now the general level of prices of the given year
for which the national income (real) is to be determined is assessed in accordance
with prices of the base year. For this purpose the following formula is employed.
• Real NNP = NNP for the current year* Base year Index (=100)
______________________________________

Current Year Index

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Example:

• Suppose 2000-2001 is the base year and the national income for
2019-2020 is 50,000 cr. and the index number for this year is
500. Hence, Real national income for 2019-2020 will be =
50000*100
------------------------------------ = 10000 cr.

500

*This is also known as national income at constant prices.

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Inter-Relationships Among Different Concepts of National Income

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Solved Some Problems
Q.1 From the data pertaining to the Indian Economy given below, Calculate GNP at Factor Cost.
GNP at Market Prices- 50000/-
Net direct taxes- 22500/-
Q.2 From the date Pertaining to the Indian Economy given below, Calculate NNP at Factor Cost and NDP
at market prices.
GNP at market prices- 28000/-
Capital consumption allowance- 5600/-
Net indirect taxes- 10576/-
Q.3 On the basis of the following information relating to the indian economy, estimate (a) GNP at market
prices, (b) Personal Income, and (c) Personal disposable income.

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Methods of measuring national income
Product
method

National
Income

Expenditure Income
Method
Method

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 Product (or Output) Method

• The total value of final goods and services produced in a country during a year is
calculated at market prices.
• To find out GNP, the data of all productive activities, such as agricultural products,
wood received from forests, commodities produced by industries, the contributions to
production made by transport, communications, insurance companies, lawyers,
doctors, teachers, etc, are collected and assessed at market prices.
• Only the final goods and services are included and intermediary goods and services
are not included in this method.
• This method concentrates on the net value added by each component; we would need
to exclude or subtract the following elements from the output of each enterprise:
Consumption of raw materials
Consumption of capital
Net indirect taxes
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Value of Each producing units

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 Steps of Computing National Income
• Step 1: Identification and classification of producing units
Identify all the producing units in the domestic economy and classify them into
the primary, secondary and tertiary sector.
• Step 2: Estimation of Gross Value Added of each sector
Gross Value Added (GVA) = Value of Output-Intermediate Consumption
• Step 3: Estimation of GDP
Then add GVA of all the three sectors, Primary, Secondary and Tertiary to get
GDP of the economy.
• Step 4: Estimation of National Income
Finally to compute National Income (NNPfc) from GDPMP
– Net factor income from abroad(NFIA) is added,
– Depreciation is subtracted and
– Net Indirect Taxes are also deducted.
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GVA includes following

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Example to calculate GDP at FC by this method

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• Primary Sector- refers to that sector where in goods are produced by exploiting

natural resources

• Secondary Sector-This sector is also called manufacturing sector. Enterprises of this

sector transform one type of good into another type.

• Territary Sector- provides services and so is called service sector. It includes trade,

hotels, transport and communication, financing, insurance. Service alone are provided

by this sector. Public administration and defense and other services also form part of it.

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Example of These three sector

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 Income Method
• The net income received by all citizens of a country in a particular year, i.e. total of net rents, net
wages, net interest and net profits. (GDP at factor cost).
• It is the income earned by the factors of production of a country.
• Add the money sent by the citizens of the nation from abroad and deduct the payments made to
foreign nationals (individuals and firms) (GNP at factor cost) or Gross National Income (GNI).
• Process: • Economy is divided on basis of income groups, such as wage/salary earners, rent earners,
profit earners etc.
Income of all the groups is added, including income from abroad and
undistributed profits.
The income earned by foreigners and transfer payments made in the year are
subtracted.
GNI = Rent + Wage + Interest +Profit + Net Income from Abroad- Transfer
payments
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 Steps to measure National Income by income method
Step 1- Identification and classification of producing enterprises
Primary Sector
Secondary Sector
Tertiary sector
Step 2 - Classification of factor income
• Factor income: a factor income refers to income earned by a person as a reward for rendering
his factor services.
Factor income are only earned incomes. It does not include that income which is not earned.
Step 3 - National income= sum of all the factor incomes

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 Classification of factor incomes

• Compensation of employees: wages and salaries, payment in kind, employers

contribution to social security schemes, pension on retirement.

• Operating surplus: it is the income from the property and entrepreurship. E.g. Rent,

interest, profit etc

• Mixed income= it refers to the income of the self employed persons using their labor

land capital

• Net factor income

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 Limitation of this method
• Exclusion of non monetary income: Ignores the non-monetized section of
economic activities.
• Exclusion of Non Marketed Services: People undertake a particular activity that are
difficult to ascertain in money value. E.g. mother’s services to the family.

Note* Income tax is paid out of compensation of employees. It should not be added
separately in the estimation of national income.

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 Expenditure Method

• One man’s income is another man’s expenditure

• Therefore national income can be arrived at by adding the total
expenditure of individual and business firms during a year
• Expenditure or outlay on final products takes place in three
ways
Expenditure by consumers on goods and services(Consumption Expenditure)
Expenditure by entrepreneurs on capital or investment goods (Investment
Expenditure)
Expenditure by government on consumption and capital goods (Government
Expenditure)
Net Exports-Net Imports
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 Expenditure Method contd...........

The formula for this method is

Y = C + I + G +(X-M)
Here Y stands for total expenditure
C stands for consumption expenditure
I stands for investment expenditure
G stands for Government expenditure
(X-M) Difference between exports and imports

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 Limitation of this Method

• Neglects Barter System

• Ignores over consumption

• Affected by Inflation

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Eg. of Income and Expenditure method

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 Difficulties in the computation of
National Income

In backward economies like

India,particularly in the rural sector, the Avoidance of double
cultivators and small producers are
illiterate and they do not keep books of counting becomes
account. This is a serious difficulty in complicated
the calculation of national income

Existence of Non- Village money lenders

monetized sector is maintain absolute secrecy
dominant of their transaction

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Why National income measurement is necessary
National income is the most dependable indicator of a
country’s economic health.

Difference between GDP and GNP indicates the

contribution of net income earned abroad

Necessary for Economic planning: useful aid in judging

which sectors should be given more emphasis

A measure of economic welfare: higher aggregate

production implies more and more goods and services
being available to people.

Help in determining the regional disparities, income

inequalities, and level of poverty in a country

Help in comparimg the situations of economic

growth in two different countries.

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Shri Vaishnav Institute of Managment, 44
Indore
• The financial year in India is

a. April 1 to March 31
b. January 1 to December 31
c. March 1 to April 30
d. March 16 to March 15

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i. National income is the monetary value of all final goods and
services produced.
ii. Depreciation is deducted from gross value to get the net value

a. I only
b. ii only
c. both
d. none

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 Gross National Product equals

• Net National Product adjusted for inflation

• Gross Domestic Product adjusted for inflation

• Gross Domestic Product plus net property income from abroad

• Net National Product plus net property income from abroad

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Indore
 Net National Product equals

a) Gross National Product adjusted for inflation

b) Gross Domestic Product adjusted for inflation

c) Gross Domestic Product plus net property income from abroad

d) Gross National Product minus depreciation

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 The standard of living is often measured by
• a)Real GDP per capita

• b) Real GDP

• c) Real GDP * population

• d) Real GDP plus depreciation

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 GDP measures

a) A country's income

b) A country's wealth

c) Consumer spending

d) Net trade income

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 Real national income measures

a)Nominal national income adjusted for population change

b) Nominal national income adjusted for unemployment

c) Nominal national income adjusted for inflation

d) Nominal national income adjusted for exchange rates

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 To adjust GDP from market prices to factor cost

a) Add indirect taxes

b) Subtract subsidies

c) Deduct indirect taxes and deduct subsidies

d) Deduct indirect taxes and add subsidies

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 To adjust from Net National Product to Gross National
Product
a) Add depreciation

b) Deduct indirect taxes

c) Add subsidies

d) Add inflation

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• While calculating GNP, income generated by foreigners in a country is taken into
consideration
• While calculating GNP, income generated by nationals of a country outside the
country is taken into account

• a. I only
• b. ii only
• c. both
• d. none

Ans. b

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• While calculating GDP, income generated by foreigners in a country is taken into
consideration
• While calculating GDP, income generated by nationals of a country outside the
country is taken into account

• a. I only
• b. ii only
• c. both
• d. none

Ans. a

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• The net value of GDP after deducting depreciation from GDP is:

a. Net national product

b. Net domestic product
c. Gross national product
d. Disposable income

Ans. b

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• While calculating GNP, income generated by foreigners in a country is taken into
consideration
• While calculating GNP, income generated by nationals of a country outside the
country is taken into account

a. I only
b. ii only
c. both
d. none

Ans. a
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Indore
• When depreciation is deducted from GNP, the net value is:

a. Net national product

b. Net domestic product
c. Gross national product
d. Disposable income

Ans. a
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Indore
• The value of NNP at consumer point is:

a. NNP at factor cost

b. NNP at market price
c. GNP at market price
d. GNP at factor cost
Ans. b
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Indore
• The value of NNP at production point is called

a. NNP at factor cost

b. NNP at market price
c. GNP at market price
d. GNP at factor cost

Ans. a

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Indore
• The value of national income adjusted for inflation is called

a. Per capita income

b. Disposable income
c. Inflation rate
d. Real national income

Ans. D
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Indore
• The average income of the country is

a. Per capita income

b. Disposable income
c. Inflation rate
d. Real national income

Ans. a
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 Some Important Questions

• What is the Difference between GDP and GNP?

• Whether unemployment allowance from the government is to
be included in the national income. Why or Why not?
• Will the transfer payment be a part of personal income or not?
• What suitable method should be used to analyse the national
income?
• How we can increase our national income?
• Write short notes on:
GDP, GNP, Per Capita Income, Desposable Income, NNP, NDP,
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 Reference Books

• Jhingan, M. L., Macro Economic Theory, 12e Vrinda

Publications

• Pathak, Bharti V, Indian Financial System, 4e Pearson

Education.

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Indore