MACROECONOMICS

CODE: BBF1201

Lecture : Dhanya Jagadeesh

BAISAGO University College
 Chapter 1
Introduction to Macroeconomics
Macroeconomic objectives and policy instruments
Concept of National income
Nominal vs Real Gross Domestic Product
Uses of National Income statistics
Shortcomings of National Income statistics
Circular flow of income, production, and
spending.
 Macroeconomic objectives and policy
instruments
Macroeconomic objectives are:-
 Economic growth
 Full Employment
 Price stability
 Balance of payment Stability.
 Equitable Distribution of income

Policy instruments are:-

 Fiscal Policy
 Monetary policy
 Measuring The Level of Economic Activity

 Economic growth: is measured by Gross Domestic

Product (GDP)
 Full Employment – Measured by Unemployment Rate
 Price stability – Measured by Consumer Price Index
 Balance of payment Stability :Measured by Terms of
Trade (TOT)
 Equal Distribution of Income : measured by Lorenze
curve and Gini coefficaint
Gross Domestic Product (GDP)
GDP is the total value of all final goods and services
produced within the boundaries of a country in a
particular period.
 Value : price of the various product
 Final good: considering the value of only final goods,
to avoid the problem of “Double counting”
 Within the boundaries : considering geographic
concept , that includes all the goods and services
produced within the geographic area of a country.
 Particular period : concerns new production, or
current production.
Double Counting
Counting the same thing twice, or more than twice.
For example, the total value of out put of all firms in a
country overstates the country's output, since the
value of produced inputs is counted again in the value
of what they help to produce. To avoid this, GDP is
measured either from value added or from only final
goods.
 Methods of Calculating GDP
Production method :- concentrates on the Market value of all final
goods and services .
GDP = (Price of Onions x Quantity of Onions) + (Price of Pears x
Quantity of Pears)

Expenditure method:- focuses on total expenditures on goods and

services produced in the period.
GDP = C + I + G + (X-M)

Income method:- concentrates on the payments to the factors of

production involved in the production activities within the period.
GDP = Wage + Rent+ Interest+ Profit.

All these 3 methods measuring the same thing but at a different way.
Measuring Full Employment
The situation of Full employment is measured by
Unemployment rate.
Unemployment rate = (No of people Unemployed/ Total no
of labour force ) X 100.
 Measuring Price stability
Inflation is a rise in the general price level of goods and
services in an economy over a period of time
Inflation is usually estimated by calculating the consumer
price index.
A consumer price index (CPI) measures changes in the price
level of a basket of consumer goods and services purchased
by households.
CPI =(Updated price / Basic price) X 100.
Measuring Balance of payment Stability
 BoP accounts are an accounting record of all monetary
transactions between a country and the rest of the
world.These transactions include payments for the
country's exports and imports of Goods, services, financial
capital, and financial transfers .
 Terms of Trade (TOT) is used to indicate Balance of
Payment.
TOT = (Price of exportable goods)/(Price of importable
goods) x 100.
 If TOT is 100 BOP will be in balance
 TOT is more than 100 = Surplus balance of Payment
 TOT is less than 100 = Deficit Balance of Payment
Measuring Inequality
Ineuality is measured by Lorenze curve and Gini Coefficient.
 The Lorenz curve is a graphical representation of the
Cumulative distribution Function of the empirical
probability of wealth.
 Gini-coefficient of inequality: This is the most
commonly used measure of inequality. The coefficient
varies between 0, which reflects complete equality and 1,
which indicates complete inequality (one person has all the
income or consumption, all others have none). Graphically,
the Gini coefficient can be easily represented by the area
between the Lorenz curve and the line of equality.
 Concept of National income
Gross Domestic Product:- Gross National Product:-
An estimated value of the An estimated value of the
total worth of a country’s total worth of production
production and services, and services, by citizens
within its boundary, by its of a country, on its land or
nationals and foreigners, on foreign land,
calculated over the course on calculated over the course
one year. on one year.
Other Concept of National income

Net Domestic Product :-refers to Gross Domestic

Product (GDP) minus depreciation.

Net National Product:- refers to Gross National

Product minus Depreciation*.

Depreciation: a reduction in the value of an asset over

time, due in particular to wear and tear.
 Nominal vs Real Gross Domestic Product

Nominal GDP is GDP evaluated at current market prices.

Therefore, nominal GDP will include all of the changes in market
prices that have occurred during the current year due to inflation
or deflation.
Nominal GDP = ∑ ptqt
t indicates the current year.

Real GDP is GDP evaluated at the market prices of some base

year. For example, if 2010 were chosen as the base year, then
real GDP for 2015 is calculated by taking the quantities of all
goods and services purchased in 2015 and multiplying them by
their prices at 2010.
Real GDP = ∑ pbqt
where b denotes the base year.
 Uses of National Income statistics
National Income as a measure of economic growth
National Income as an indicator of success or failure of
planning
Useful in measuring inequalities in the distribution of
income
Makes international comparisons possible
The national income estimates show the
contribution made by the various sectors of the
economy, such as agriculture manufacturing
industry, trade, etc., to the national income.
 Shortcomings of National Income
statistics
Errors in Measurement: Black Market and underground
activities are not included when calculating GDP. This is because
there is no way to accurately measure black market activity. 
Welfare is NOT Measured: GDP only measures the market
activity and does not take welfare into account. 
Services of house wives or some informal business activities are
not included.
Non marketed goods are not included.

A black market or underground economy' is a market in

which goods or services are traded illegally
Circular flow of Production, income,&
Expenditure including
Firms,
Households,
Government,
Financial institutions and
Foreign sector.
Flows and stock variable
Flow variable is a kind of variable which can only be
measured over a period. For eg: production, Income &
spending. A stock variable is measured at one specific
time, and represents a quantity existing at that point
in time (say, December 31, 2004), which may have
accumulated in the past
Stock variable can only be measured over a period of
time. Eg: Wealth & Population.
Major flows
Production
Income
Spending Production

Spending Income
Inter dependence between House hold,
Firms and Government

Factors Goods
House Hold Sp
m e en
o din
Inc g

Factor Market Govt Goods Market

Sp
en o me
din c
g In
Firms
Factors Goods
Review questions
1. identify Macro economic objectives.
2. what are the polices being used to achieve macro economic
objective.
3. How do you measure GDP? Briefly explain each of the method?
4. Differentiate GDP and GNP
5. Differentiate NDP & NNP
6. Differentiate Stock and Flow variable.
6. Briefly explain Uses and Limitation of National Income
Accounting.
7. Illustrate the circular flow of income , production and expenditure,
including house hold , business firm, and Govt

Thank You
END