Lecture 02 Macro Economics)

Some Basic Concepts of Macro Economics

1. Aggregates of The Economic System
Aggregate of the economic system refers to macro economic
variables, or the variables which represent the economy as a whole.
Some important examples of these aggregates are as these.

(1) Aggregate Demand:- Total expenditure on the purchase of

all goods and services in the economy during the period of
an accounting year.

(2) Aggregate Supply:- Total production of goods and services

in the economy during the year.

(3) Aggregate Consumption:- Consumption of all the goods

and services in the econmy during the period of an accounting
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(4) Aggregate Investment:- Expenditure by all the producers in
the economy on the purchase of such goods which add to their
stock of capital during the year.

(5) Domestic Income: - Income generated within the domestic

territory of a country during the year. It is also defined as
production of goods and services in the economy during the year

(6) General price Level:- Index of prices of all goods and services
at the end of a specified period of time.

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 Classification of Goods

Intermediate Consumer Capital

Final Goods
Goods Goods Goods

Final Goods:- These are those goods which have crossed the boundary
line of production and are ready for use by their final users. Who are
the final user? These are (i) Consumers, and (ii) producers. Accordingly,
final goods are often classified as (i) Final Consumer Goods (ii) Final
Producer Goods.
(a) Final Consumer Goods:- These are the goods which are ready for
use by their final users, and consumers are their final users. Example:-
Bread and butter, as used by the consumers.
(b) Final Producer Goods:- These are the goods which are ready for use
by their final users, and producers are their final users. Example:
Tractors and harvesters ,as used by the farmers.
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(2)Intermediate Goods:- Intermediate goods are those goods
which are purchased by one firm from the other firm (i) as raw
material or (ii) as goods for resale
Difference Between Final & Intermediate Goods
Intermediate Goods Final Goods
(i) These are goods which may be used (i) These goods are not used as raw
as raw material for the production of material for the production of other
other goods during accounting year. goods during the accounting year.
(ii) These goods may be resold by he (ii) These goods are not resold by the
firms for the profit during the firms for profit during the accounting
accounting year year.
(iii) These goods remains within the (iii) These goods are outside the
boundary line of production, and are boundary line of production. And are
not ready for use by their final users. ready for use by their final users.
(iv) Value is yet be added these goods (iv) Value is not to be added to these
(v) These goods are not included in the goods
estimation of national product or (v) These goods are included in the
national income. estimation of national product or
national income

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(3)Consumer Goods:- Consumer goods (also called consumption
goods) are those goods which are directly used for the satisfaction
of human wants. These are not used in the production of other
goods. Example:- Ice Cream, and milk used by the households.
Consumer goods are meant for final consumption and as final
goods, these are ready for use by their final users.

Consumer Goods/Consumption Goods

Non-material
Semi Durable Non-durable Goods or
Durable Goods
Goods Goods Services

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(1) Durable Consumer Goods:- Durable Consumer Goods are those goods
which can be used for several years and are of relatively high value.
These goods are repeatedly used before being discarded as useless. TV,
radio, car, scooter, washing machine are some examples of durable
goods.
(2) Semi-durable Consumer Goods:- Semi-durable consumer goods are
those goods which can be used for a period of one year or slightly more.
These are not of very high value. Clothes,furniture,crockery,electric
goods,etc are the examples of semi-durable consumer goods.
(3) Non-durable or Single-use Consumer Goods:- Single-use consumer
goods are those goods which are use-up in single act of consumption.
For Example:- The bread that you eat is used-up in a single act of
consumption. The same bread cannot be used again. Also these goods
are of relatively low value. Ink,milk,petrol are some examples of non-
durable or single-use consumer goods.
(4) Services:- Services are those non-material goods which directly satisfy
human wants. A few examples of services are the services of a doctor,
lawyer, domestic servant etc.
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Concept & Components of Consumption Expenditure:-
In macro economics, consumption expenditure refers to aggregate
consumption in the economy. These are broadly classified as : (i)
housel's, (ii) the government, and (iii) non-profit private institutions
(like NGO’s , temples, mosques and others.
Concept & Component of Investment
Capital is an important factor of production. It is a stock of the
produced mans of production. It is a stock of those man-made
goods which are used for further production. Capital stock
implies production capacity of the producers. Larger the capital
stock with the producer, greater is their capacity to produce
goods and services.

I= K
I=Investment
K=Capital Stock
K= Change in Capital Stock 7
Fixed Investment & Inventory Investment:-
Investment has two components:
(i) Fixed Investment, &
(ii) Inventory Investment
Fixed Investment refers t o increase in the stock of fixed asses of
the producers during an accounting year. Expenditure of the
producers on the purchase of fixed assets or capital goods (Like
Plant, and machinery) causes fixed investment.
Example:- IF at the beginning of the year 2014, producer has stock
of 5 machines and at he end of 2014, he has a stock of 7 machines,
then the stock of his fixed assets increases by 2 machines during the
year 2014.
(b) Inventory Investment:- At a point of time, producers hold the
stock of (i) finished goods (Unsold goods), (ii) Semi-finished goods
(goods which are in the process of production), and (iii) raw
material. This is called “inventory stock”. This stocks keeps varying
over time. Change in inventory stock during the year is called
inventory investment of the producers. 8
Four Sectors of the Economy
From the macro point of view, economy is often divided into four
sectors viz,
(1)Household Sector:- It includes consumes of goods and services.
Households are also the owners of the factors of production.
(2)Producer Sector:- It includes all producing units (firms) in the
economy. For the production of goods and services, the firms
hire/purchase factors of production (Land,labour,capital and
entrepreneurial skill from the household.)
(3)Government sector:- It includes (i) Government as a welfare
agency, and (ii) Government as a producer. Government as a
welfare agency performs such welfare functions as of law & order
and defense.
(4)The External Sector (also called Rest of the World Sector):- It
includes all such activities which are related to export and import of
goods, and the flow of capital between the domestic economy and
rest of the world.
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