Teacher s Profile

Name: Dr. Debasish Mazumdar Email : debanee@rediffmail.com Subject: MACROECONOMICS

What is macroeconomics all about?

Introduction: Economic environment in terms of economic growth all over the world keeps changing, sometimes reflecting slowdown & upturns. Why this happens? We need to understand certain issues like, what is economic growth, its measurement, how it helps an economy, inflation, deflation, how to control, international economic relation etc.

MACROECONOMICS
Macroeconomics makes an attempt to find answers to these questions. It is primarily the study of the whole economy. Analyzes various causes like unemployment, low growth-rate, business fluctuations as they relate to the whole economy.

MACROECONOMICS
The study of Macroeconomics is relatively new development. The then only existing school of economic thought, i.e. Classical school emphasized on microeconomics as they believed in natural tendency towards attaining equilibrium through interaction of individual economic agents and opposed any kind of govt intervention. Further market forces guided by price mechanism would lead an economy to full employment.

MACROECONOMICS
Keynes s book General Theory of Employment, Interest and Money , published in 1936 made an attempt to understand the Great Depression which gripped the Western world in the 1930s. He had a different perspective on the situation in these countries & explained reasons for prolonged unemployment & provided suggestions to overcome the problems He strongly advocated intervention of govt. to deal with macroeconomic problems due to lack of effective demand

MACROECONOMICS
Between World War II & 1970s economic policies mainly focused on inflation & unemployment. Govt used fiscal & monetary policies to reduce unemployment & inflation. Economic policy in this period focused on shortrun management of aggregate demand. Some economists suggested that instead of changing fiscal policies, money supply should be allowed to grow at a fixed rate which would address the issues like inflation & unemployment

MACROECONOMICS
In the 1970s & 1980s new thoughts emerged stressing more on supply-side economics which provided incentives to people to work and save and thus control inflation & unemployment.

MACROECONOMICS
Objectives of Macroeconomics: 1. Policy to achieve high level of output (GDP) 2. To achieve price stability 3. Full employment 4. Sustainable BOP 5. Rapid economic growth Some key variables like GDP, inflation and unemployment rate help economists to measure macroeconomic performance of an economy.

MACROECONOMICS
Instruments of macroeconomic policy: To achieve macroeconomic objectives, govts have to use various macroeconomic policies such as 1. fiscal, 2. monetary, 3. employment, 4. international trade, 5. exchange rate 6. price & income policy

NATIONAL INCOME
National income statistics provides important data about the economy such as level of output produced, income generated. The break-up provides insight into the working of the economy & its performance. It helps in ascertaining how output relates to income, how govt taxes, subsidies and expenditures affect the economy. Flow of goods & services that become available to a nation during a year.

NATIONAL INCOME
Circular flow of income real flow & money flow. It can be explained through four models: 1. Two-sector; a closed economy (without savings) 2. Two-sector with savings 3. Three-sector with govt 4. Four-sector with external world

NATIONAL INCOME
Factors affecting/influencing National Icome: a) Natural resources b) Human resources c) Capital resources There are three ways to measure National Incomei. Product approach: calculating total value of the final product of a country. Goods & services produced in a given year denoted by Q1, Q2,Q3 .. Qn & market prices by P1, P2 Pn

NATIONAL INCOME
Hence N.I. = P1Q1+P2Q2+ .PnQn ii. Income Approach: The annual flow of factor earnings in the form of rent, wage, interest and profits accrued from land, labour, capital & organization as these factors contribute to production of final output. Mathematically, PiOi= Wi+ Ri+ Ii+ Pi

NATIONAL INCOME
iii. Expenditure Approach: measured by aggregating the flow of total expenditure on the final goods & services in an economy. An economy consists of households, business firms, & govt. Mathematically, Y = En + Eb + Eg

NATIONAL INCOME
Gross & Net concepts: when no allowances are made for capital consumption while in net capital consumption has been made. Hence, the difference is depreciation . Domestic & National concept: national includes the income of all factors irrespective of whether they are there in home country or abroad while domestic products or income are generated within the country.

NATIONAL INCOME
Market prices & Factor cost: factor cost equals total costs of production. In market prices two elements need attention, namely indirect taxes that add to the price of a product and subsidies which lower the price. Market prices > the value of factors if indirect taxes are added & it be lower if subsidies are given. Since govt levies indirect taxes on more goods & subsidies on fewer goods, NI at market price is > NI at factor cost.

NATIONAL INCOME
GDPmp = ? The most comprehensive measure of aggregate income calculated after deducting net exports from total final expenditure , i.e. C + I + G + (X M) GDPfc = GDPmp + susidies indirect taxes GNPfc = GDPfc (+or-) Net factor income from abroad. NNPfc = GNPfc depreciation Nominal & Real GDP

NATIONAL INCOME
GDP Deflator = Nominal GDP / Real GDP = rate of inflation (in % terms) Personal Income = NNPfc corporate taxes undistributed profits + transfer income Disposable Income = Personal Income personal taxes.