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Macroeconomics is ...

• the study of the economy as a whole

• it deals with broad aggregates
• but uses the same style of thinking about economic issues as
in microeconomics.

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 Some key issues in macroeconomics

• Inflation
– the rate of change of the general price level
• Unemployment
– a measure of the number of people looking for work, but
who are without jobs
• Output
– real gross national product (GNP) measures total income of
an economy

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 More key issues in macroeconomics
• Economic growth
– increases in real GNP, an indication of the expansion of the
economy’s total output
• Macroeconomic policy
– a variety of policy measures used by the government to affect the
overall performance of the economy

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National Income
Concept
&
Measurement

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 Meaning of National Income
• National income is the money value of all the final
goods and services produced by a country during a
period of one year.

• National income consists of a collection of different

types of goods and services.

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 Why is NI Important?
• Provides information on the country’s economic performance over a period
of time.
• Provides information to be used for making economic policies or budgeting
or planning.
• Provides information on the contribution of each sector of the economy to
the national income.
• Provides a breakdown of consumer expenditure and government
expenditure.
• Provides information on the distribution of income.
• Provide statistics for measuring the economic growth of the country.
• Provides information that is used to measure the standard of living in the
country.

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Circular Flow of Income

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 National Income Accounting

• National income accounts are an accounting framework is

useful in measuring economic activity
• Three approaches—all produce the same measurement of the
production of the economy:
o Output/product approach: how much output is produced
o Income approach: how much income is created by production
o Expenditure approach: how much purchasers spend

Landskroner Money slide 9

 Methods of Measuring national income
1. Output Method: This measures the monetary or market value of all the goods
and services produced within the borders of the country. In order to avoid a
distorted measure of GDP due to price level changes, GDP at constant prices of real
GDP is computed.
GDP (as per output method) = Real GDP (GDP at constant prices)–Taxes + Subsidies.

2. Expenditure Method: This measures the total expenditure incurred by all entities
on goods and services within the domestic boundaries of a country.
GDP (as per expenditure method) = C + I + G + (X-IM) /
GNP = wages and salaries + rent interest + Dividends + undistributed
corporate profits + mixed incomes + direct taxes + indirect taxes +
depreciation + net income from abroad.

3. Income Method: It measures the total income earned by the factors of

production, that is, labor and capital within the domestic boundaries of a country.

GDP (as per income method) = GDP at factor cost + Taxes – Subsidies.
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 Value added method
• In order to avoid double counting value added at each
stage of production should be calculated to arrive at
GNP. The difference between the value of output
and input at each stage of production is called the
value added. By summing such value added for all
industries in the economy, GNP can be found out

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 Things that are not included in NI calculation

• National debt interest

• Winning of lottery prize
• Profit earned by foreign companies
• Unprocessed goods
• Sale of second-hand goods
• Goods sold in a black market
• Barter trade

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 Basic Concepts in National income
• Gross Domestic Product (GDP)
• Net Domestic Product (NDP)
• Gross National Product (GNP)
• Net National Product (NNP)
• Personal Income (PI)
• Disposable Personal Income (DPI)
• Real income

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 Gross Domestic Product
• Gross domestic product (GDP) is the monetary value of all
final goods and services produced in the domestic territory
of a country during an accounting year.
• It counts all of the output generated within the borders of a
country.
• GDP growth rate is an important indicator of the economic
performance of a country

The formula of GDP is:

GDP = C + G + I + NX
• (where G=government spending, C=consumption, I=Investment,
and NX=net exports).

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 Net Domestic Product
• Net domestic product (NDP) is an annual measure of the
economic output of a nation that is adjusted to account for
depreciation. It is calculated by subtracting depreciation from
the gross domestic product (GDP).

• Depreciation is the monetary value of an asset that decreases

over time due to use, wear and tear or obsolescence. This
decrease is measured as depreciation. Description:
Depreciation, i.e. a decrease in an asset's value, may be caused
by a number of other factors as well such as unfavorable
market conditions
NDP = GDP – Depreciation

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 Gross National Product

• Gross national product (GNP) is defined as the sum of

the gross domestic product and net factor incomes from
abroad.
• Gross national product (GNP) refers to the total value of all the
goods and services produced by the residents and businesses
of a country, irrespective of the location of production. GNP
takes into account the investments made by the businesses and
residents of the country, living both inside and outside the
country.
GNP = GDP + NFIA.

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 Net National Product
• Net National Product (NNP) is the total value of goods
produced and services provided in a country during one year
after depreciation of capital goods has been allowed for.
• It can be derived by subtracting depreciation allowance from
GNP. It can also be found out by adding the net factor
income from abroad to the net domestic product.

NNP = GNP – Depreciation

OR
NNP = NDP + NFIA

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 Market Price vs Factor Cost
• Market price
oIs the amount that consumers pay for goods or services in
the marketplace
oIt includes cost of production as well as taxes (indirect
taxes) levied on product or service and any subsidies
provided by the government
oThe market price represents the final price by consumers,
which also covers the cost of making product available in
the market

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 What Is Factor Cost?
• Factor cost can be defined as the total cost of all the factors of
production in manufacturing a good. Factors of production
include capital, land, labor, and enterprise.
• It does not account for the subsidies received and taxes paid.
Hence, it is not the same as the market price.

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NNP at factor cost or National Income
• NNP at factor cost is the volume of commodities and services
turned out during an accounting year, counted without
duplication.
• NNP at factor cost is equal to the national income. since it can
present a picture of the cost of factors of production in a
country.
NNPFC = GNPMP – Net Indirect Taxes – Depreciation

• NNPFC shows how factor contributes to commercial activities.

This is important because if the government sees a change in
any economic trend or if a factor becomes a barrier to the
business, it can establish policies to ease the economy.

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 Difficulties in the Measurement of National
Income
•Non-monetized transactions: Exchange of goods and services that have no monetary
payments, like services rendered out of love, courtesy, or kindness are difficult to include
in the computation of national income.
•Unorganized sector: The contributions of the unorganized sector are unrecorded. It is
very difficult to identify the income of those who do not pay income tax.
•Multiple sources of earnings: Part-time activity goes unrecognized and such income is
not included in national income.
•Categorization of goods and services: In many cases, categorization of goods and
services as intermediate and final products is not very clear.
•Inadequate data: Lack of adequate and reliable data is a major hurdle to the
measurement of national income of underdeveloped countries.

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Personal Income and Disposable income
• Personal income may be defined as the current income of
persons or households from all services. Personal income is
not a measure of production.
• Personal income includes compensation from a number of
sources, including salaries, wages, and bonuses received from
employment or self-employment, dividends and distributions
received from investments, rental receipts from real estate
investments, and profit sharing from businesses

• Personal Income = Private Income - Undistributed Profit -

Corporate tax

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 Disposable Income
• Disposable income, also known as disposable personal income
(DPI), is the amount of money that an individual or household
has to spend or save after income taxes have been deducted

DPI = Personal income – Personal Direct taxes.

• The disposable personal income may be spent fully or

individuals may save. What remains after saving is called the
Personal Outlay.

Disposable Outlay= DPI - Savings

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 Other concepts in NI accounting
• Private Income: The income accruing to the private
sector both from domestic and international sources.
• Undistributed profits refer to that part of the earned income
which is not given to households but are saved by the firm for
future investments
• A transfer payment is a payment of money, usually from the
government, for which there are no goods or services
exchanged.
• Per capita income (PCI) or total income measures the average
income earned per person in a given area (city, region, country,
etc.) in a specified year.

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Mathematical summaries of various concept

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TAKE HOME ASSIGNMENT

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 Inflation
• According to C.CROWTHER, “Inflation is State in which the
Value of Money is Falling and the Prices are rising.”
• In economics, inflation is a rise in the general level of prices of
goods and services in an economy over a period of time. When
the general price level rises, each unit of currency buys fewer
goods and services

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 TYPES OF INFLATION
• Open Inflation-: The rate where Costs rise due to Economic trends of
Spending Products and Services.
• Suppressed Inflation-: Existing inflation disguised by government Price
controls or other interferences in the economy such as subsidies. It is Also
Called Repressed Inflation.
• Galloping Inflation-: Very Rapid Inflation which is almost impossible to
reduce
• Creeping Inflation -: Circumstance where the inflation of a nation increases
gradually, but continually, over time. This tends to be a typically pattern for
many nations. Although the increase is relatively small in the short-term, as
it continues over time the effect will become greater and greater
• Hyper Inflation-: Hyperinflation is caused mainly by excessive deficit
spending (financed by printing more money) by a government, some
economists believe that social breakdown leads to hyperinflation (not vice
versa), and that its roots lie in political rather than economic causes

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 CAUSES OF INFLATION

DEMAND SIDE
• Increase in money supply
• Increase in disposable income
• Deficit financing
• Foreign exchange reserves

SUPPLY SIDE
• Rise in administered prices
• Rising in cost of production

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 ADVANTAGES OF INFLATION

• Deflation is potentially very damaging to the economy and can lead to lower
consumer spending and lower growth. For example, when prices are falling,
consumers are encouraged to delay purchasing in the hope prices will be cheaper in
the future.
• A moderate inflation rate reduces the real value of debt. If there is deflation, the
real value of debt increases leading to a squeeze on disposable incomes.
• Moderate rates of inflation allow prices to adjust and goods to attain their real
price.
• Moderate rates of wage inflation, allow relative wages to adjust. Nominal wages are
sticky downwards. With moderate inflation, firms can freeze pay rises for less
productive workers – to effectively give them a real pay cut.
• Moderate rates of inflation are a sign of a healthy economy. With economic growth,
we usually get a degree of inflation.

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 DISADVANTAGES OF INFLATION
• High inflation rates tend to cause uncertainty and confusion leading to less investment. It is
argued that countries with persistently higher inflation, tend to have lower rates of investment
and economic growth.
• Higher inflation leads to lower international competitiveness, leading to fewer exports and a
deterioration in the current account balance of payments. In a fixed exchange rate, e.g. the
Euro – this is even more problematic as countries do not have the option of devaluation.
• Menu costs. – This is the cost of changing price lists.
• Inflation and stagnant wage growth lead to declining incomes.
• Inflation can reduce the real value of savings, which might particularly affect old people who
live on savings. However, it does depend on whether interest rates are higher than the
inflation rate.
• Inflation will reduce the real value of government bonds. Investors will demand higher bond
yields to compensate; this will increase the cost of debt interest payments
• Hyper-inflation can destroy an economy. If inflation gets out of hand, it can create a vicious
cycle, where rising inflation, causes higher inflation expectations, which in turn pushes prices
even higher. Hyper-inflation can wipe out the savings of the middle-classes, and redistribute
wealth and income towards those with debt and assets and property.

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 STAGFLATION

• Stagflation is period when slow economic growth plus

unemployment and accompanied by rising in prices. It can also
be defined as a period of Inflation combined with a decline in
Gross Domestic Product (GDP)

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 Disinflation
• Disinflation refers to a slowdown or a fall in the annual rate of
price inflation. Consumer prices are still increasing, but more
slowly. This drop in the inflation rate may be temporary in
nature. Disinflation might occur when the annual rate of
inflation falls from 7% to 3%.

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Unemployment

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 Contents
• Types of unemployment
• Causes of unemployment
• Costs of unemployment
• Measurement
• Solutions

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 UNEMPLOYMENT
• Unemployment refers to a situation in which workers who are capable
of working and willing to work do not get employment.

• Usually measured by the unemployment rate, which is dividing the

number of unemployed people by the total number of people in the
workforce, unemployment serves as one of the indicators of a country’s
economic status.

• The term “unemployment” is often misunderstood, it as it includes

people who are waiting to return to a job after being discharged, yet it
does not include individuals who have stopped looking for work in the
past four weeks due to various reasons such as leaving work to pursue
higher education, retirement, disability, and personal issues. Also people
who are not actively seeking a job but do want to work are not classified
as unemployed.

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 Types of unemployment

•Frictional unemployment
•Structural unemployment
• Cyclical or Keynesian unemployment
•Seasonal unemployment

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 Frictional unemployment

• Frictional unemployment occurs when a worker moves

from one job to another. It is a result of imperfect
information in the labor market, because if job seekers
knew that they would be employed for a particular job
vacancy, almost no time would be lost in getting a new
job, eliminating this form of unemployment.

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 Structural unemployment

• Structural unemployment arises when the qualification of

a person is not enough to meet his job responsibilities.
Conversely, structural unemployment arises when the
salary offered to a person falls short of the minimum wage
that can be paid for the concerned job.

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 Cyclical unemployment
•Cyclical or demand-deficient unemployment occurs when
the economy is in need of low workforce. The demand for
labor increases with the economy in the growth phase.
Again, when the economy passes through depression,
demand for labor decreases and the extra workers are
released as the unemployed labor force.

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 Seasonal unemployment

• Seasonal unemployment occurs when an occupation is not

in demand at certain seasons.
• Seasonal unemployment occurs when people are
unemployed at particular times of the year when demand for
labor is lower than usual. Seasonal unemployment refers to a
temporary window of time where the number of available
employment opportunities decreases.

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 Causes of unemployment

High Population growth.

Absence of employment opportunities.
Seasonal Employment.
Joint Family System.
An increasing turnout of students from Universities.
Slow Developing of Industries.
Insufficient Rate of Economic Progress.
Technological development

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 Costs of unemployment
• Individual: Unemployed individuals are unable to
earn money to meet financial needs. Failure to pay
installments or to pay rent may lead to homelessness
through eviction. Unemployment increases chances of
malnutrition, illness, mental stress, and loss of self-
esteem, leading to depression.
• Society: An economy with high unemployment is not
using all of the resources, i.e. labor, available to it. Since it
is operating below its production capability, it could have
higher output if more people are usefully employed.

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 Economic costs of high unemployment?

• Lost Output: High unemployment results in a loss of potential output, as unemployed workers are
not able to contribute to the economy.
• Decreased Consumer Spending: Unemployed workers have less real disposable income, which can
result in decreased consumer spending and a reduction in aggregate demand. This in turn can
cause a fall in planned investment spending by firms increasing the risk of a deeper recession.
• Reduced Tax Revenue: High unemployment can also reduce direct and indirect tax revenue, as
fewer workers are paying into the system and more are receiving unemployment benefits.
• Increased Government Spending: High unemployment can increase government spending on
social welfare programmes, which then leads to a rise in the size of a government's budget deficit
and a higher level of national debt.
• Reduced Investment: High unemployment can reduce investment, as firms may be less confident
in the future prospects of the economy and may not be willing to invest in new projects or expand
their operations.
• Lower Labour Force Participation: High unemployment can lead to discouragement, where
workers drop out of the labour force and may not return, reducing the size of the potential labour
force and the economy's long run productive capacity. This is known as labour market hysteresis.
• Increased Relative Poverty: High unemployment can result in increased poverty, as unemployed
workers are unable to meet their basic needs and may require government support .

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 Solutions to Unemployment
1. Modification in Industrial Technique
2. Change in the Education System
3. Expansion of Employment Exchanges
4. Full and more Productive Employment
5. Policy Regarding Seasonal Unemployment
6. More Assistance to Self-employed People
7. Population Control
8. Decentralization of Industrial Activity
9. High rate of capital formation

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QUERRIES
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any
question ?