What is macroeconomics?

What is macroeconomics?
Macroeconomics considers the performance of the economy as a whole. We try to understand changes in The rate of economic growth The rate of inflation Unemployment Our trade performance with other countries Macroeconomics also includes an evaluation of the relative success or failure of government economic policies

Introduction to Macroeconomics
Microeconomics examines the behavior of individual decision-making unitsbusiness firms and households. Macroeconomics deals with the economy as a whole; it examines the behavior of economic aggregates such as aggregate income, consumption, investment, and the overall level of prices. Macroeconomics deals with the functioning of the economy as a whole.

The Components of the Macroeconomy

Everyones expenditure is someone elses receipt. Every transaction must have two sides.

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 The economy is made up of four sectors sometimes called economic agents: Households who receive payments (income) for their services (eg labour and land) and use this money to buy the output of firms (ie consumption or household spending). Firms who use land labour and capital to produce goods and services for which they pay wages rent etc (income) and receive payment (expenditure) Government (also known as the public or state sector) and International eg consumers buying overseas products (M) and Foreigners buying UK products (X)

The main objectives of government economic policy

The key elements of the Government's strategy are:

1.
2.

Delivering macroeconomic stability (a very broad macroeconomic aim)

Meeting the productivity challenge (an important supply-side target)

3.
4. 5.

Increasing employment opportunity for all (a labour market objective)

Ensuring fairness for families and communities (commitment to equity) Protecting the environment (green economics has a macroeconomic dimension)

Concepts of Macro Economics

Inflation

Business cycle
Employment & unemployment National income (GNP) Stagflation Exchange rates

Balance of payment
Economic Growth
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Concepts of Macro Economics

Inflation is a monetary phenomenon characterized by high prices i.e. falling value money or in simple words inflation refers to a rapid rise in price level ,

which causes a decline purchasing power of money

The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other

macroeconomic variables
Employment &unemployment is an important macroeconomic variables . The unemployment rate is the percentage of the labor force that is

unemployed. The unemployment rate is a key indicator of the economys

health. The existence of unemployment seems to imply that the aggregate labor market is not in equilibrium.

Concepts of Macro Economics

National income is the value of all final goods and services produced in a country in a year GNP/GDP shows the performance of the economy in a year and determine the overall living standard of the economy of a country, aggregate demand and aggregate supply of the product Stagflation occurs when the overall price level rises rapidly (inflation) during periods of recession or high and persistent unemployment (stagnation) Exchange Rates at which the currencies of two nations are exchanged for each other and transactions in foreign market are carried out Balance of payment is the difference between export and import over the net result of foreign trade and gives a true picture as to where the country stands in international trade Economic growth can be measured by an increase in countrys GDP 9 of 31

Nature of Macro Economics

Macroeconomics studies economy as whole. It deals with national income or national output , aggregate consumption , investment, demand, price, employment etc Macro economies studies all phases of business cycle It study the short period of time It deals with real income It serves as a guide for decision making It plays crucial role of investment decision Its laws and theories based on experience which serves as guideline to the present day politician

Scope of Macroeconomics
1.Theory of National Income:-Macroeconomics studies the concept of national income, its different elements, methods of its measurement and social

accounting.
2.Theory of Employment:-It studies the problems of employment and unemployment. There are different factors which determine employment. They are like effective demand, aggregate demand, aggregate supply, total consumption ,total savings and total investment etc. 3.Marco Theory of distribution:-There are macro economic theories of distribution. These theories try to explain how the national output is distributed

among the factors of production.

4.Economic development:-UDC's are blessed with mass poverty and low per capita income curve for economic development. Economic development is a long run process. In it, we analyze the problems and theories of development.

Scope of Macroeconomics
5.Theory of International Trade:-It also studies principles determining trade among different countries. Tariff's protection and free-trade polices fall under foreign trade.

6.Theroy of Money:- Changes in demand and supply of money effect level of

employment. Therefore ,under macro economics functions of money and theories relating to money are studied.

7.Theory of Business Fluctuations:-It also deals with the fluctuations in the level of employment, total expenditure, general price level.

8.Theory of Genral Price Level:-A continuous rise in the price level is called inflation. It distorts production. It increases inequalities in the distribution of income and wealth. The common man is injured by inflation. Deflation is the opposite of inflation. The general price level falls continuously. Output and employment levels fall. Macro economics provides explanation for the occurrence of inflation and deflation.

Importance of Macroeconomics
Helpful in understanding the functioning of an economy Study of national income Formulation of economic policy Study of trade cycle Changes in general price level Economic growth International comparison Economic planning Helpful in understanding Macro Economic Paradoxes

Importance of Macroeconomics
Macroeconomics is useful in several ways. Some of them are discussed under the following headings: a. To understand the working of economy:-Macroeconomics gives birds eye view of the economic world. It helps in understanding how the macroeconomic variables behave in the aggregate. Study of the national income, aggregate output, gross saving and output, national expenditure is very essential to understand the working of the economy. b. Helpful in formulation of economic policies:-Macroeconomic analysis provides a sound basis for the formulation of governments economic policy. The economic policies for the removal of poverty, employment and price stabilization must be based upon reliable statistics of the aggregate variables. c. Helpful in controlling economic fluctuations:-Economic fluctuations like trade cycle, inflation, deflation etc. need to be handled appropriately in appropriate period to correct them. This will give a finite direction to the economy. For this the knowledge of macroeconomics is essential.

Importance of Macroeconomics
d. Helpful in international comparisons:-Only macroeconomic variables like national income, total output, aggregate demand, and consumption behaviour and investment patterns of different countries can be easily compared. Macroeconomics provides the necessary information for this. e. National Income:-National income is the barometer that scales the growth of a country. It analyses the overall performances of the economy within a given period of time and allow us to compare that performance with the post. National income, basically, is an aggregate concept. Thus, macroeconomics studies about the problems of unemployment, inflation, economic instability and economic growth. It also enriches our knowledge of functioning of the whole economy by studying the behaviour of national income, output, investment, saving, and consumption.

Limitations of Macro Economics

Fallacy of Composition

In Macro economic analysis the fallacy of composition is involved, i.e.

aggregate economic behaviour is the sum total of the economy of individual activities. But what is true of individuals is not necessarily true

to the fiscal entirely. For instance, savings are a private virtue but a public
vice. If total savings in the economy increases, they may initiate a depression unless they are invested. Again, if an individual depositor

withdraws his money from the bank, there is no risk. But if all depositors
simultaneously do this, there will be a run on the banks and the banking system will be affected adversely.

Limitations of Macro Economics

To Regard the Aggregates as Homogenous The main defect in macro analysis is that it regards the aggregates as homogenous without caring about their internal composition and structure. The average wage in a nation is the sum total of wages in all professions, i.e. wages of clerks, typists, teachers, nurses etc. But the volume of aggregate employment depends on the relative structure of wages rather than on the average wage. If, for instance, wages of nurses increase but of typist rises much aggregate employment would increase. Statistical and Conceptual Difficulties The measurement of macro economics concepts involves a number of statistical and conceptual complexities. These problems relate to the aggregation of micro economic variables. If individual units are almost similar, aggregation does not present much difficulty. But if micro economic variables relate to dissimilar individual units, their aggregation into one aggregation into one macro economic variable may be incorrect and hazardous.

Limitations of Macro Economics

Aggregate Variables may not be Important Necessarily The aggregate variables which form the economic system may not be of much significance. For instance, the national income of a country is the total of all individual income. A hike in national income does not mean that individual incomes have risen. The increase in national income might be the result of the increase in the incomes of a few rich people in the nation. Thus a rise in the national income of this type has little significance from the point of view of the community. Indiscriminate Use of Macro Economics Misleading An indiscriminate and uncritical use of macro economics in analysing the complexities of the real world can frequently be misleading. For instance, if the policy measures needed to achieve and maintain full employment in the economy are applied to structural redundancy in individual firms and industries, they become irrelevant. Likewise, measures aimed at controlling general prices cannot be applied with much advantage for controlling prices of individual products.

Economic Growth & Development

Economic development is a broader term than economic growth Economic growth usually means the growth in production of an economy i.e countrys real output of goods & services or the product per capita Economic development implies progressive changes in socioeconomic structure of a country. It includes other factors such as

literacy health, child mortality rate, equality, regional balance,

infrastructure

Economic Growth
Economic Growth is a narrower concept than economic development. It is an increase in a country's real level of national output which can be caused by an increase in the quality of resources (by education etc.), increase in the quantity of resources & improvements in technology or in another way an increase in the value of goods and services produced by every sector of the economy. Economic Growth can be measured by an increase in a country's

GDP (gross domestic product).

Features of Economic Growth

1. Rise in output by mobilizing resources and raising their productivity 2. Supply of capital raises effective demand which in turn induce business activity 3. Rate of increase in per capita income 4. Increase in accumulation of capital, technological

improvement
5. Full employment

Economic Development
Economic development is a normative concept i.e. it applies in the context of people's sense of morality (right and wrong, good and bad). The definition of economic development given by Michael Todaro is an increase in living standards, improvement in self-esteem needs and freedom from oppression as well as a greater choice. The most accurate method of measuring development is the Human Development Index which takes into account the literacy rates & life expectancy which affects productivity and could lead to Economic Growth. It also leads to the creation of more opportunities in the sectors of

education, healthcare, employment and the conservation of the environment. It

implies an increase in the per capita income of every citizen.

Features of Economic Development

1. Changes in socio economic structure

2. Economic development involves a steady decline in the agriculture

share in GDP& corresponding increase in share of industries , trade , banking , construction & services

3. It implies changes in technological and institutional organization of

production and distributive pattern of income 4. It helps in human resource development & thus raises productivity

level
5. It reduces social tension & thereby create congenial environment for business

Economic Development vs Economic Growth

Economic Growth does not take into account the size of the informal economy. The informal economy is also known as the black economy which is

unrecorded economic activity. Development alleviates people from low

standards of living into proper employment with suitable shelter. Economic Growth does not take into account the depletion of natural

resources which might lead to pollution, congestion & disease. Development

however is concerned with sustainability which means meeting the needs of the present without compromising future needs. These environmental effects

are becoming more of a problem for Governments now that the pressure has
increased on them due to Global warming. Economic growth is a necessary but not sufficient condition of economic

development.

Economic Development Concept: Normative concept

Economic Growth Narrower concept than economic development

Scope:

Concerned with structural changes Growth is concerned with in the economy increases in the economy's output

Growth:

Development relates to growth of human capital indexes, a decrease in inequality figures, and structural changes that improve the general population's quality of life

Growth relates to a gradual increase in one of the components of Gross Domestic Product: consumption, government spending, investment, net exports

Economic Development Implicati on: It implies changes in income, saving and investment along with progressive changes in socioeconomic structure of country(institutional and technological changes)

Economic Growth It refers to an increase in the real output of goods and services in the country like increase the income in savings, in investment etc.

Measure ment:

Qualitative.HDI(Human Quantitative. Increase in real Development Index), gender- GDP. Shown by PPF. related index (GDI), Human poverty index (HPI), infant mortality, literacy rate etc. Brings qualitative and quantitative Brings quantitative changes in changes in the economy the economy

Effect:

Growth & Development in Indian Economy

In the case of the Indian economy economic growth is not enough; we need economic development. We need better health of people, education for all, reduction in inequality among sections of people and regions, reduction in infant mortality rate (IMR), access to drinking water for all, etc.

The government has to devise policies and allocate government

expenditure so that these facilities are available to all. Thus the additional income generated in the economy reaches the backward regions and the

poorer sections of society. To achieve economic development we need

economic growth. In a stagnant economy, where there is no economic growth, realization of economic development is difficult.

Indicator for measurement of Growth & Development in Indian Economy

Measurement of the level of economic development is difficult, because it does not depend upon a single factor. There are a number of indicators of economic development. These indicators could be quite varied and too many. For economic growth given the per capita GDP along with annual growth rates of some of the economies. In order to make comparison possible we have given these figures in a comparable form . We can see that Indian economy is not comparable to developed economies. The per capita GDP in India is much lower than in developed countries. However, it has a higher growth rate compared to others. Note that some of the countries have very low GDP per capita and have experienced decline in it over time (see, Nigeria and Tanzania)

Indicator for measurement of Growth & Development in Indian Economy

Economic Development Apart from low per capita income India is far below

the developed economies in terms of development indicators. Some of these

indicators are consumption of electricity, literacy rate, access to safe drinking water, empowerment of women, etc. United Nations Development Programme (UNDP) brings out a 'human development index' by combining several indicators of development such as life expectancy, education, per capita income, and empowerment of women. According to Human Development Report 2001, India ranks 1 15 out of 162 countries in terms of human development index .A positive feature of the Indian economy is that it is not stagnant; it is developing. It is one of the fastest growing economies in the world. There have been improvements in life expectancy, literacy, and availability of infrastructure.