24199166 what is macroeconomics its origin

8/13/2019 24199166 What is Macroeconomics Its Origin

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What is Macroeconomics? Its Origin

Scope of Macroeconomics

1. Theory of National Income.2. Theory of Employment.3. Theory of Money.4. Theory of General Price Level.5. Theory of Economic Growth.6. Theory of International Trade.7. Macro Theory of Distribution.8. Theory of Trade Cycles.9. Balance of Payments and Exchange Rates.


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Scope of Macroeconomic Theory

Theory ofIncome andEmployment

Theory ofGeneral Price

Level and Inflation

Theory ofEconomic

Growth

Macro theoryof Distribution

Theory of Consumptionfunction

Theory of Investment

Theory of Business Cycles


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M a c r oE

c on omi c

C on

c e p t s

GROWTH

BUSINESS CYCLES

UNEMPLOYMENT

INFLATION


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Importance of Macroeconomics1. Macroeconomic paradoxes show the importance of Macroeconomic

analysis: The study of macroeconomics is important in its own sake, as ittells us how the economy as a whole works. We cannot obtain and derivelaws governing macroeconomic variables such as national income, totalemployment, general price level by studying the microeconomic decisions ofindividual consumers, firms and industries. This is because what is true andvalid in case of an individual firm or industry may not be valid for the

economy as a whole.2. Important nature of Macroeconomic Issues: Macroeconomics is concerned

with the study of issues and problems which are of vital importance fordetermining well-being of the people. Macroeconomic problems such asunemployment, inflation, instability of foreign exchange rate case a lot ofhuman sufferings.

3. Importance of Macroeconomics for Accelerating Economic Growth: Macroeconomics explains the factors which determine economic growthand brings out what causes slowdown in productivity growth. All theeconomic models explains the same.


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4. Understanding Business Cycles: Fluctuations in aggregate demanddue to volatile nature of investment demand.

5. Formulating Governments Macroeconomic Policies: In formulatingthe monetary and fiscal policies of the government.

6. Individual Decision-making: The understanding about the working of

the economy as a whole helps the individuals to take better decisions.The individuals can take care of situations like saving during inflation,investment during interest rise etc. Buying a new asset-whether it isthe right time or not.

7. Importance in Business Decisions: The changes in domestic business

environment and the changes in International business environmentcan have a great impact in business decisions of investors and businesshouses.


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Limitations of Macroeconomics

1. Many propositions which are true for either individuals or for smallgroups of individuals or for small groups of individuals turn out to be falsewhen the economy as a whole is considered.

2. The Macroeconomic approach, which focuses attention on the large

aggregates, often treats these aggregates as homogeneous forgetting thesignificance of the internal composition and structure of such aggregates.

3. The utility of Macroeconomic analysis is further restricted by the fact thatthe bulk of the macroeconomic theory developed so far has relevance tothe developed countries since most macroeconomic models have beenconstructed to approximate reality in the developed countries.


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National Income Some countries are rich, some are poor and yet some others are in between. How do wemeasure the performance of an economy? Performance of an economy is related to thelevel of production (of goods and services) or total economic activity. Measures of nationalincome and output are used in economics to estimate the total value of production in aneconomy. The standard measures of income and output are Gross National Product (GNP),Gross Domestic Product (GDP), Gross National Income (GNI), Net National Product(NNP), and Net National Income (NNI). In India, the Central Statistical Organization has

been estimating the national income.National income per person or per capita income is often used as an indicator of peoples standard of living or welfare. However, many development economists have criticized thatGNP as a measure of welfare has many limitations. They argued that human well-beingdoes not depend on national income alone. As measures of GNP exclude poverty, literacy,

public health, gender equity, and many human issues of well-being, they developed othermeasures of welfare such as the Human Development Index (HDI).

Some rich countries in terms of national income are poor in human development.Similarly, poor countries in terms national income have performed well in humandevelopment. In the case of India, though the GDP is growing faster, its performance interms of HDI is far below than that of many countries.


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National Income AccountingNational income of a country can be defined as the total market value of all

final goods and services produced in the economy in a year.

Two things must be noted in regard to the meaning of National Income.

First, it measures the market value of annual output. In other words nationalincome is a monetary measure .

Secondly, for calculating national income accurately all goods and servicesproduced in any given year must be counted only once.

Thus the total value of all final goods and services produced by various productive firms or businesses in a year is known as national product.

Wages

Value of Final +

National Product= Goods and Services = Rent =National Income

Produced +

Interest

+

Profits


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National Income and Related Concepts

GROSS DOMESTIC PRODUCT (GDP):

Gross domestic product is the total money value of all final goods and servicesproduced in an economy during a particular year by normal residents as wellas non-residents in the domestic territory of a country but excludes theincomes received from abroad.

GDP=Money Value of all Final Goods and Services Produced by National

Residents + Income Earned Locally by Foreigners Income Received byNationals Abroad.

We can think of actual GDP and potential GDP.

Actual GDP means what the economy produces while Potential GDP representswhat the economy could produce.

GDP can be computed both at factor cost as well at market price. GDP at factorcost provides an estimate of the total value of final goods and servicesproduced during a year at cost of production. For computing GDP at marketprice, all final goods and services are valued at their market prices and thevalues thus obtained are added.


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Relation between different concepts of NationalIncome

1. Gross Domestic Product

Market Value of Final Goods and Services produced within the domestic territories.

(+) Net Factor Income from Abroad

= 2. Gross National Product

(--) Depreciation

= 3. Net National Product at Market Price(--) Net Factor Income from Abroad

= 4. Net Domestic Product at Market Price

(--) Net Indirect Taxes (i.e. Indirect Taxes minus Subsidies)

= 5. Net Domestic Product at Factor Cost or Domestic Income(+) Depreciation

= 6. Gross Domestic Product at Factor Cost

(+) Net Factor Income from Abroad


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= 7. Gross National Product at Factor Cost(--) Depreciation= 8. Net National Product at Factor Cost or National Income

(--) Property and Entrepreneurial Income of the Government(--) Savings of Non-Departmental Enterprises(--) Social Security Contributions(--) Net Factor Income from Abroad= Income from Domestic Product Accruing to Private Sector

(+) Interest on National Debt(+) Transfer Earnings from the Government(+) Current Foreign Transfer Payments(+) Net Factor Income from Abroad= 9. Private Income(--) Corporate Tax(--) Saving of Corporation(--) Retained Earnings of Foreign Companies


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= 10. Personal Incomes

(--) Direct Taxes

(--) Miscellaneous Receipts of Government Administration

= 11. Disposable Income

= Consumption + Saving

Measurement of National Income

There are three methods of measuring National Income

1. Census of Production Method

2. Census of Income Method

3. Census of Expenditure Method


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1. Census of Production Method : This method measures the output of hecountry.

Y=( P-D) + ( S-T) + ( X-M) + ( R- p)

Y= Total income of the nation.P= Domestic output of all production sectors, D= Depreciation allowance.

S= Subsidies, T= Indirect taxes

X= Exports, M= Imports.

R= Receipt from abroad, p= Payments made abroad.

2. Census of Income Method: In this method the income of all factors ofproduction is added together.

Y= (w + r + i + profit) + ( X-M) + ( R- p)

w = wages, r = rent, i = interest

3. Census of Expenditure Method : National income on the expenditure sideis equal to the value of consumption plus investment.

Y= ( C + I + G) + ( X M) + ( R - P),

Where, C= Consumption Expenditure, I= Investment Expenditure

G= Government Expenditure.


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GDP and GNP

While GDP indicates productive capacity of an economy, GNP is a crude indicatorfor living standard. The significance of the distinction between GNP and GDPdepends on the nature of a particular economy. For instance, if a country hasmore non-resident inflows and produces a considerable portion of its output bymultinational corporations (i.e. with the help of external factors of production),

its GNP will be higher than GDP. Otherwise the distinction will be negligible.

Many countries have foreign firms. In the case of US Ford Motors in Chennai, theincome from the car factory would be counted as Indian GDP and not as USGDP. But the amount of profit the company sends to US will be added to their

GNP. Similarly, our GNP can be arrived by adding to our GDP the net factorincome receipts from abroad for the factor inputs owned by Indians. That is,the non-resident Indians income will be added to GDP to arrive at our GNP.


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NI at Cur r ent Pr i ces and Constant Pr i ces

The concepts of national income discussed above can be measured either atcurrent price or at constant price . The measure based on current priceuses the ongoing market prices to compute the value of output. It is quite

possible that the current price may always be higher than real value due tomany factors like taxes and inflation (or rising prices). Hence, nationalincome arrived at current price includes such influences as inflation and

taxes.With inflation as a common feature in almost all the economies, it is necessary

to measure the national income after deducting any such increase in thevalue of any output or income. National income at constant price measures the national income after making necessary adjustment to

eliminate the effect of inflation. Thus it is based on unchanged price ofoutput. As the national income at constant price is computed based on thereal worth of the purchasing power of income, it is also called as real national income or national income in real terms.


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Difficulties in the Calculation of National Income

1. Definition of Nation ( in a open economy)

2. Choice of Goods ( only goods having money value can be taken)

3. Choice of Method ( availability of data)

4. Stage of Economic Activity ( production stage, consumption stage or

expenditure stage)5. Double Counting.

6. Transfer Payments ( pension, unemployment allowance, interest on loansetc)

7. Illegal Income. ( Black Money)

8. Non-Availability of Data.

9. Non Monetized Sector.

10. Price Level Changes.

11. Difficulties in Underdeveloped Countries.


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Importance of National Income Studies1. Indicator of Economic Structure.

2. Indicator of Economic Welfare.3. Helpful in Economic Policy.

4. Helpful in Economic Planning

5. Inflationary and Deflationary Gaps.

6. Importance in International Sphere.

7. Determination of Grants in Aid.

8. Basis of Budgetary Policies.

9. Importance in Defense and Development

10. Basis of Social Accounting

11. Importance in Economic Analysis-growth of the economy, the trendsin various sectors, the trends of various macro variables ( saving,investment, inflation, forex reserves etc.)


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Circular Flow Model

Injections, withdrawalsand equilibrium


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Consumption ofdomestically

produced goodsand services (C d)

The circular flow of income


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Factorpayments





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Factorpayments



BANKS, etc

Netsaving (S)



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Factorpayments



BANKS, etc GOV.

Investment (I)

Netsaving (S)

Nettaxes (T)



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Factorpayments



BANKS, etc GOV. ABROAD

Investment (I)

Government

expenditure ( G )

Netsaving (S)

Nettaxes (T)

Importexpenditure (M)



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Factorpayments




Investment (I)

Government

expenditure ( G )

Exportexpenditure (X)

Netsaving (S)

Nettaxes (T)




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Factorpayments




Investment (I)

Government

expenditure ( G )


Netsaving (S)

Nettaxes (T)


WITHDRAWALS



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Factorpayments




Investment (I)

Government

expenditure ( G )


Netsaving (S)

Nettaxes (T)



WITHDRAWALS

INJECTIONS


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Factorpayments

Regional Purchases ofregionally produced goods

and servicesOUTSIDE OF REGION



Economic Base Model Collapses All Spendinginto Regional and Non-Regional

WITHDRAWAL

INJECTION

24199166 what is macroeconomics its origin

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