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7/28/2019 Unit I BE Macroeconomics
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What is macroeconomics?
http://news.bbc.co.uk/1/hi/business/economy/default.stm7/28/2019 Unit I BE Macroeconomics
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What is macroeconomics?
Macroeconomics considers the performance of the economy asa 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
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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 asaggregate income, consumption, investment, and the overall
level of prices.
Macroeconomics deals with the functioning of the economy
as a whole.
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The Components of
the Macroeconomy
Everyones
expenditure is
someone elses
receipt. Every
transaction musthave two sides.
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The economy is made up offour sectors sometimes calledeconomic agents:
Households who receive payments (income) for their services (eglabour and land) and use this money to buy the output of firms (ieconsumption or household spending).
Firms who use land labour and capital to produce goods andservices for which they pay wages rent etc (income) and receivepayment (expenditure)
Government (also known as the public or state sector) and
International eg consumers buying overseas products (M) andForeigners buying UK products (X)
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The main objectives of government
economic policyThe key elements of the Government's strategy are:
1. Delivering macroeconomic stability (a very broad macroeconomicaim)
2. Meeting the productivity challenge (an important supply-sidetarget)
3. Increasing employment opportunity for all (a labour marketobjective)
4. Ensuring fairness for families and communities (commitment toequity)
5. Protecting the environment (green economics has amacroeconomic dimension)
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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 isunemployed. 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.
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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
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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
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1.Theory of National Income:-Macroeconomics studies the concept of nationalincome, 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. Theyare 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
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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.
Scope of Macroeconomics
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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
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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 ofgovernments 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.
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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 ofnational income, output, investment, saving, and consumption.
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Limitations of Macro Economics
Fallacy of Composition
In Macro economic analysis the fallacy ofcomposition 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 depositorwithdraws 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.
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Limitations of Macro Economics To Regard the Aggregates as Homogenous
The main defect in macro analysis is that it regards the aggregates ashomogenous 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.
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Limitations of Macro Economics
Aggregate Variables may not be Important Necessarily
The aggregate variables which form the economic system may not be of muchsignificance. 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 thecommunity.
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 theeconomy 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.
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Economic Growth & Development
Economic development is a broaderterm 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 socio-
economic structure of a country. It includes other factors such as
literacy health, child mortality rate, equality, regional balance,
infrastructure
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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).
Economic Growth
http://www.diffen.com/difference/GDP_vs_GNPhttp://www.diffen.com/difference/GDP_vs_GNPhttp://www.diffen.com/difference/GDP_vs_GNPhttp://www.diffen.com/difference/GDP_vs_GNPhttp://www.diffen.com/difference/GDP_vs_GNPhttp://www.diffen.com/difference/GDP_vs_GNPhttp://www.diffen.com/difference/GDP_vs_GNPhttp://www.diffen.com/difference/GDP_vs_GNP7/28/2019 Unit I BE Macroeconomics
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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, technologicalimprovement
5. Full employment
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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.
Economic Development
http://en.wikipedia.org/wiki/Human_development_indexhttp://en.wikipedia.org/wiki/Human_development_indexhttp://en.wikipedia.org/wiki/Human_development_indexhttp://en.wikipedia.org/wiki/Human_development_indexhttp://en.wikipedia.org/wiki/Human_development_indexhttp://en.wikipedia.org/wiki/Human_development_index7/28/2019 Unit I BE Macroeconomics
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Features of Economic Development
1. Changes in socioeconomic 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
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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 effectsare 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.
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Economic Development Economic Growth
Concept: Normative concept Narrower concept than economic
development
Scope: Concerned with structural changes
in the economy
Growth is concerned with
increases in the economy's
output
Growth: Development relates to growth of
human capital indexes, a decrease
in inequality figures, and
structural changes that improvethe 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
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Economic Development Economic Growth
Implicati
on:
It implies changes in income,
saving and investment along with
progressive changes in socio-economic structure of
country(institutional and
technological changes)
It refers to an increase in the real
output of goods and services in
the country like increase theincome in savings, in investment
etc.
Measure
ment:
Qualitative.HDI(Human
Development Index), gender-
related index (GDI), Human
poverty index (HPI), infant
mortality, literacy rate etc.
Quantitative. Increase in real
GDP. Shown by PPF.
Effect: Brings qualitative and quantitative
changes in the economy
Brings quantitative changes in
the economy
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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.
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Measurement of the level of economic development is difficult, because itdoes 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
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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