ASSIGNMENT DEC 21

MACROECONOMICS

ANSWER 1

1. Introduction. Macroeconomics studies the economy as a whole. That

means it studies everything that has an economic impact on individuals’ daily lives. It
works on the aggregate value of the various individual units, to determine its more
substantial impact on the whole nation. All the prominent reforms and policies are based
on this concept.

2. The scope of macroeconomics includes the following: -

(a) Economic systems: There are three major economic systems, namely
capitalist, socialist and mixed economies.

(b) Economic structure: It means, whether the country is an agrarian

economy, industrial economy or service-oriented economy. This depends on
which sector contributes most to the country’s GDP.

(c) Trends in macroeconomic variables: Macroeconomic variables such as

GDP, employment, income, production, consumption, inflation, international
trade, interest rates, wage rates, etc.

(d) Business cycles: Business cycles consist of alternate phases of expansion

and contraction in an aggregate economic activity. The first phase is a slowdown,
second is recession and then depression. This is followed by a period of
recovery, then expansion and then there is booming. During the depression,
aggregate levels of income, output, employment and prices fall. On the other
hand, during boom all of these variables trend upward.

(e) International economy: Today, the world’s economies have strong

interlinks with each other via international trade and investment. Trillions of
dollars are sunk in the world’s financial markets and any disequilibrium in any
part of the world can travel rapidly on digital platforms. Macroeconomics explores
how international economies trade with each other and how investment takes
place.

(f) via the Foreign Direct Investment (FDI) route such as subsidiaries,
branches or joint ventures. On the other hand, foreign investors invest in the
domestic economy via the Foreign Institutional Investment (FII) route. The
determination of foreign exchange rates and international prices constitute
international economics. The concepts and behaviour of economic agents are
explained in the underlying economic theories.
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(g) Economic planning: The aim of economic planning is to allocate scarce

national resources according to the national priorities and economic and social
objectives. The steps in planning include:
(i) Review of the state of the economy and its level of development

(ii) Estimate of the potential resources available with the country

(iii) The setting of the targets to be achieved at the end of the planning
process

(iv) Reconciling the competing demands of various productive sectors

(v) Allocation of resources in the most efficient manner to achieve the

stated goals.

(h) Economic policies: The government regulates and develops the economy
through its various economic policies. These include monetary policy, fiscal
policy, industrial policy, agricultural policy, trade policy, foreign exchange
management act, competition act among others.

(j) Money and capital markets: The money market consists of short term debt
instruments, while capital market consists of long-term financial instruments such
as stocks, bonds and debentures.

6. Conclusion. Macroeconomics is the basis of various economic reforms and the

national decision model in a country. However, the policies framed under this concept
usually have a dual impact, i.e., on the society as a whole and individual citizen.
Therefore, it requires a highly analytical, logical and extraordinary approach while
reaching to such interferences.

ANSWER 2

1. Introduction. A two-sector model of income determination of an economy

consists only of domestic and business sectors interjected by the financial institutions.
In two-sector economy where only consumption and investment expenditures take
place. Here, producers produce or manufacture goods and sell them to the household,
but the products are not sold for free, the producers get money in return. At the same
time, to produce these goods and services they hire the factor services of the household
sector and pay them rewards in terms of rent for land, wages for labour, interest for
capital, and profit for the organisation. In this pipe, which is closed, the income
circulates continuously and is recycled. the income keeps circulating within the pipe. If
savings are considered as well, it would cause a leakage which is mended by Financial
Institutions (buckets). The “bucket” here is the banks, financial markets and other
financial institutions which collect these savings. They act as financial intermediaries,
pool these savings, and lend it back to the businesses which helps them to invest it
back in the economy. The investments amount to an injection. Hence, effectively, round
after round, even if savings leakages happen, investments will refill them so that the
pipe will never dry out. In our above analysis of money flow, we have ignored the
existence of government for the sake of making our circular flow model simple. This is
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quite unrealistic because government absorbs a good part of the incomes earned by
households. The national income equation, is: -
Y = C + I, Where, Y is income, C is consumption and I is income
2. The Three Sector Model. In the three-sector economy, government is included
as well. Government as an economic actor creates taxes. It collects these taxes from
both-businesses as corporate tax and from households as income tax. Further, the
government ploughs back these taxes into the economy in the form of government
expenditure. The government increases aggregate demand by spending on goods and
services, and by collecting taxes. In national income accounting, government
expenditure refers to government spending on buying goods and services for current
use to meet the economy’s needs. It includes both public spending, public investment,
and transfer payments. Examples of government spending includes its various welfare
schemes, developmental programmes, providing public goods such as police, hospitals,
or public libraries. Every rupee that the government spends is received by the people
who in turn use them to buy goods and services. For national income to increase
all/either consumption, investment, or government spending has to increase.

4. Circular Flow of Income. Two Sector Economy, the resources such as land,
capital and entrepreneurial ability flow from households to business firms. In opposite
direction to this, money flows from business firms to the households as factor payments
such as wages, rent, interest and profits. Consequently, money flows from households
to firms as consumption expenditure made by the households on the goods and
services produced by the firms, while the flow of goods and services is in opposite
direction from business firms to households. Thus, we see that money flows from
business firms to households as factor payments and then it flows from households to
firms. Therefore, there is a circular flow of money or income. In three Sector Model,
Government purchases goods and services just as households and firms do.
Government expenditure takes many forms including spending on capital goods and
infrastructure (highways, power, communication), on defence goods, and on education
and public health and so on. These add to the money flows. The government purchases
of goods and services from firms and households. Government expenditure may be
financed through taxes, out of assets or by borrowing. Total expenditure flow in the
economy is now the sum of consumption expenditure (denoted by C), investment
expenditure (I) and Government expenditure (denoted by G). Thus

National Income Equation = C + I + G

5. Conclusion. If Government expenditure is greater than the tax revenue, the

government will have a deficit budget. To finance the deficit budget, the Government will
borrow from the financial market. For this purpose, then private investment by business
firms must be less than the savings of the households. Thus, Government borrowing
reduces private investment in the economy. Hence, prudent act of the government in
the economy is very significant.
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ANSWER 3A

With the help of following three formulas, GNP and GDP can be calculated.

GNPFC = GNPMP - Net Indirect Taxes -----(1)

Net Indirect taxes = Indirect taxes- Subsidies -----(2)

GDPFC = GNPFC - Net Factor Income from Abroad

-----(3)

Net Indirect taxes = Indirect taxes – Subsidies = 70 – 40 = 30

Therefore,

GNPFC = GNPMP - Net Indirect Taxes

= 700 - 30
= 670

&

GDPFC = GNPFC - Net Factor Income from Abroad

= 670 - 150
= 520

ANSWER 3B

1. Introduction. Jean-Baptiste Say, a very famous French economist, was

the one who developed Say's market law in 1803. It is well known that the JB Say's Law
of market theory is based on the classical economics theory that the ability to purchase
goods on the market depends on the ability to generate income through their
production.

2. The Say Law of Market can be understood as a way for a person to create a
demand for a specific type of product or service by supplying that particular type of
product or service. Jean Baptiste learned approximately the character of markets in his
e-book in 1803. After analysing the Treatise on Political economy, he said that an
economic agent should first manufacture a very well earlier than creating demand for
that particular or service in the market. As a marketer produces the products first and
then the order comes next, they should search for the delivery while there is an intake of
products.
Say mentions that if a character desires to have some means to buy items, the
consumer has first to promote something. As a result, the supply of demand comes first
from the production and income of commodities for attention instead of money itself. In
a barter economy, every time a producer brings a commodity inside the market to sell,
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he does so that you could get another product or service in return from the market.
Hence, supply represents the demand for different items. Consequently, one could say
that each supplier is a purchaser, and supply creates the need. In an economic system,
the medium of trade is money. Therefore, while a seller sells the products or offerings in
the marketplace and earns cash in change, they purchase every other precisely from
the money earned. For this reason, the supply of products performed through the seller
creates the demand for the goods he desires to shop for. So we will say that the supply
value is the same as the cost of the request made by the seller.

3. Conclusion. The Say law of market assumes a loose-market economy without

an authority’s intervention, which results in computerized adjustments of the economy
because of the flexible wages, charges, and interest in the market. Money is the
medium of change only and does now not play any other function. Its supply in the
market creates the demand for a good or service. Also, it facilitates the proper and
optimum allocation of the assets.