THE IAS AKADEMIA
Economics
Micro Macro
Individual Government
Income Expenditure Receipts Expenditure
Market
Demand
Price Annual Financial statement
Supply
Microeconomics
Vs
Macroeconomics
Microeconomics is the study of decisions made by people and businesses regarding the
allocation of resources, and prices at which they trade goods & services.
It focuses on supply & demand & other forces that determine price levels in the economy.
It takes up a bottom -up approach to analyze the economy. In other words, microeconomics
tries to understand human choices, decisions & allocation of
Resources.
Macroeconomics, on the other hand studies the behaviour of the country & how its policies
impact the economy as a whole. It analyze entire industries & economies rather
than individual or specific companies. Macroeconomies focuses on aggregates econometric
correlations.
Therefore, governments & their agencies rely on mass economic data to formulate economic &
fiscal policies.its policies impact the economy as a whole. It analyze entire industries &
economies rather than individual or specific companies. Macro economies focuses on
aggregrates econometric correlations.
Therefore , governments & their agencies rely on macro economic data to formulate economic
& fiscal policies.
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National
Income
What you can not measure , you can not improve.
It is important to account for national income to check growth and compare it with growth of
other countries.
GDP
GNP
NNP(FC)
Indicators
NNP(MP)
PI
Disposable
income
Gross Domestic
Geographical area
Product
Wear and tear not accounted.
Goods and Services Produced in One year.
Price value of all Goods & Services Produced within a geographical area during a particular time.GDP
Includes production by both citizens & non-citizens who are resident in India .
GDP= QxP
Eg: ITC 1 crore in India
British national 1 crore of services in India.
Ratan TATA 5 crore of services in India.
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Gross National
Product
Value of all final Goods & Services produced by Indian’s in Particular year.
Eg: US embassy in India 1 Crore of Service
Indian embassy in US 2 Crore of Service
NRI in Dubai 2 Crore of Service
Viv Richards in IP 1 Crore of Service.
GNP = 4 Crores[Indians]
GNP=GDP + Net Factors Income from Aboard
[ E---I ] [X---- M]
[Export – Import]
Entrepreneur
land Rent
Factors of Profit
Production
Labour Capital
Wage Interest
Net National
Product
Net = Gross – wear & Tear.
Depreciation
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Net National Product is arrived after reducing depreciation from Gross National Product.
Depreciation means wear & Tear of Goods & Services produced .It is deducted because a part
Of current produced goes to replace the depreciated parts of the product already produced.
Independently, it is not adding any value to the current year’s total produce.
Factor cost and Market price
NNP(FC) = NNP(MP) - Indirect tax + Subsidies
NNP(MP) = NNP(FC) + Indirect taxes – subsides
Personal
Income
PI = National Income – undistributed Profit of corporates + payment for Social Security + transfer
Payments.
Personal Income is the sum of all the income received by entire people of the country.
Transfer Payments :
It means payments that are made against which no productive activity on part of the receiver.
For eg: gifts, old age pension , disaster relief compensation etc.
Constant Price & Current Price
We need to calculate the national income of various yeras.Therefore , national income is calculated
with reference to the particular year.That year is called base year.
The price in this base year is called the Constant Price. Therefore the quantity of all final goods &
services multiplied by the base year gives the GDP at Constant Price. It is also called Real income.
Base Effect:
The effect that the choice of a basis of comparision or reference can have on the result of the
comparision blw data points.Multiplied by the price of that year gives GDP at current price.
It is also called nominal GDP.
GDP Deflator:
It is simply the measure of level of prices for all domestically produced final goods & services in an
economy, in a particular year.
GDP deflator = nomial gdp/real gdp.
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National Income - Measurement
Circular economy
Economic agents
House Hold Firms Govt Foreign
Factors of Production – land /capital/Labour/entrepreneur
Factor income
Rent , interest, wage,profit
Household Firms
Consumption expenditure Expenditure Method
Goods & Services Product Method
Cetris Method:
All other things being unchanged.
Income Method:
The national income is calculated by compiling income of factors of Production i.e. Land, labour,
capital & entrepreneur.
NI = Total wage + Total rent + Total interest + Total Profit
SNA --- Common method by UN
NI = Compensation of employees + consumption of fixed capital + gross operating surplus +
production tax – production subsidies.
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Production Method
All final goods & Services produced in geographical area within a particular time.
Final good
An item which is ready for final use & will not pass through any more stages of production or
transformation is called final good.
GVA ---- Gross Value added.
GVA = output of final goods & Services – intermediate consumption.
GDP = GVA + Indirect tax-Subsidy
Final goods
Capital goods Consumption goods
Machine Biscuit Packets
These final goods which are durable in character and are used further in the production
Process like tools, machines, implements are called capital goods.
They themselves donot get transformed in the production process.
Gross fixed Capital formation
It is the capital accumulation during an accounting period for a particular country. The term refers to
addition of capital goods such as equipment tools, transportation , assests & electricity.
Generally , higher the capital formation of economy , faster an economy can grow its aggregate
income.
ICOR – Incremental Capital Output Ratio
Capital Output ratio = capital/output
Amount of capital required to produce a product
Additional amount of capital needed to produce one additional product.
Growth rate = capital investment/ICOR
Or
Capital investment = Growth rate X ICOR
Used by Harrod Domar in their growth model.
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[Growth rate α 1/ICOR]
Lesser the ICOR , better the growth rate.
Expenditure Method:
GDP = C+I+G
SNA = Household final + Consumption expenditure + Consumption
Gross Capital formation + Savings
Which method is best suited -?
All three methods give the similar estimate of the GDP.
The product method is more suitable for primary & Secondary sector because they are tangible
products which can be counted.
Income method is most suited for teritary sector.
Primary Sector encompasses economic activities that utilize natural resources.
Secondary sector encompasses economic activities that involve manufacturing.
Teritary : Provision of Services
Quatanary Sector – Contain high degree of intellectual & Knowledge based skills.
Eg: Innovation , new technology etc.
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