Unit 1

BASIC CONCEPT OF
MACRO ECONOMICS
 Definition of Macro economics
• Macro economics deals with total or aggregate
level of output, aggregate level of consumption,
aggregate level of investment, aggregate level of
employment and general price level in economy.

• Macroeconomics (from the Greek prefix makro-

meaning "large" and economics) is a branch
of economics dealing with the performance,
structure, behavior, and decision-making of
an economy as a whole, rather than individual
markets. This includes national, regional, and
global economies.
 Macroeconomic Concerns
• Three of the major concerns of
macroeconomics are:

– Unemployment

– Inflation

– Output growth
 1. Unemployment
Unemployment refers to the situation where the population of a
country do not find work to earn their livelihood.
• Unemployment represents that ratio of labor force which fails to get
employment.
• The unemployment rate is a key indicator of the economy’s health.
• The existence of unemployment seems to imply that the aggregate
labor market is not in equilibrium.
Problem of Unemployment:
Classical economist believed in full employment i.e. all recourses of
economy are fully employed and there is no possibility of
unemployment. But

Great depression of 1930 brought a lot of miseries in form of slump and

vast unemployment. So Keynes wrote a book in 1936 “General theory”
in which he rejected the philosophy of full employment .
 2. Inflation
• Inflation is an increase in the overall price level.
• Hyperinflation is a period of very rapid increases in the
overall price level. Hyperinflations is a rare phenomenon.

• Deflation is a decrease in the overall price level. Prolonged

periods of deflation can be just as damaging for the
economy as sustained inflation.

Problem of Unemployment:
• During 1930 the phenomena of unemployment got a lot of
attractions. Policy makers presented their ideas to remove
unemployment .

• So Government tried to provide better social and economic

service due to which Government expenditures went on
increasing.
 3. Output and Growth
• Growth refers to change in the level of economic
activity from one year to another year.
• Growth means that poor and developing countries
wish to attain a rise in their national income and per
capita income.

• Aggregate output is the total quantity of goods and

services produced in an economy in a given period.
• The aggregate output is the main measure to see
how well an economy is doing.
 NATURE & SCOPE OF
MACROECONOMICS
• Macroeconomics is the study of aggregates or averages
covering the entire economy, such as total employment,
national income, national output, total investment, total
consumption, total savings, aggregate supply, aggregate
demand, and general price level, wage level, and cost
structure.

• Macroeconomics is also known as the theory of income and

employment, or simply income analysis. It is concerned with
the problems of unemployment, economic fluctuations,
inflation or deflation, international trade and economic
growth. It is the study of the causes of unemployment, and
the various determinants of employment.
 Scope of macroeconomics
As a method of economic analysis
macroeconomics is of much theoretical and
practical importance.

(1) To Understand the Working of the Economy:

The study of macroeconomic variables is

indispensable for understanding the working of
the economy. Our main economic problems are
related to the behaviour of total income, output,
employment and the general price level in the
economy.
(ii) In National Income:
The study of macroeconomics is very important for
evaluating the overall performance of the economy in
terms of national income. With the advent of the Great
Depression of the 1930s, it became necessary to analyze
the causes of general overproduction and general
unemployment.

(iii) In Economic Growth:

The economics of growth is also a study in
macroeconomics. It is on the basis of
macroeconomics that the resources and
capabilities of an economy are evaluated. Plans
for the overall increase in national income,
output, and employment are framed and
implemented so as to raise the level of economic
development of the economy as a whole.
(iv) In Monetary Problems:
It is in terms of macroeconomics that monetary
problems can be analysed and understood
properly. Frequent changes in the value of
money, inflation or deflation, affect the economy
adversely. They can be counteracted by adopting
monetary, fiscal and direct control measures for
the economy as a whole.

(v) In Business Cycles:

Further macroeconomics as an approach to
economic problems started after the Great
Depression. Thus its importance lies in analyzing
the causes of economic fluctuations and in
providing remedies.
 Key Macro Economic Variables
1. National Income and GDP
2. Unemployment
3. Economic growth
4. Inflation
5. International Trade
6. Balance of Payment
7. Monetary & Fiscal Policy
8. Interest Rate
9. Stock Market
10.Business Cycle
11.Exchange Rate
1. Gross Domestic Product & National
Income
• GDP refers to the monetary value of all the finished goods
and services produced within a country's borders in a
specific time period, though GDP is usually calculated on an
annual basis.

• It includes all of private and public consumption,

government outlays, investments and exports less imports
that occur within a defined territory.

• The gross domestic product (GDP) is one the

primary indicators used to gauge the health of a
country's economy.
 2. Unemployment
• The Unemployment Rate:

– to be unemployed, a person must want to work and

be actively looking for a job (but have not yet found
one)
– the labor force consists of those who are employed
and those who are unemployed
– the unemployment rate is equal to the number of
unemployed people divided by the labor force
 3. Economic Growth

• Economic growth is the increase in the market

value of the goods and services produced by
an economy over time.

• Also, economic growth is the increase in the

capacity of an economy to produce goods and
services, compared from one period of time to
another.
 4. Inflation
• In economics inflation means, a rise in general level of prices
of goods and services in a economy over a period of
time. When the general price level rises, each unit of
currency buys fewer goods and services. Thus, inflation
results in loss of value of money. Another popular way of
looking at inflation is "too much money chasing too few
goods".

• Inflation is caused when goods and services are in high

demand, creating a drop in availability. Consumers are
willing to pay more for the items they want, causing
manufacturers and service providers to charge more.
Supplies can decrease for many reasons: A natural disaster
can wipe out a food crop or a housing boom can exhaust
building supplies, among other situations.
INFLATION
 5. International trade
• International trade is the exchange of goods and
services between countries. This type of trade gives
rise to a world economy, in which prices, or supply and
demand , affect and are affected by global events.

• International trade allows to expand markets for both

goods and services that otherwise may not have been
available to all. It is the reason why you can pick
between a Japanese, German or American car.

• As a result of international trade, the market contains

greater competition and therefore more competitive
prices, which brings a cheaper product home to the
consumer.
 6. Balance Of Payments (BOP)
• The balance of payments (BOP) of a country is the
record of all economic transactions between the
residents of a country and the rest of the world in a
particular period (over a quarter of a year or more
commonly over a year).

• These transactions are made by individuals, firms and

government bodies. Thus the balance of payments
includes all external visible and non-visible transactions
of a country during a given period, usually a year.

• It represents a summation of country's current demand

and supply of the claims on foreign currencies and of
foreign claims on its currency.
 7. Monetary policy

• Monetary policy is the process by which

the monetary authority of a currency controls
the supply of money, often targeting an inflation
rate or interest rate to ensure price stability and
general trust in the currency.

• Further goals of a monetary policy are usually to

contribute to economic growth and stability, to
low unemployment, and to predictable exchange
rates with other currencies.
 7. Fiscal Policy
• Fiscal policy is the means by which a
government adjusts its spending levels and tax
rates to monitor and influence a nation's
economy.
• It is the sister strategy to monetary policy
through which a central bank influences a
nation's money supply. These two policies are
used in various combinations to direct a
country's economic goals.
 8. Interest Rate
• An interest rate is the rate at which interest is paid by
borrowers (debtors) for the use of money that they
borrow from lenders (creditors). Specifically, the
interest rate is a percentage of principal paid a certain
number of times per period for all periods during the
total term of the loan or credit.

• Many different interest rates in the economy vary by

duration and degree of risk.
 9. Stock market

• A stock market or equity market is the aggregation of buyers and

sellers (a loose network of economic transactions, not a physical
facility or discrete entity) of stocks (also called shares); these may
include securities listed on a stock exchange as well as those only
traded privately.
• History has shown that the price of stocks and other assets is an
important part of the dynamics of economic activity, and can
influence or be an indicator of social mood.
• An economy where the stock market is on the rise is considered
to be an up-and-coming economy. In fact, the stock market is
often considered the primary indicator of a country's economic
strength and development.
 10. Business cycle
• The term business cycle (or economic cycle or boom–bust cycle) refers to
fluctuations in aggregate production, trade and activity over several
months or years in a market economy.
• The business cycle is the downward and upward movement of levels
of gross domestic product (GDP) and refers to the period of expansions
and contractions in the level of economic activities (business fluctuations)
around its long-term growth trend.
• These fluctuations occur around a long-term growth trend, and typically
involve shifts over time between periods of relatively rapid economic
growth (an expansion or boom), and periods of relative stagnation or
decline (a contraction or recession).
BUSINESS CYCLE
 11. Exchange Rate
• The Exchange Rate between two currencies is the
rate at which one currency will be exchanged for
another.
• It is also regarded as the value of one country’s
currency in terms of another currency.

– governs the terms on which international trade

and investment take place
– nominal exchange rate is the rate at which monies
of different countries can be exchanged for one
another
– real exchange rate is the rate at which the goods
and services produced in different countries can
be exchanged for one another
 Importance of Macroeconomics
• It helps us understand the functioning of a complicated
modern economic system. It describes how the
economy as a whole functions and how the level of
national income and employment is determined on the
basis of aggregate demand and aggregate supply.
• It helps to achieve the goal of economic growth, a
higher GDP level, and higher level of employment. It
analyses the forces which determine economic growth
of a country and explains how to reach the highest
state of economic growth and sustain it.
• It helps to bring stability in price level and analyses
fluctuations in business activities. It suggests policy
measures to control inflation and deflation.
Contd….

• It explains factors which determine balance of payments. At

the same time, it identifies causes of deficit in balance of
payments and suggests remedial measures.

• It helps to solve economic problems like poverty,

unemployment, inflation, deflation etc., whose solution is
possible at macro level only (in other words, at the level of
the whole economy).

• With a detailed knowledge of the functioning of an economy

at macro level, it has been possible to formulate correct
economic policies and also coordinate international
economic policies.

• Last but not least, macroeconomic theory has saved us from

the dangers of application of microeconomic theory to the
problems that require us to look at the economy as a whole.