Macro Economic Concepts
• The total income of the nation is called national
income. In real terms, national income is the flow of
goods and services produced in the economy in a
particular period—a year.
• Modern economy is a money economy. Thus, national
income of the country is expressed in money terms.
• A National Sample Survey has therefore defined
national income as “The money measures of the net
aggregate of all commodities and services accruing to
the inhabitants of community during a specific
period.”
Definitions
• The Marshallian Definition:
• According to Marshall—”The labour and capital of a
country acting on its natural resources produce annually a
certain net aggregate of commodities, material and
immaterial including services of all kinds. This is the true
net annual income or revenue of the country or national
dividend.” In this definition, the word “net” refers to
deductions from the gross national income in respect of
depreciation of capital equipment used in the creation of
productive activity. And to this must be added income
from abroad.
Pigovian Definition
• ”National income or National Dividend is that
part of objective income of the community
including of course income derived from
abroad which can be measured in money.”
Important Concepts
• 1. Gross National Income or Product (GNP)
Gross National Product has been defined as the
total market value of all final goods and services
produced in a year. It is the money value of all
the final goods and services which the labour
and capital of a country working on its natural
resources have produced in a year.
2. Net National Product or (NNP):
• Net National Product (NNP) refers to the value
of the net output of the economy during the
year. It is obtained by deducting the value of
depreciation or replacement allowance of the
capital assets from the GNP.
• To put it symbolically:
• NNP = GNP – D
3. Gross Domestic Product (GDP):
• Gross Domestic Income includes:
• (i) Wages and salaries,
• (ii) Rents, including imputed house rents,
• (iii) Interest,
• (iv) Dividends,
• (v) Undistributed corporate profits, including surpluses of
public undertakings,
• (vi) Mixed incomes consisting of profits of
unincorporated firms, self-employed persons,
partnership etc., and
• (vii) Direct taxes.
• National Income = Domestic Income + Net Income
earned from abroad.
4. Per Capita Income
• Per capita income refers to the average
income of an individual in a particular year. It
denotes the income received by an individual
during a certain year in a country.
• Per-Capita Income = National Income of India
in 2002/Population of India in 2002
5. Personal Income
• Personal income is the aggregate income received by the
individuals of a country from all sources before payment
of direct taxes in one year. It is derived from national
income by deducting undistributed corporate profits,
profit taxes and employee’s contributions to social security
schemes.
• Personal Income = National Income + Transfer Payment +
Interest on Public Debt – Undistributed Corporate Profits –
Profit Taxes — Social Security Contribution.
• Personal Income = Private Income – Undistributed
corporate profits – Profit taxes.
Disposable Income or Personal Disposable Income
• Disposable income or personal disposable
income is the actual income which can be
spend on consumption because it is the
income that accrues before direct taxes have
actually been paid. Therefore, in order to
obtain the disposable income, direct taxes are
deducted from personal income.
• Disposable Income = Personal Income — Direct
Taxes.
Measuring National Income
• Value Added Method
• Income Method
• Expenditure Method
Value Added Method
• This is also called output method or production
method. In this method the value added by each
enterprise in the production goods and services is
measured
• Value of output produced by an enterprise is equal
to physical output (Q) produced multiplied by the
market price (P), that is, P.Q. From the value added
by each enterprise we subtract consumption of fixed
capital (i.e., depreciation) to obtain net value added
at market prices (NVAMP).
• NI or NNPFC = NDPFC + Net factor income from
abroad
Income Method:
• National income is obtained by summing up of the
incomes of all individuals of a country. Individuals
earn incomes by contributing their own services
and the services of their property such as land and
capital to the national production.
• Therefore, national income is calculated by adding
up the rent of land, wages and salaries of
employees, interest on capital, profits of
entrepreneurs
Expenditure Method
• Expenditure method arrives at national
income by adding up all expenditures made on
goods and services during a year. Income can
be spent either on consumer goods or capital
goods. Again, expenditure can be made by
private individuals and households or by
government and business enterprises.
• GDPMP = Private final consumption
expenditure + Government’s final
consumption expenditure + Gross domestic
capital formation + Exports — Imports or
• GDPMP = C+G + I+ (X — M)
= C + G + I + NX
Indian Financial Risk
• The financial system of a country is an
important tool for economic development of
the country as it helps in the creation of
wealth by linking savings with investments.
• Financial Services
• Financial Assets/Instrumebt
• Financial Markets
• Financial Intermediaries
Fiscal Policy
• Fiscal policy means the use of taxation and
public expenditure by the government for
stabilization or growth of the economy
General objectives of Fiscal Policy are given
below
• 1. To maintain and achieve full employment.
• 2. To stabilize the price level.
• 3. To stabilize the growth rate of the economy.
• 4. To maintain equilibrium in the Balance of
Payments.
• 5. To promote the economic development of
underdeveloped countries.
Objectives
• Development by effective Mobilisation of
Resources:
• Reduction in inequalities of Income and Wealth
• Price Stability and Control of Inflation
• Employment Generation
• Balanced Regional Development
• Reducing the Deficit in the Balance of Payment
• Increases National Income
• Development of Infrastructure:
Monetary Policy
• Monetary policy is the process by which the
monetary authority of a country, typically the
central bank or currency board, controls either
the cost of very short-term borrowing or the
monetary base, often targeting an inflation
rate or interest rate to ensure price stability
and general trust in the currency
Elements
• It regulates the stocks and the growth rate of money
supply.
• ii. It regulates the entire banking system of the economy.
• iii. It determines the allocation of loans among different
sectors.
• iv. It provides incentives to promote savings and to raise
the savings-income ratio.
• v. It ensures adequate availability of credit for growth
and tries to achieve price stability.
Objectives
• To Regulate Money Supply in the Economy
• To Attain Price Stability
• To promote economic growth
• To Promote saving and Investment
• To Control Business Cycles
• To Promote Exports and Substitute Imports
• To Manage Aggregate Demand:
• To Ensure more Credit for Priority Sector
• To Promote Employment
• To Develop Infrastructure
• To Regulate and Expand Banking
Balance of Payments
• The balance of payments is the record of all international
trade and financial transactions made by a country's
residents.
• The balance of payments has three components. They are
the current account, the financial account, and the capital
account. The current account measures international
trade, net income on investments, and direct payments.
The financial account describes the change in international
ownership of assets. The capital account includes any
other financial transactions that don't affect the nation's
economic output.
Causes of Disequilibrium
• Imbalance between exports and imports of
goods and services.
• Cyclical Disequilibrium.
• Secular or Long-Run Disequilibrium
• Technological Disequilibrium
• Structural Disequilibrium
Remedies
• Method Trade Policy Measures: Expanding
Exports and Restraining Imports
• Expenditure-Reducing Policies
[Tight Monetary Policy
Contractionary Fiscal Policy]
Expenditure – Switching Policies: Devaluation
Exchange Control
Free market Economy
• Free market is an idealized system in which
the prices for goods and services are
determined by the open market and
by consumers.
• In a free market the laws and forces of supply
and demand are free from any intervention by
a government, by a price-setting monopoly, or
by other authority.
Government Intervention Benefits
• The government tries to
combat market inequities through regulation,
taxation, and subsidies
• Government may also intervene in markets to
promote general economic fairness.
• Maximizing social welfare is one of the most
common and best understood reasons for
government intervention.
Economic Reforms
• New economic reforms in India refers to the neo-
liberal polices introduced by the government in
1991 and in the later years.
• The central point of the reforms was
liberalization of the economy, simplifying
regulations, giving more role to the private sector
and opening up of the economy to competition.
• New industrial policy of 1991 is the heart of the
new economic reforms.
Main features of New Economic Reforms
• Dereservation of the industrial sector
The industrial sector of the economy has been opened
up to the private sector after the New Industrial Policy of
1991. Previously, the public sector has given reservation
especially in the capital goods and key industries. Other
operators- private sector and foreign investors were not
allowed in these critical industries. Deregulation of the
industrial sector allowed private sector operation in
most of these sectors except in eight selected areas
including atomic energy, mining and railways.
• Industrial delicensing policy
The most important part of the new industrial policy
of 1991 was the end of the industrial licensing or the
license raj or red tapism. Under the previous industrial
licensing policies, private sector firms have to secure
licenses to start an industry. This has created long
delays in the startup of industries. The industrial policy
of 1991 has almost abandoned the industrial licensing
system. It has reduced industrial licensing to fifteen
sectors.
• Opening up of the economy to foreign
competition
Another major feature of the economic reform
measure was that it has given welcome to
foreign investment and foreign technology.
Opening up of the economy to foreign
competition started a new era in India’s
economic policy with permission to FDI upto 51
per cent in selected sectors.
• Liberalization of trade and investment:
The economic reforms introduced extensive
liberalization of foreign trade and foreign investment.
The import substitution and import restriction policies
were abandoned and instead import liberalization and
export promotion policies were introduced. On the
investment front, the economic reforms mark the era of
capital mobility in the country. Foreign capital in the
form of FDI (Foreign Direct Investment) and FPI (Foreign
Portfolio Investment) were entered into our country.
• Financial Sector Reforms: on the financial
sector the government is introducing
numerous measures for the deregulation as
well as liberalisation of the sector. Different
banking sector reforms including removal of
control on interest rate and branch licensing
policy liberalization were launched. Capital
market reforms and money market reforms
were extensive after 1994.
• Reforms related to the Public sector
enterprises: reforms in the public sector were
aimed at enhancing efficiency and
competitiveness of the sector. The public
sector will be concentrating in key and
strategic sectors. Government has adopted
disinvestment policy for the restructuring of
the public sector in the country along with
several other policies
• Abolition of MRTP Act: The New Industrial
Policy of 1991 has abolished the Monopoly
and Restricted Trade Practice Act. In 2010, the
Competition Commission has emerged as the
watchdog in monitoring competitive practices
in the economy.
Inflation
• Inflation refers to a situation when there is an overall increase in the
prices of goods leading to a general decline in the value of money.
• Inflation is phenomena marked by an excess of money supply over the
demand for it, that is to say, an excess of the supply of currency and
credit over the actual requirements of trade, commerce and industry.
• We have inflation when there is an increase in the value of total money
supply multiplied by its velocity of circulation without a corresponding
increase in goods and services.
• Inflation is characterized by a fall in the purchasing power of money and
an extraordinary rise in the cost of living. As a result of increased
money supply in the hands of people and the consequent competition
for purchasing goods which are in scarcity, there is a general increase in
the price indices.
Types
1. Demand Pull Inflation: Inflation arises when there is an increase
in the supply of money but there is no corresponding increase in the
supply of goods useful to the community.
Accumulation of more money than before raises the purchasing
power of people and stimulates the demand for goods but the
supply of the latter being limited, the necessary consequence will be
the inflation of the price level. Demand Pull Inflation thus means, in
plain words, too much money chasing too few goods.
2. Cost Push Inflation: When the prices of goods increases because
of an increase in the cost of production, it is known as cost push
inflation.
Causes of Inflation
• Additional money put in the hands of people
naturally creates in them a desire to spend more on
goods. The sellers these commodities get more
money and they too feel an urge to add something
to what they already possess, and the new
purchases made with additional money will
correspondingly benefit other producers and sellers
too in an ever-widening circle. In this way, the
demand for various commodities and services will
go on rising in a spiral order in times of inflation.
• The activities of speculators, hoarders, and
profiteers also contribute much to the upward
trend of price
• The selling prices of good also increases if there is
an overall increase in manufacturing cost
• If the production of industrial and agricultural
goods did not multiply in proportion to the increase
in demand, the prices of commodities increases by
leaps and bounds resulting into steep inflation.
Remedies
• Inflation can be combated by reducing the purchasing power of
the people through imposition of additional taxes. The
Governments sought to minimize the evil of inflation by resorting
to taxation, controls, bans on speculation and encouragement to
savings. Income tax, tobacco tax, entertainment tax and excess
profit tax are all meant to withdraw currency from the money-
market. A high rate of taxation may, however, prove annoying and
take away the initiative for enterprise.
• The Government sometimes raises public loans, which also
effectively restricts the purchasing power of people.
• It may also be necessary to impose a system of control on
production and distribution of many goods. Rationing systems are
introduced and prices of consumer goods are controlled.
• Governments encourage people to invest in bank deposits, and
government securities, thus withdrawing the currency in excess.
