UNIT 1

MEANING,NATURE,SCOPE,IMPORTANCE,LIMITATIONS OF MACROECONOMICS
Definition
"Macroeconomics is the study of the nature, relationships and behaviour of
aggregates of economic quantities. Macroeconomics deals not with individual
quantities but with aggregates of these quantities not with individual incomes,
but with the national income, not with individual prices, but with the price levels,
not with individual output, but with the national output"
Scope of Macroeconomics.
1.Employment and Unemployment
Macroeconomics explains what determines the level of employment and national
income in an economy and therefore what causes involuntary unemployment..
Keynes explained that level of employment and national income is determined by
aggregate demand and aggregate supply. With aggregate supply remaining
unchanged in the short run,causing deficiency of aggregate demand that cause
underemployment .
2. Determination of National Income (or GNP).
National income is the value of all final goods and services produced in a country
in a year. Gross National Product (GNP) shows the performance of the economy
in a year and determines the overall living standards of the people of a country.
The higher the per capita national income, the greater the amounts of goods and
services available for consumption per individual on an average.
3. General Price Level and Inflation.
Another macroeconomic issue is to explain the problem of inflation. Inflation haş
been a major problem faced by both the developed and developing countries in
the last fifty years. Classical economists thought that it was the quantity of money
in the economy that determined the general price level in the economy and,
according to them, rate of inflation depended on the money supply in the
economy.
4. Business Cycles
Business cycles refer to fluctuations in output and employment with alternating
periods of boom and recession. In boom periods both output and employment
are at high levels, whereas in recession periods both output and employment fall
and as a consequence large unemployment come to exist in the economy. When
these recessions are extremely severe, they are called depressions.
What are the causes of these business cycles or ups and dawns in market is an
important macroeconomic issue .The objective of macroeconomic policy is to
achieve economic stability with equilibrium at full employment level of output
and income.
5. Economic Growth
Another important issue in macroeconomics is to explain what determines
economic growth in a country. Economic growth means sustained increase in
national income (GNP) or per capita income over a sufficiently long period of
time.
Theory of economic growth or what is simply called growth economics which has
been recently developed as an important branch of macroeconomics,
6. Balance Of payment and Exchange Rate
Balance of payments is the record of economic transactions of the residents of a
country with the rest of the world during a period. There may be deficit or surplus
in balance of payments. Both create problems for an economy. Balance of
payment are influenced by the exchange rate ie the rate at which a country's
currency is exchanged for foreign currencies. The instability in exchange rate has
been a major problem in recent years which has given rise to Serious balance of
payments problems.
Importance Of Macroeconomics
1.To Understand the Working of Macroeconomy :
it tells us how the economy as a whole works We cannot obtain and derive the
laws governing macroeconomic variables such as national income, total
employment, general price level by studying the microeconomic decisions of
individual consumers, firms and industries
2. For Accelerating Economic Growth.
Macroeconomics explains the factors which determines economic growth and
brings out what causes of slowdown in productivity .Higher rate of economic
growth helps in solving the problems of poverty and unemployment in the
developing countries like India
3.Understanding Business Cycles.
Business cycles have been the biggest ailment of market economics. Fluctuations
in aggregate demand due to volatile nature of investment demand, multiplier and
accelerator provides an adequate explanation of business cycles. It is because of
this understanding about business cycles that has helped to adopt proper fiscal
and monetary policies to check business cycles and also due to these policies that
severity of business cycles in recent years has greatly reduced. This shows that
important contribution made by macroeconomics in controlling business cycles.
4. Formulating Government's Macroeconomic Policies.
With the knowledge of the causes of recession and inflation brought out by
macroeconomics governments formulate proper fiscal and monetary policies to
tackle them. During recession, expansionary fiscal and monetary policies are
adopted to lift the economy out of recession. On the other hand, in inflation h
tight monetary policy and contractionary fiscal policies adopted.
5. Individual Decision-Making
The understanding about the working of the economy as a whole helps the
individuals to take better decisions. For example, If on the basis of certain
Government's economic policy they predict that inflation rate will increase, they
may decide to act in the present in a way to to save themselves from the
undesirable consequences of inflation. Similarly people's decisions about whether
or not to buy a house, or a new car would be based in goverments policies.
6.Importance in business decisions.
 The understanding of M.E helps businesses and managers who are faced with
various decision-making problems. Business firms do not work in vacuum, The
level of overall economic activitydi.e. national income and employment,
aggregate demand conditions, government's policies like fiscal and monetary the
rate of inflation affect business firms.These aggregates of the economy make up
overall business environment which affects decisions of managers.
Limitations Of Macroeconomics.

 Overgeneralization and Aggregation:

Macroeconomics analyzes the entire economy, treating it as a single entity. This can
lead to overlooking the diverse impacts of economic policies on different sectors,
individuals, or firms. For example, an increase in national income might not translate
to a rise in the income of every individual or household.
 Simplified Assumptions:
Macroeconomic models often make assumptions about rationality, perfect information,
or other factors that may not hold true in the real world. These simplifications can lead
to inaccurate predictions or policy recommendations.
 Data Limitations:
Macroeconomics relies on data, which can be incomplete, inaccurate, or have
limitations in terms of granularity. This can affect the accuracy of analysis and the
effectiveness of policy interventions.
 Difficulty in Predicting the Future:
Macroeconomic forecasts are often uncertain, and economic models may struggle to
accurately predict future economic conditions. This is partly due to the complexity of
the economy, the influence of unexpected events, and the difficulty in capturing all
relevant factors.
 Political and International Factors:
Macroeconomic policies are often influenced by political considerations, which may
not align with the most economically sound choices. Additionally, macroeconomics
can sometimes overlook international factors that significantly impact national
economies.
 Lack of Specific Real-World Details:
 Macroeconomic theories may not account for specific real-world details like taxation,
regulation, and transaction costs. These details can significantly impact economic
outcomes.
 Social and Ethical Considerations:
Macroeconomic analysis may not adequately address the social and ethical
implications of economic policies, such as income inequality or environmental
sustainability.

NATURE OF ECONOMICS

1. Aggregative Nature:
 Macroeconomics analyzes the economy at an aggregate level, meaning it deals with the
overall performance of the entire economy, rather than individual markets or
businesses.
 It focuses on broad aggregates like national income, total employment, and the general
price level.
2. Focus on the Economy as a Whole:
 Macroeconomics aims to understand the overall functioning of an economy, including its
production, consumption, and distribution of resources.
 It examines how different sectors of the economy interact and how they contribute to
overall economic performance.
3. Role of Policy:
 Macroeconomics plays a crucial role in informing government policy decisions related to
fiscal and monetary policies.
 It provides insights into how changes in government spending, taxes, interest rates, and
other policies can affect the economy.
4. Key Areas of Study:
 Economic Growth:
Macroeconomics seeks to understand the factors that drive long-term economic
growth and how to promote sustainable development.
 Inflation:
It examines the causes and consequences of inflation and how to maintain price
stability.
 Unemployment:
Macroeconomics investigates the factors that contribute to unemployment and how to
achieve full employment.
 Business Cycles:
It studies the cyclical nature of economic activity, including periods of expansion,
recession, and depression.
5. Distinction from Microeconomics:
 While macroeconomics focuses on the overall economy, microeconomics analyzes the
behavior of individual economic units like consumers, firms, and markets.
 Both branches of economics are interconnected, as microeconomic decisions of
individuals and firms have a significant impact on the overall macroeconomy.

MACROECONOMIC VARIABLES (highest chance of shortnotes)

 Gross Domestic Product (GDP):
GDP measures the total value of goods and services produced within a country's
borders in a specific period, often a year. It's a key indicator of economic growth and
overall output.
 Inflation:
Inflation refers to the rate at which the general level of prices for goods and services is
rising, and consequently, the purchasing power of money is falling.
 Unemployment:
Unemployment is the percentage of the labor force that is actively seeking
employment but is unable to find a job.
 Interest Rates:
Interest rates are the price charged for the use of borrowed money and can be used
by central banks to influence economic activity.
 Balance of Payments:
The balance of payments tracks the flow of money into and out of a country, including
exports, imports, and foreign investment.
 Economic Growth:
 Economic growth refers to the increase in the value of goods and services produced in
an economy over a period of time, typically measured by the percentage change in
GDP.

UNIT 2
NATIONAL INCOME
MEASURES OF NATIONAL INCOME (might not come in exam but need to
know )
1. GDP VS GNP
 GDP (Gross Domestic Product) measures the value of all goods and services
produced within a country's borders, regardless of who produces them. GNP
(Gross National Product), on the other hand, measures the value of all goods
and services produced by a country's citizens and businesses, regardless of
where they are located.
 GDP does not include NFIA(net factor income from abroad) whereas GNP
includes NFIA.
Components of gdp are [GDP = C+I+G+(X-M)]
 Consumption (C):
This refers to the spending by households on goods and services, like food, clothing,
and entertainment.
 Investment (I):
This includes business spending on capital goods (like machinery and equipment) and
residential construction.
 Government Spending (G):
This encompasses government purchases of goods and services, including defense,
education, and infrastructure.
 Net Exports (NX): (OR X-M)
This is calculated as the difference between a country's total exports and total
imports.
[GDP = C+I+G+(X-M)]
Components of GNP 1.Consumption
2.Investment
3.Govt spending
4.Net exports
5.NFIA
GNP= GDP + NFIA (or) C+I+G+(X-M)+NFIA
NFIA :
the net factor income from abroad is the difference between factor income received from
abroad by normal residents of India and factor income paid to the foreign residents of India.
Factor income includes wages ,rent, interest and profit.
GDPMP = Gross Domestic Product at Market Price
represents the total market value of all final goods and services produced within a country's
borders, including taxes and excluding subsidies. It reflects the cost of final goods & services.
GDPFC= Gross Domestic Product at Factor Cost
represents the total value of all final goods and services produced, but at the price paid to the
factors of production (labor, capital, etc.), excluding taxes and including subsidies. It reflects the
cost of production.

GNPFC (Gross National Product at Factor Cost):

Includes all factor incomes earned by a country's residents, whether within the country or abroad.

Excludes net indirect taxes (indirect taxes minus subsidies).

GNPFC = GDPMP + Net factor income from abroad - Net indirect taxes.
GNPMP (Gross National Product at Market Price):
Includes the total value of goods and services produced by a country's residents, including those
working abroad.

Includes all indirect taxes and subsidies.

GNPMP = GDPMP + Net factor income from abroad.