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Introduction To Macro Economics

This document provides an introduction and overview of macroeconomics. It discusses key topics like the goals of macroeconomics, important macroeconomic principles, and how economic theory is applied in practice. Specifically, it defines macroeconomics as the study of aggregate economic measures, outlines the main macroeconomic goals of low unemployment, price stability, and economic growth, and explores concepts like gross domestic product, economic indicators, the circular flow model, and the typical phases of the economic cycle.

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Gaurav Meena
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61 views

Introduction To Macro Economics

This document provides an introduction and overview of macroeconomics. It discusses key topics like the goals of macroeconomics, important macroeconomic principles, and how economic theory is applied in practice. Specifically, it defines macroeconomics as the study of aggregate economic measures, outlines the main macroeconomic goals of low unemployment, price stability, and economic growth, and explores concepts like gross domestic product, economic indicators, the circular flow model, and the typical phases of the economic cycle.

Uploaded by

Gaurav Meena
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Introduction to Macro Economics

An Overview of Macroeconomics

1. What is Macroeconomics

2. Macroeconomic Goals

3. Key Principles of Economics

4. Economic Theory in Practice


1. What Is Macroeconomics?

• Microeconomics - study of behavior of


individual economic agents.

• Macroeconomics - study of aggregate


measures of the economy
2. Macroeconomic Goals

• Low Unemployment
• Price Stability
• Economic Growth
2. Macroeconomic Goals
Complementary and Conflicting Goals
• Complementary Goals
– Low unemployment and high economic
growth

• Conflicting Goals
– Low unemployment and low inflation
Recent Macroeconomic History
• Fine-tuning was the phrase used by Walter
Heller to refer to the government’s role in
regulating inflation and unemployment.
• The use of Keynesian policy to fine-tune the
economy in the 1960s, led to disillusionment
in the 1970s and early 1980s.

6 of 31
Aggregate?
• The amount or total formed from separate units.
Aggregate refers to a total, everything added up.

• Aggregate = Total

• The economy can be viewed as a series of


aggregates, flowing together to make a working
whole
Gross Domestic Product
• the total market value of all final goods and
services produced in a given year in the
domestic territory of India.
• A Monetary Measure
Gross Domestic Product
• the total market value of all final goods and
services produced in a given year in a country
• A Monetary Measure
• Avoiding Multiple Counting

illustrated…
Value Added in a Five-Stage Production
Process
Table 5-2

Production Stage Sales Value Value Added


Sheep Ranch $120 $120
Wool Processor $180 $ 60
Suit Manufacturer $220 $ 40
Wholesaler $270 $ 50
Retailer $350 $ 80
Total $1140 $350
Value Added in a Five-Stage Production
Process
Table 5-2

Production Stage Sales Value Value Added


Sheep Ranch $120 $120
Wool Processor $180
intermediate good $ 60
Suit Manufacturer $220 $ 40
Wholesaler $270 $ 50
Retailer $350 $ 80
Total $1140 $350
Value Added in a Five-Stage Production
Process

Production Stage Sales Value Value Added


Sheep Ranch $120 $120
Wool Processor $180 $ 60
Suit Manufacturer
final good $220 $ 40
Wholesaler $270 $ 50
Retailer $350 $ 80
Total $1140 $350
3 Approaches for measuring GDP
1. Expenditure Approach (upper loop) – measures
GDP as the sum of expenditures on final goods and
services.
2. Income Approach (lower loop) – measures GDP as
the sum of incomes of factors of production
(wages, rent, interest and profit.
3. Value-added Approach – measures GDP as the sum
of value added at each stage of production (from
initial to final stage)
Expenditure Approach
• Uses the upper loop of the circular flow diagram.
• Example: Suppose the economy has only one
product, namely, rice.

Good Price per Q sold Expenditure


unit
Rice 20 1000 20,000
GDP 20,000
Income Approach
• Uses the lower loop of the circular flow diagram: sum of payments to the
various factors of production.
• Suppose that in the production of rice the sales and expenses are as
follows:

Sales 20,000
Expenses:
Wages 8000
Rent 4000
Interest 2000
Total 14,000
Profit 6,000
GDP=Sum of Payments to 20,000 20,000
factors
Value Added Approach

• Suppose that rice is the only final product of an economy: It


goes through several (3) stages of production.

Value of
Stage of Prod’n intermediate Value of Value-added
good Sales
Farmer - Palay 12,000 12,000
Rice Miller -Milled 12,000 15,000 3,000
Rice
Retailers - Rice 15,000 20,000 5,000
GDP= Total Value 20,000
Added
The Circular Flow Model
• Shows the economic transactions that occur
between households, firms and other sectors
in the economy.

• Money flows- We will only focus money flows


as it is simpler than trying to account for the
physical flows.
payments for goods and services

goods and services

FIRMS HOUSEHOLDS

factor services

factor payments
(wages, interest, rent, profit)

Circular flow diagram. The diagram above represents the transactions between firms and households in a simple economy.
In the upper loop, the arrow emanating from firms to households represents the sale by firms of goods and services to households. On the
other hand, the arrow from households to firms represents the payments.
n the lower loop, the arrow originating from the households to the firms shows that firms hire labor and capital from households in order to
produce goods and services. The arrow emanating from the firms indicates their payments for the use of the factors of production.
Five-sector Circular Flow of Income
Income

Household sector Firms


sector
Expenditure
I
L
N
E
Financial J
A
Savings sector Investment E
K
C
A
Government T
G
sector I
E Government
Taxation O
S expenditure N
External
Imports Exports S
sector
Real A Typical Trade Cycle
GDP

Peak

Recession Recovery

Boom

Trough/Depression

Time
Divide into two groups
downturn peak downswing

contraction trough upturn

expansion recession recovery

depression slump boom


economic ______ vs. economic ______

• contraction • upturn
• depression / slump • boom
• trough • expansion
• recession • peak
• downturn /downswing • recovery

Match the opposites, pls!


economic decline vs. economic growth

• depression / slump • boom


• recession • recovery
• downturn /downswing • upturn
• contraction • expansion
• trough • peak
Recession v. Expansion
• economic activity slows down • economic activity picks up
again
• consumers spend less money
• sales improve
• businesses make fewer sales • excess inventories are used
• inventories build up up
• companies earn less revenue • new orders are placed
• fewer orders are placed • production is ramped up
• businesses cut back on output again
• job opportunities improve
• unemployment rate goes up
• unemployment rate comes
• businesses reduce the number down
of people on payrolls • eventually it tops out
• eventually it reaches a trough
Macro Paradoxes
• What is true of parts is not true of the whole.

1. Paradox of Thrift
2. Wage-Employment Paradox
3. Fallacy of Composition

Footnote : H. L. Ahuja ( p.g. 13-14)


Personal Income
Personal Income =
National Income – Social Security Contribution
– Corporate Income Taxes – Undistributed
Corporate Profits + Transfer Payment
Disposable Income
Disposable Income = Personal Income –
Personal Taxes

Disposable Income = Consumption + Saving


Thank You

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