Macro Economics_I.pptx macro ppt introduction slides
- 2. Learning Outcome To understand the meaning of Macro economics To understand the scope of Macro economics To understand the importance of Macro economics
- 3. MACROECONOMICS Microeconomics is the study of how individual households and firms make decisions and how they interact with one another in markets.
- 4. Macro Economics According to Shapiro “ Macro Economics deals with the functioning of the economy as a Whole”
- 5. Macroeconomics deals with the economy as a whole. It studies the behaviour of economic aggregates such as aggregate income, consumption, investment, and the overall level of prices.
- 6. Major Concerns of Macro Economics Aggregate Demand Aggregate Supply Saving Inflation/Deflation Economic growth Unemployment Trade Cycle International Trade Economic Planning (Fiscal policy/Monetary Policy)
- 7. Importance of Macro Economics It explains the working of the economy as a whole. It examines the aggregate behaviour of Macro Economics entities like firms, households and the government. It is very useful to the planner for preparing economic plans for the country's development. It is helpful in international comparison.
- 8. Its knowledge is indispensable for the policy-makers for formulating macro-economic policies such as monetary policy, fiscal policy, industrial policy, exchange rate policy, income policy, etc. It explains economic dynamism and intricate interrelationship among macroeconomic variable, such as price level, income, output and employment.
- 9. Scope of Macro Economics Macro economics studies the concept of national income, its methods and measurement. Macro economics studies the problems related to employment and unemployment. Macro economics studies functions of money and theories relating to it. Banks and other financial institutions are also a part of its study.
- 10. Study of problems relating to economic growth or increase in per capita real income forms part of macro economics Macro economics also studies trade among different countries. Theory of international trade, tariff, protection etc. are subjects of great significance to macro economics.
- 11. What is the Difference Between Micro economics and Macro Economics? Why to study macro economics? What is the subject matter of Macro economics? Do you think study of Macro Economic aggregates is useful for an individual firm? Justify your answer with appropriate example.
- 12. National Income
- 13. Lecture Plan Introduction to National Income Concepts of National Income Real and Nominal GDP Methods for Measuring National Income Uses of National Income Data Difficulties in Measurement of National Income
- 14. Learning objective To understand various concepts of national income, like GDP, GNP and NNP. To understand the different methods of measuring national income. To understand the importance of national income calculations. To understand the difficulties involved in the calculation of national income.
- 15. National income is defined as the money value of all the final goods and services produced in an economy during an accounting period of time, generally one year. Accounting Year= 1st April-31st March
- 16. Concepts of National Income • Gross Domestic Product (GDP) • Gross National Product (GNP) • Net Domestic Product (NDP) • Net National Product (NNP) • Per Capita Income • Disposable Income
- 17. Gross Domestic Product Gross Domestic Product (GDP): GDP is the sum of money values of all final goods and services produced within the domestic territories of a country during an accounting year. GDP= C+I+G+(X-M) GDP at market price: includes the final value of goods and services also includes indirect taxes and excludes the subsidies given by the government. GDP at factor cost is the money value of final goods and services based on the cost involved in the process of production. Gross Domestic Product at factor cost = GDP at Market Prices –Indirect Taxes+ Subsidies
- 18. Gross National Product Gross National Product (GNP): GNP is the aggregate final output of citizens and businesses of an economy in a year. GNP may be defined as the sum of Gross Domestic Product and Net Factor Income from Abroad (NFIA). GNP = GDP + NFIA GNP = C+I+G+(X-M)+NFIA Net Factor Income from Abroad: difference between income received from abroad for rendering factor services and income paid towards services rendered by foreign nationals in the domestic territory of a country.
- 19. Net Domestic Product and Net National Product Net Domestic Product = GDP-Depreciation Net National Product (NNP) = GDP–Depreciation +NFIA Or =GNP–Depreciation Thus NNP is the actual addition to a year’s wealth and is the sum of consumption expenditure, government expenditure, net foreign expenditure, and investment, less depreciation, plus net income earned from abroad. = C+I+G+(X–M)–Depreciation + NFIA NNP at Factor Cost is the sum total of income earned by all the people of the nation, within the national boundaries or abroad It is also called National Income. NNP at Factor Cost = NNP at Market Prices –Indirect Taxes+ Subsidies
- 20. ? Why should a manager monitor GDP growth?
- 21. Per Capital Income and Personal Income Personal income is the total income received by the individuals of a country from all sources before direct taxes in one year. Personal Income = National Income –Undistributed Corporate Profits – Corporate Taxes – Social Security Contributions + Transfer Payments + Interest on Public Debt Personal Disposable Income is the income which can be spent on consumption by individuals and families. Personal Disposable Income = Personal Income – Personal Taxes Total Population Per capita income is the average income of the people of a country in a particular year. Per Capita Income = National Income
- 22. Real GDP and Nominal GDP Nominal GDP = National income estimated at the prevailing prices is called nominal GDP. Real GDP=National income measured on the basis of some fixed price, say price prevailing at a particular point of time, or by taking a base year, is known as national income at constant prices, or Real GDP x100 Real GDPdeflator NominalGDP GDP Deflator = GDP deflator is the ratio of nominal GDP in a year to real GDP of that year GDP deflator measures the change in prices between the base year and the current year.
- 23. ? How far national income of a country a measure of welfare?
- 24. ? What is the Difference between GDP and GNP? Whether unemployment allowance from the government is to be included in the national income. Why or Why not? Will the transfer payment be a part of personal income or not?
- 25. GDP and Economic Well-Being GDP is the best single measure of the economic well-being of a society. GDP per person tells us the income and expenditure of the average person in the economy.
- 26. GDP and Economic Well-Being Higher GDP per person indicates a higher standard of living. GDP is not a perfect measure of the happiness or quality of life, however.
- 27. GDP and Economic Well-Being Some things that contribute to well-being are not included in GDP. The value of leisure. The value of a clean environment. The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work.
- 28. Methods of measuring national income Product (or Output) Method Income Method Expenditure Method
- 29. Product (or Output) Method Product method is also called Value Added Method or Industrial Origin Method The market value of all the goods and services produced in the country by all the firms across all industries are added up together.
- 30. Steps of Value Added or Product Method: Step 1 : Identification and Classification of Producing Enterprises a) Primary Sector: refers to that sector goods are produced by exploiting wherein natural resources
- 31. b). Secondary Sector: This sector • manufacturing sector. Enterprises transform one type of good into another type. • c) Tertiary Sector: provides services and so is called service secto includes trade, hotels, transport and communication, finan insurance. Service alone are provided by this sector. Pu administration and defense and other services also form part of it. is also of this called sector
- 32. Step 2: Estimation of Value Added • Value added is the difference between value of output of an enterprise and the value of its intermediate consumption (non-factor inputs). • Value added = Value of output- Value of non-factor input • Value of Output= Sales + Change in stock (C.S –O.S)
- 33. Value added may be of the following kinds: 1. Gross Value added at Market Price: Gross value added is the difference between value of output and intermediate goods. Gross domestic value added is equal to gross domestic product at market price. 2. Net Value Added at Market Price 3. Net Value Added at Factor Cost
- 34. Estimating Value Added Item Producing Enterprise Value of Output (Rs) Cost of Intermediate Goods Value Added Farmer 600 200 400 Flour Mill 800 600 200 Baker 1000 800 200 Shopkeeper 1200 1000 200 Total 3600 2600 1000
- 35. Limitations of Product Method Problem of Double Counting: – unclear distinction between a final and an intermediate product. Not Applicable to Tertiary Sector: – This method is useful only when output can be measured in physical terms Exclusion of Non Marketed Products – E.g. outcome of hobby or self consumption Self Consumption of Output – Producer may consume a part of his production.
- 36. Product (or Output) Method – – – – – The market value of all the goods and services produced in the country by all the firms across all industries are added up together. Process The economy is divided on basis of industries, such as agriculture, fishing, mining and quarrying, large scale manufacturing, small scale manufacturing, electricity, gas, etc. The physical units of output are interpreted in money terms The total values added up. (GDP at market price) The indirect taxes are subtracted and the subsidies are added. (GDP at factor cost) Net value is calculated by subtracting depreciation from the total value (NDP at factor cost).
- 37. Limitations of Product Method Problem of Double Counting: – unclear distinction between a final and an intermediate product. Not Applicable to Tertiary Sector: – This method is useful only when output can be measured in physical terms Exclusion of Non Marketed Products – E.g. outcome of hobby or self consumption Self Consumption of Output – Producer may consume a part of his production.
- 38. Income Method The net income received by all citizens of a country in a particular year, i.e. total of net rents, net wages, net interest and net profits. (GDP at factor cost). It is the income earned by the factors of production of a country. Add the money sent by the citizens of the nation from abroad and deduct the payments made to foreign nationals (individuals and firms) (GNP at factor cost) or Gross National Income (GNI). Process: • Economy is divided on basis of income groups, such as wage/salary earners, rent earners, profit earners etc. • Income of all the groups is added, including income from abroad and undistributed profits. • The income earned by foreigners and transfer payments made in the year are subtracted. GNI = Rent + Wage + Interest +Profit + Net Income from Abroad- Transfer payments
- 39. Step- I • Identification and classification of producing enterprises Primary Sector Secondary Sector Tertiary sector
- 40. Step- II • Classification of factor income • Factor income: a factor income refers to income earned by a person as a reward for rendering his factor services. • Factor income are only earned incomes. It does not include that income which is not earned.
- 41. Step- II • National income= sum of all the factor incomes
- 42. Classification of factor incomes • Compensation of employees: wages and salaries, payment in kind, employers contribution to social security schemes, pension on retirement. • Operating surplus: it is the income from the property and entrepreurship. E.g. Rent, interest, profit etc • Mixed income= it refers to the income of the self employed persons using their labor land capital • Net factor income
- 43. Precautions while estimating factor income • Transfer payment • Income from illegal activities • Sale proceeds of second hand goods • The sale proceeds of shares and bonds are not included in national income • Windfall gains should not be included. • Imputed rent of owner houses is included in NI • Indirect taxes like sales tax excise duty tend to increase the market price of goods and services. These are included in the estimation of national income at market prices but are not added while calculating national income at factor cost
- 44. • Income tax is paid out of compensation of employees. It should not be added separately in the estimation of national income.
- 45. Limitations of Income Method Exclusion of non monetary income: Ignores the non- monetized section of economic activities. Exclusion of Non Marketed Services: People undertake a particular activity that are difficult to ascertain in money value. E.g. mother’s services to the family.
- 46. Expenditure method 46 • One man’s income is another man’s expenditure • Therefore national income can be arrived at by adding the total expenditure of individual and business firms during a year • Expenditure or outlay on final products takes place in three ways
- 47. Expenditure method 47 Expenditure or outlay on final products takes place in three ways Expenditure by consumers on goods and services( Consumption Expenditure) Expenditure by entrepreneurs on capital or investment goods (Investment Expenditure) Expenditure by government on consumption and capital goods (Government Expenditure) Net Exports
- 48. Expenditure method 48 The formula for this method is Y = C + I + G +(X-M) • Here Y stands for total expenditure • C stands for consumption expenditure • I stands for investment expenditure • G stands for Government expenditure • (X-M) Difference between exports and imports
- 49. Limitation s 49 Neglects Barter System Ignores over consumption Affected by Inflation
- 50. Difficulties in the computation of National Income In backward economies like India, particularly in the rural sector, the cultivators and small producers are illiterate and they do not keep books of account. This is a serious difficulty in the calculation of national income Avoidance of double counting becomes complicated Existence of Non-monetized sector is dominant The village money lenders maintain absolute secrecy of their transactions 50
- 51. Uses of National Income Data National income is the most dependable indicator of a country’s economic health. Difference between GDP and GNP indicates the contribution of net income earned abroad Necessary for Economic planning: useful aid in judging which sectors should be given more emphasis A measure of economic welfare. • higher aggregate production implies more and more goods and services being available to people Helps in determining the regional disparities, income inequality and level of poverty in a country. Helps in comparing the situations of economic growth in two different countries.
- 52. Summary GDP is the sum of money values of all final goods and services produced within the domestic territories of a country during an accounting year. It can be measured at current or constant prices. GNP is the aggregate final output of citizens and businesses of an economy in one year. NNP is GNP less depreciation. The average income of the people of a country in a particular year is per capita income for that year. National income can be measured by product method, income method and expenditure method. National income accounting data are of utmost importance for the economy of any country; such data reveal the aggregate production of the economy and also help to determine the total expenditure and total income of that country. Difficulties in measuring national income include multiple counting, exclusion of non market transacted services, self consumption of output, inflation or deflation, confusion about informal sector, etc. National income is considered as a measure of economic welfare. As national income rises, the aggregate production of goods and services rises. Therefore, there is a positive relation between increase in national income and welfare.
- 53. ? Consider an economy that produces only three types of goods: A, B and C. In the base year (a few year ago), the production and price data were as follows: Fruit Quantity Price A 3,ooo $2 B 6,000 $ 3 C 8,000 $ 4
- 54. In the current year the production and price data are given as follow Fruit Quantity Price A 4,000 $ 3 B 14,000 $ 2 C 32,000 $4
- 55. Find the nominal GDP and real GDP. Find the GDP deflator for the current year and the base year. By what percentage does the price level change from base year to current year?
- 57. Learning Objectives To explain the circular flow of economic activity and income: Two- Sector Model Three- Sector Model Four- Sector Model Injections and Leakages in the circular flow of economic activity.
- 58. Circular Flow of Economic Activities and Income The simple model of the circular flow assumes two players Firms • Produce and supply the goods and services. • Require various factors of production to produce these goods and services. Households • Include a set of individuals living in the same house • Take joint decision about the consumption of goods and services. • Provide services in terms of factor inputs to the firms • Get paid for these services by firms which households spend on consumption. • Money flows from firms to households as factor payments and from households to firms as expenditure on goods and services. • It is a circular flow of money or income
- 59. Circular Flow of Income (Two Sector Economy) Firms Households Goods and Services (O) Consumption expenditure (C) In the equilibrium Y=C+S=C+I=E=O (Wages, Rent, Interest and Profits) Factor Payments (Y) Factor Inputs Financial Market Investment (I) Savings (S)
- 60. Circular Flow of Economic Activities and Income • Value of output produced (Y) = value of output sold (O) • Value of output sold = Sum of consumption expenditure (C) and investment expenditure (I). Y=O=C+I=E……(1) • Income is either consumed or saved (S). Y=C+S………….(2) C+I=Y=C+S………(3) • Therefore: I = S…………(4) • Savings are withdrawal of money from the circular flow • Investment is injection of money into the circular flow • For equilibrium savings should be equal to investments • Hence Y=O=E
- 61. Circular Flow of Income (Four Sector Economy) The third sector is Government (G) • Government Spending – On provision of public utility goods and services. – Provides salaries to the households – Pays to firms for purchases of goods and services • Government Revenue – Households and firms pay various taxes and other payments and provide factor inputs to the government. – Government borrows from the financial market to fill revenue gap. The fourth sector is the external sector • Imports (M): Outflow of income occurs when the domestic firms buy goods and services from foreign ones. • Exports (X): Inflow of income takes place when foreign firms buy goods and services from domestic ones
- 62. Circular Flow of Income (Four Sector Economy) Government (G) Remittances for purchases Foreign Nations (X-M) Salaries Taxes Taxes Consumption Expenditure Financial Market Investment (I) Savings (S) Firms Households Factor Inputs Goods (O) Factor Payments Imports (M) Imports (M) Exports (X) Exports (X) National Income=C+I+G+(X-M)
- 63. Circular Flow of Income (Four Sector Economy) • National income includes expenditures on consumption investment, government and net of exports (X-M) National Income=C+I+G+(X-M) • Since national income can either be consumed, or saved, or paid as tax to the government: C+I+G+(X-M)=C+S+T I+G+(X-M) =S+T • Sum of private investment and expenditure on net exports is equal to the sum of savings and tax revenue. Thus: I+G+X =S+T+M • Therefore, W=J • At equilibrium, total injections are equal to total withdrawals.
- 64. Mention two important leakages in the circular flow of national income. Mention two important injections in the circular flow of national income Difference between the 2 and 3 sector model.