Unit-4A. Mohamed Riyazh KhanAssistant Professor (SE.G)Dept. of Management Studies.

Meaning of Macro

• It is also known as the theory of income and employment, or simple income analysis. It is concerned with the problem of unemployment, economic fluctuation, inflation or deflation, international trade and economic growth.

• According to Edward Shapiro, “Macro economics deals with the functioning of the economy as a whole”

Important

• 1. Understanding the determination of income & employment• 2. Determination of general level of prices• 3. Economic growth• 4. Deals with Business Cycle• 5. Unemployment• 6.Global economic system

Circular flow of Macroeconomics

National Income• Economics the total of all incomes accruing over a specified period to residents 

of a country and consisting of wages, salaries, profits, rent, and interest.

• While per capita gross domestic product is the indicator most commonly used to compare income levels, there are two other measures are generally preferred by analysts: per capita Gross National Income (GNI) and Net National Income (NNI). Whereas GDP refers to the income generated by production activities on the economic territory of the country,

National Income / Concepts

• GDP: (Gross Domestic Product)• It referred aggregate value of goods and services produce in the

year with in the country itself.• GDP = GNP – Income received from abroad.

• GNP: (Gross National product)• GNP = GDP + foreign earnings.

• NNP: (Net National Product)• The net national product is obtained after deducting the

depreciation charges from GNP thus.• NNP = GNP – depreciation.

• Per- capita Income:• It’s the real income indicator   GNP ……..……… Population

• Disposable income: The disposable income refers that the amount which is

ready for spending from the total of a person. Its mainly influence by the liabilities of the person.

 

Estimation - Before Independence

• Dhada bhai nauroji ----- 1867-70• Lord Curzan ----- 1900• Wadia & Joshi ---- 1913-1914• Fridley Shirras ---- 1921• Simal Ammission ----- 1929• Dr. V.K.R.V. Rao ----- 1931-32 (he was estimate two

times for national income)• • After Independence•  • C.S.O - Central Statistical Organisation

 Methods of National Income Calculation

• Three important methods of calculation these are given below…

• Product Method:

• National income is calculated on the basic of the basic of the value of good & services produced by different sectors of the economy, in a given year.

•  • National Income = production of primary sector +

production of secondary sector + production of Tertiary sector.

• Income Method:

• Under this method the factor come is taken into account. • National Income = the total rents for lands + wages & salaries for labour +

interest for capitals + profits of entrepreneurs.

• • Expenditure Method:

• The national income of a country can be calculated through the total expenditure spent by it in a particular year.

• National Income = expenditure on consumption goods + expenditure on investment + expenditure on capital goods.

Aggregate Demand & Aggregate Supply• Aggregate demand is the total demand for final goods and

services in the economy (Y) at a given time and price levels. • This is the demand for the gross domestic product of a country

when inventory levels are static.

• Aggregate Demand: Y= C+I+G+(X-M)

• C-consumption, I-investment• G-government spending, X-total exports & M-total imports

Components

•1. Consumption: (personal expenditure of household)

•2.Investment (investment capital)•3. Government Spending•4. Net Exports

Aggregate-Demand Curve

•Aggregate demand curve is downwards sloping because at lower price a greater quantity is demanded.

AD

Aggregate Supply• The aggregate supply mean the total money value of goods

and services produced in an economy in a year. There are two important constituents of aggregate supply.

• 1. the supply or output of final consumer goods and service in a year

• 2. the output of capital goods which are also called investment goods or producer goods.

• Keynes also derived his aggregate supply function from the short-run production function with a given capital stock and constant technology.

What is fiscal policy?•changes in government•spending or taxes to alter•the economy

•Its embraces the tax &expenditure policies of the govt

What are examples of expansionary fiscal policy?

•Increase government•spending•• Decrease taxes•• increase government•spending and taxes equally

Objectives•1. Full employment•2. Economic stabilization•3. Economic Growth•4. Fiscal policy and social justice

Instruments•1. Taxation•2. Public Borrowing•3. Public spending &•4. deficit budget

Fiscal Policy & Eco Growth•1. Imposition of additional taxes•2.Direct physical control•3. Revenue of public enterprises•4. Increase in the rate of taxation•5. Public debt•6. Deficit finance

Controlling• 1. Fiscal policy - taxation (at the time of inflation)• * high rate of tax should be implemented• * Reduce the public spending

Laffer Curve• the idea that increasing taxes from zero will increase tax

revenues up to a certain point.

• The Laffer curve is typically represented as a graph which starts at 0% tax with zero revenue, rises to a maximum rate of revenue at an intermediate rate of taxation, and then falls again to zero revenue at a 100% tax rate.

• Why does the shrink happen?• Workers have less incentive to work and investors have less of an incentive to invest

Demand Side Management• It is an economic theory which suggest that economic

stimulation comes best from increasing for good and services.

• The simple Keynesian model of income, output and employment determination focuses on the relationship between aggregate income and expenditure.

• Effective demand:• Effective demand represents that aggregate demand or total

spending (consumption expenditure and investment expenditure which mates with aggregate supply).

• Effective Demand = National Income (Y) = National Output

Determination of Effective Demand•1. Determination of Employment•2. Say’s law falsified (how much you will

produced part of the commodity you will save)

•3. Role of Investment

Multiplier

• DEFINITION OF 'MULTIPLIER‘

• In Keynesian economic theory, a factor that quantifies the change in total income as compared to the injection of capital deposits or investments which originally fueled the growth.

• It is usually used as a measurement of the effects of government spending on income, and it can be calculated as one divided by the marginal propensity to save.

• That any injection into the economy via investment capital, government spending or the like will result in a proportional increase in overall income at a national level.

• • ∆Y K = Multiplier, ∆Y = Change in Income, ∆I= Change in investment

• K = …………• ∆ I

The Multiplier and Keynesian Economics• The concept of the multiplier process became important in the 1930s when

Keynes suggested it as a means to achieving full employment. This demand-management approach, meant to help overcome a shortage of business capital investment, measured the amount of government spending needed to reach a level of national income that would prevent unemployment.

• The higher the propensity to consume, the greater is the multiplier effect. The government can influence the size of the multiplier through changes in direct taxes. For example, a cut in the basic rate of income tax will increase the amount of extra income that can be spent on further goods and services.