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Macro eco

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Macro Economics - Prabha Baid (Prodigy Investment Solutions)
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Page 1: Macro eco

Macro Economics- Prabha Baid (Prodigy Investment Solutions)

Page 2: Macro eco

What is Economics all about?

Two Fundamental Facts:

(i) Human Being have unlimited wants;

(ii) The means of satisfying these wants are relatively scarce from the subject matter of economics.

The term ‘Economics’ owes its origin to the Greek Word ‘Oikonomia’ meaning

‘Household’ .

The Subject matter of Economics divided into 2 Parts;

Micro Economics Macro Economics

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Prof. Boulding defines “Micro-economics is the study of particular firms, particular households, Individual Price, wages, income, Individual Industries and particular commodities”.

The term Micro Economics is derived from the Greek word ‘Mikros’ meaning ‘Small’.

In Micro-Economics we study the following: Product Pricing; Consumer Behavior; Factor Pricing; Economics conditions of a section of the people; Study of firms; Location of an Industry;

Micro-Economics:

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Mc Connel defines, “ Macro-economics examines the forest and not the trees. Thus it analyses and establishes the functional relationship between large aggregates”.

Macro Economics is derived from the Greek word ‘Makros’ meaning “Large”.

Thus in Macro-Economics, we study the economic behavior of the large aggregates which includes; National Income and Output; General Price Level; Balance of Trade and Balance of Payments; External Value of Money; Savings and Investment; Employment and Economic Growth;

Macro-Economics

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Nature of Economics:

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Economics is Science or Arts or Both

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What is Science?

Economics is a science:

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A systematic body of knowledge which studies the relationship between cause and effect.

It is capable of measurement. It has its own methodological apparatus. It should have the ability to forecast.

Science is

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Do you think Economics is a Science?

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Economists do not have uniform opinion about a particular event.

The Subject matter of Economics is the economic behavior of man, which is highly unpredictable.

Money which is used to measure outcomes in economics is itself a dependent variable.

It is not possible to make correct predictions

about the behavior of economic variables.

Economics is not a perfect Science. Why?

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What is Art??

Economics is an Art:

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A system of rules for the attainment of a given end.

It is a practice of knowledge. Science teaches us to know and Art teaches us to

do. Science is theoretical and art is practical.

Art is

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So what is Economics?

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Economics is both Art and Science. It is Science in its methodology and Arts in its application.

Sir Cossa has said that Science and Arts are complimentary to each other. Individually both are incomplete.

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Economic problem arises due to scarcity of resources.

Human wants are unlimited and productive resources such as land and other natural resources, raw-material, capital equipments etc. with which goods and services are produced to satisfy those wants are scarce.

Economic Problems:

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What to produce? How to Produce? For whom to Produce? What provisions (if any) are to be made for

economic growth?

The economic problems are divided into four basic problems:

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Capitalist Economy Socialist Economy Mixed Economy

Economies are divided into 3 broad classification based on their mode of production.

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Capitalism is the economic system in which all the means of production are owned and controlled by private individuals for profits. Government is not supposed to interfere in the management of economic affairs. Such Economy is known as “Capitalist” or a “free market economy” or “laissez -faire economy”.

Capitalist Economy:

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The right of Private Property. Freedom of enterprise. Freedom to choice by the consumers. Profit motive Competition Inequalities of Incomes

Characteristics of Capitalist Economy:

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To Attract the consumer the producer will bring out newer and finer varieties of goods.

The existence of Private property and the driving force of profit motive results in high standard of living.

Capitalism works automatically through the price mechanism.

The Freedom of enterprise results in maximum efficiency in production.

Merits of Capitalist economy:

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All activities under capitalism enjoy the maximum amount of liberty and freedom.

Under Capitalism freedom of choice brings maximum satisfaction to consumers.

Capitalism preserves fundamental rights such as right to freedom and right to private property

Country as a whole benefits through growth of business talents, development of research etc..

Merits of Capitalist economy cont…

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In capitalism the enormous wealth produced is apportioned by a few. This causes rich to become richer and poor to become poorer.

Welfare is not protected under capitalism, because here the aim is profit and not the welfare of the people.

The producer spends huge amounts of money on advertisement and sale promotion activities like fair, exhibitions etc.

Economics instability in terms of over production, economic depression, unemployment etc is very common under capitalism.

Demerits of Capitalism:

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Class conflict arises between employer and employee. They will be paid low wages and this lead to strikes and lock-outs.

Production resources are misused under capitalism. They are used for the production of luxuries as they will bring high profits.

Capitalism leads to the formation of monopolies. There is no security of employment under

capitalism.

Demerits of Capitalism cont…

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In this economy, the material means of production i.e., factories, capital, mines etc are owned by the whole community represented by the state. All members are entitled to get the benefit from the fruits of such socialized planned production on the basis of equal rights. A socialist economy is also called as “Command Economy” or a “Centrally Planned Economy”.

Socialist Economy:

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Collective Ownership. Centrally planned Authority. Absence of Consumer Choice. Relatively Equal income distribution. Minimum role of Price Mechanism or Market

forces.

Characteristics of Socialist Economy:

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Equitable distribution of wealth and income and provision.

Better utilization of resources and maximum production.

Wastage of all kind is avoided through strict economic planning.

Unemployment is minimized, business fluctuation are eliminated and stability is brought about and maintained.

It helps the community to develop a co-operative mentality and avoid class war.

Ensures right to work and minimum standard of living to people.

Labourers and consumers are protected from the exploitation.

Merits:

Page 27: Macro eco

Predominance of bureaucracy, there may also be corruption, redtapism, favoritism.

Restricts freedom of individuals. It will not provide necessary incentives to hard-

work in the form of profit. No proper basis for cost calculation. State monopolies created sometimes becomes

uncontrollable. This is all the more dangerous than the private monopolies under Capitalism.

No freedom of choice to consumers

Demerits:

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The aim is to develop a system which tries to include the best features of both the controlled economy and the market economy while excluding the demerits of both. It appreciates the advantages of private enterprise and private property with their emphasis on self-interest and profit motive.

Mixed Economy

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Co-existence of Private and Public Sector: Private Sector Public Sector Combined Sector

Existence of Economic planning Positive role of the government Administered price

Characteristics of a mixed economy:

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Secures the merits of both capitalism and socialism, while avoiding the evils.

Protects individual freedom. Price mechanism is allowed. Reducing the inequalities of wealth and class

struggle. Avoids economic fluctuations. Helps under-developed countries to have rapid

and balanced economic development.

Merits

Page 31: Macro eco

Difficult to operate. Balancing and adjusting the public & private sector is often difficult.

Excessive control and heavy taxes are likely to prevail under mixed economy.

Problems of red-tapism, nepotism, favoritism, officialdom etc.. are found.

Demerits:

Page 32: Macro eco

What was the problems faced by European countries? What solution was adopted by EU Countries? Which type of economy style is adopted by EU countries? Individual inputs on suggesting the solution to resolve the issue.

2 recommendation from each member.

Group Assignment:

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