MacroeconomicsMacroeconomics

DefinitionDefinitionMacroeconomics is the study of the

behavior and performance of the economy as a whole.

According to P.A Samuelson , Macroeconomics is the study of the behavior of the economy as a whole. It examines the overall level of a nation’s output , employment, prices and money.

Importance of Importance of macroeconomics macroeconomics

1) Growing importance of macroeconomic issues

2) Persistence of macroeconomic problems

3) Growing complexity of economic system

4) Need for government intervention with the market system

5) Use of macroeconomics in business management

Macroeconomic issuesMacroeconomic issues1) Growth related issues2) Business cycles3) Inflation4) Unemployment and poverty5) Budgetary deficits6) International economic issue

Circular flow of incomeCircular flow of income

Circular flow of incomeCircular flow of income

National IncomeNational Income

According to Prof Pigou,” The national dividend is that part of the objective income of the community including income derived from abroad, which can be measured in money”

Rules of computing GDPRules of computing GDPTo compute the total value of different goods

and services, the national income accounts use market prices.

Used goods are not included in the calculation of GDP.

Some goods are not sold in the marketplace and therefore don’t have market prices. We must use their imputed value as an estimate of their value. For example, home ownership and government services.

Intermediate goods are not counted in GDP– only the value of final goods. Reason: the value of intermediate goods is already included in the market price. Value added of a firm equals the value of the firm’s output less the value of the intermediate goods the firm purchases.

National income measuresNational income measuresGross domestic productGross domestic productGross domestic product can be defined as

the sum of market value of all final goods and services produced in a country during a specific period of time , generally a year.

GDP includes income earned by the foreigners in the country and excludes income earned abroad by the residents.

GDP market price=GDPfc+IT-S

GDP at factor cost and GDP at factor cost and market pricemarket priceGDP at factor cost is calculated as the sum

of net value added by different producing units and the consumption of fixed asset.

( wages+interest+rent+profit+depreciation)GDPfc=GDPmp-IT+S

GDP at market price include indirect taxes and exclude the subsidies given by the government.

GDPmp=GDPfc+IT-S

Components of GDPComponents of GDP

Y=C+I+G+NXC= Consumption by household on

goods and servicesI=Investment includes capital

equipment, inventories and structuresG=Spending on goods and services by

the governmentNX=Export-Import

Gross national productGross national product

The concept of GNP includes the income of the residents nationals which are received abroad, and excludes the income generated locally but accruing to the non-nationals.

GNP=GDP+Net factor income from abroad

Net National productNet National product

The concept of GNP includes the output of final consumer and capital goods. However, a part of capital goods is used up or consumed in the process of production of these goods. This is called depreciation. NNP is obtained by subtracting depreciation from GNP

NNP=GNP-Depreciation

Net domestic productNet domestic product

When depreciation allowance is subtracted from GDP ,We get net domestic product.

NDP=GDP-depreciation

NNP at factor cost or NNP at factor cost or National incomeNational incomeNational income is the total of all

income payment received by the factor of production

National income=Net National product-Indirect Taxes+Subsidies-profits accruing to the government

Personal incomePersonal incomePersonal income is that income

which is actually received by the individuals during a year from all resources.

PI=NNP-(Undistributed company profits+Surplus of public undertaking+Rentals of public property)

Disposable personal Disposable personal incomeincomeDisposable income refers to personal

income of the income earners against which they do not have any legally enforceable payment obligations.

DPI=Personal income-personal direct taxes

DPI=Consumption+Saving

Nominal and real GNPNominal and real GNPGNP estimated at current prices

is called nominal GNP and GNP estimated at constant prices is called real income.

Economic survey 2007-08

At current prices

At constant prices(1999-2000prices)

1990-91 5,15,032 10,83,5722006-07 37,90,063 28,64,309

GNP DeflatorGNP DeflatorThe GNP deflator is a factor which is

used to convert nominal GNP into real GNP. The GNP deflator is the ratio of price index number(PIN) of a chosen year to the price index of the base year.

GNP deflator=PIN of the chosen year 100Real GNP=Nominal GNP/GNP

Deflator

CalculateCalculateFrom the following, compute i) real GNPii) GNP deflator

Year Nominal GNP Wholesale PIN

1993-94=100)

2002-03 2284614 166.82003-04 2531168 175.9

Methods of measuring Methods of measuring national incomenational incomeNet output or value added

method: Y=[sales+Self consumption+increase in

stocks]-[Value of intermediate products+depreciation]

Three Stages: 1) Estimating the gross value of domestic

output in the various branches of production(P.Q)

2.Determining the cost of material and services used and also the depreciation of physical asset.

3. Deducting these costs and depreciation from the gross value to obtain the net value of domestic output

Factor income methodFactor income methodNational income= Rent

+Wages+ Interest+ Profit+Depreciation

Total factor income is divided into :1. Labour incomes :

a) wages and salaries paid to the residents of the country including bonus and commission and social security payments

b) supplementary labour income including employer contribution to social

Factor income methodFactor income method Security and employee welfare funds

and direct pension payment to retired employees

c) supplementary labour incomes in kind free health and education, food and clothing.

2) Capital incomes: a. dividendsb. royaltiesc profits of government enterprises

methodmethodd) net interest paid out by commercial

bankse) net rent from land buildingf) undistributed before tax profits of

corporationg) Interest on bonds and saving deposits

3)Mixed income: farming enterprises , sole proprietorship, other profession including legal and medical practices, trading and transport etc.

Expenditure methodExpenditure methodWe obtain the gross national

product at market prices by adding up the personal expenditures, gross private domestic investment, net foreign investment and government purchases of goods and services.

Y=C+I+G+X-M

GNP break-up by different GNP break-up by different methodsmethodsValue added method

Expenditure method

Income method

Agriculture 250

Consumption exp 630

Wages and salaries 400Corporate profits 250

Industry 350

Gross investment 210

Rental income 80Interest income 100

Service sector 400

Govt purchase 160

NY 830Add:Indirect taxes less subsidies 90Add:Capital consumption 80

1000

1000

1000

National income statisticsNational income statisticsYear 2007-

082008-09 2009-10 2010-11 2011-12

GDP(Market prices)

4987090

5630063 6457352 7674148 8912178

Growth Rate (%)

16.1 12.9 14.7 18.8 16.1

GDP(factor cost 2004-05 prices)

3896636

4158676 4507637 4885954 5222027

Growth rate

9.3 6.7 8.4 8.4 6.9

Per capita net national income(factor cost)

35825 40775 46117 53331 60972

Sectoral distribution of Sectoral distribution of India’s NIIndia’s NI

Agriculture Industry Service

1950-51 53.1 16.6 30.3

1990-91 29.6 27.7 42.7

2010-11 14.5 27.8 57.7

2011-12 13.9 27.0 59.0

Household consumption exp

550 billion

Govt consumption exp 250 billionGross fixed capital formation 100 billionDepreciation 150 billionIndirect taxes 160 billionSubsidies 40 billionExports 200 billionImports 250 billionNet Income from abroad 150 billion

Computei) GDP at market priceii)GDP at factor priceiii)GNP