1. Describe the nature and scope of Macroeconomics.

Nature:
Macroeconomics is known as theory of income. It is concerned with the problems of economic
fluctuations, unemployment, inflation or deflation and economic growth. It deals with the
aggregates of all quantities not with individual price levels or outputs but with national output.

As per G. Ackley, Macroeconomics concerns itself with such variables −

 Aggregate volume of the output of an economy

 Extent to which resources are employed
 Size of the national income
 General price level

Scope:
A. Working of the Economy: The study of macroeconomics is crucial to understand the working
of an economy. Economic problems are mainly related to the employment, behaviour of
total income and general price in the economy. Macroeconomics help in making the
elimination process more understandable.
B. In Economy Policies: Macroeconomics is very useful in an economic policy. Underdeveloped
economies face innumerable problems related to overpopulation, inflation, balance of
payments etc. The main responsibilities of government are controlling the overpopulation,
prices, volume of trade etc.
C. Understanding the Behaviour of Individual Units: The demand for individual products
depends upon aggregate demand in the economy therefore understanding the behaviour of
individual units is very important in macroeconomics. Firstly, to solve the problem of
deficiency in demand of individual products, understanding the causes of fall in aggregate
demand is required. Similarly, to know the reasons for increase in costs of a particular firm
or industry, it is first required to understand the average cost conditions of the whole
economy.

2. Describe various components of Macroeconomics Variables.

A. Gross Domestic Product: The Gross Domestic Product is the monetary value of final goods
and services produced by an economy in a given period, usually one year. The Gross
Domestic Product is usually used as a measurement of a nation’s economic activity. If the
GDP grows, it means that the economy increased its output.
B. Inflation: From: Inflation is the proportional variation of the Consumer Price Index over a
period. Inflation is an important macroeconomic variable because it has a close relationship
with other variables. For instance, high economic growth with low unemployment imply a
risk to high inflation.
C. Unemployment: Unemployment Rate is an important macroeconomic variable because it
measures the percentage of the labour force currently unemployed and actively seeking
employment. A high unemployment rate is an undesirable macroeconomic situation
because it means that a lot of people cannot find a job.
D. Economic Output: Output in economics is the "quantity of goods or services produced in a
given time period, by a firm, industry, or country", whether consumed or used for further
production. The concept of national output is essential in the field of macroeconomics. It is
national output that makes a country rich, not large amounts of money.
 3. Draw the diagram of 4-sectors economy and explain about
the circular flow of income and economic activities.

A circular flow of income is an economic model that describes how the money exchanged in the
production, distribution, and consumption of goods and services flows in a circular manner from
producers to consumers and back to the producers.

Economic Activities:

1. Firms are the producers of goods and services, and therefore, they require various
production or societal resources to produce goods and services.
2. Households provide the resources or factors of production. For example, a household
provides land and labour to carry out business operations in exchange for the money paid in
rent, wages, etc.
3. The government plays a pivotal role in consuming a major portion of the money flow in
taxes.
4. With the introduction of the foreign sector, the scope widens further. The money flows to
households or firms when they buy goods and services from a foreign country, also known
as imports.
5. The money flows back to households when foreign countries give them employment. For
firms, money flows back when foreign countries purchase goods and services, also called
exports.
6. If the value of imports is equal to the value of exports, it is called a balanced trade. If imports
are greater than exports, it is a trade deficit. If exports are greater than imports, it is called a
trade surplus.
 4. Explain the concept of national income with their formulas.
National income is the sum of money value of all the final goods and services produced within the
domestic territory of a country in an accounting year plus the net factor in come from abroad.

National Income=Value of Goods+Value of Service+ Net Factor Income ¿ Abroad

Income method is based on the incomes generated by the factors of production such as labour and
land. The expenditure method is based on investment and consumption, while the value-added
method is mostly based on the value added to a product during the stages of production.

National income=C+G+ I + X + F – D
Where,

C = consumption

G = government expenditure

I = investments

X = net exports (Exports subtracted by imports)

F = national resident’s foreign production

D = non-national resident’s domestic production

5. What are the difficulties an economy face during the

calculation of national income?
A. Non-monetary transactions such as services of housewives have been excluded from the
estimation of national income. But it should not be so. In this event the value of national
income would go down. In countries like India non-monetised transactions are considerable.
So, it does not come to the market.
B. Small producers do not keep record of the quantity and value of their output. It is difficult
together to get reliable information’s about the value and volume of their output.
C. In case of mixed income, a grave problem arises regarding allocation of income among the
factors. This makes the task of income among the factors. This makes the task of estimating
national income difficult.
D. In case of unorganised sectors, assessment of output is a guess work. This makes the figure
for national income unreliable.
E. The greatest difficulty in estimating national income is lack of adequate statistical data.