Macroeconomics: Meaning

 Macroeconomics is the branch of economics that deals with the structure,

performance, behavior, and decision-making of the whole, or aggregate,
economy.
 Macroeconomics is that specialized field of economics which focuses on
the overall economy. It works on the aggregate value of the various
individual units, to determine its more substantial impact on the whole
nation. All the prominent reforms and policies are based on this concept.
Macroeconomics: Meaning
 Scope of Macroeconomics

 Macroeconomics is a vital field of study for the economists, government,

financial bodies and researchers to analyze the general national issues and
economic well-being of a country.
 Macroeconomics widely cover two major fundamentals which are further sub-
parted into multiple topics, as explained below:

1. Macroeconomics Theories

2. Macroeconomics Policy
Scope of Macroeconomics
 Scope of Macroeconomics

 Macroeconomics Theories

 Government, as we know, is the regulatory body of a nation, it considers the

various aspects which are crucial and impacts the lives of the citizens.
 There are six significant theories under macroeconomics:

 Economic Growth and Development: The status of a country’s economy can be

evaluated in terms of the per capita real income and standard of living, as
studied under macroeconomics.
 Scope of Macroeconomics

 Theory of National Income: It covers the various topics related to the evaluation of
national income, including the income, expenditure and budgeting.
 Theory of Money: Macroeconomics analyzes the functions of the reserve bank in the
economy, the inflow and outflow of money, along with its impact on the employment
level.
 Theory of International Trade: It is a field of study that enlightens upon the export and
import of goods or services. In brief, it determines the impact of cross-border trade and
duty charged, on the economy.
 Scope of Macroeconomics

 Theory of Employment: This stream of macroeconomics helps to figures

out the level of unemployment and prevailing employment conditions in
the country. Also, to know how it affects the supply, demand, savings,
consumption, expenditure behaviour.
 Theory of General Price Level: The most important of all is the analysis of
product pricing and how these price levels fluctuate because of inflation or
deflation.
 Importance of Macroeconomics
 1. It helps to understand the functioning of a complicated modern
economic system. It describes how the economy as a whole functions and
how the level of national income and employment is determined on the
basis of aggregate demand and aggregate supply.
 2. It helps to achieve the goal of economic growth, higher level of GDP and
higher level of employment. It analyses the forces which determine
economic growth of a country and explains how to reach the highest state
of economic growth and sustain it.
 Importance of Macroeconomics

 3. It helps to bring stability in price level and analyses

fluctuations in business activities. It suggests policy measures to
control Inflation and deflation.
 4. It explains factors which determine balance of payment. At the
same time, it identifies causes of deficit in balance of payment
and suggests remedial measures.
 Importance of Macroeconomics

 5. It helps to solve economic problems like poverty, unemployment, business cycles,

etc., whose solution is possible at macro level only, i.e., at the level of whole economy.
 6. With detailed knowledge of functioning of an economy at macro level, it has been
possible to formulate correct economic policies and also coordinate international
economic policies.
 7. Last but not the least, is that macroeconomic theory has saved us from the dangers
of application of microeconomic theory to the problems of the economy as a whole.
Micro Vs Macroeconomics
Micro Vs Macroeconomics
State of the Economy 2022-23
 National Income-Concept

 National income means the value of goods and services produced by a

country during a financial year. Thus, it is the net result of all economic
activities of any country during a period of one year and is valued in terms
of money. National income is an uncertain term and is often used
interchangeably with the national dividend, national output, and national
expenditure.
 National Income-Concept

 The National Income is the total amount of income accruing to a country

from economic activities in a years time. It includes payments made to all
resources either in the form of wages, interest, rent, and profits.
 The progress of a country can be determined by the growth of the national
income of the country.
 National Income-Concept

 According to Marshall: “The labor and capital of a country acting on its natural resources produce
annually a certain net aggregate of commodities, material and immaterial including services of all
kinds. This is the true net annual income or revenue of the country or national dividend.”
 The definition as laid down by Marshall is being criticized on the following grounds.
 Due to the varied category of goods and services, a correct estimation is very difficult.
 There is a chance of double counting, hence National Income cannot be estimated correctly. For
example, a product runs in the supply from the producer to distributor to wholesaler to retailer and then
to the ultimate consumer. If on every movement commodity is taken into consideration then the value
of National Income increases.
 National Income-Concept

 Also, one other reason is that there are products which are produced but not
marketed. For example, In an agriculture-oriented country like India, there are
commodities which though produced but are kept for self-consumption or exchanged
with other commodities. Thus there can be an underestimation of National Income.
 Simon Kuznets defines national income as “the net output of commodities and
services flowing during the year from the country’s productive system in the hands of
the ultimate consumers.”
 National Income-Concept

 Gross Domestic Product (GDP)

 Gross domestic product relates to the product of the factors of production employed

within the political boundaries i.e., within domestic territory.

 It is defined as a measure of the total amount of goods and services produced by an

economy within the political boundaries over a specified time period, usually a year.

 All value of intermediate products is excluded. So only the market value of final

products is included to define GDP.

 National Income-Concept

 Gross Domestic Product (GDP)

 Gross domestic product relates to the product of the factors of production

employed within the political boundaries i.e., within domestic territory.

National Income-Concept
National Income-Concept
 National Income-Concept

 Gross National Product (GNP)

 Gross national product is the total measure of the flow of goods and services at market value

resulting from current production during a year in a country, including net income from abroad.

 GNP= GDP + Net income from abroad(X-M)

 For example, in case of India, Net Factor Income from abroad will be = income earned by

Indian resident in foreign countries – Income earned by foreign resident in India.

 National Income-Concept

 Let us understand this through an example: Many Indians reside and work

in Saudi Arabia. They earn their wages in the same country. The wages

earned by Indians in Saudi Arabia will be counted in the Saudi Arabia’s

GDP. It will not be counted in the India’s GDP, but it will be counted in

India’s GNP.
National Income-Concept
National Income-Concept
 National Income-Concept

 Net National Product:

 Net national product is considered a true measure of national product or

income. It is defined as GNP minus depreciation or capital consumption

allowance or wear and tear.

 NNP = GNP – Depreciation

 National Income-Concept

 Net National Product (@ factor cost):

 Net national product at factor cost is the net output evaluated at factor

prices. It includes income earn by factors of production through

participation in the production process such as wages and salaries, rents

profits etc. NNP at factor cost is also called National Income. (As per

NCERT 2019 edition)

 National Income-Concept

 Net National Product (@Market Price):

 Net national product at market prices is net value of final goods and services evaluated at

market prices in the course of one year in a country. If we deduct depreciation from the GNP,

we get is NNP.

 Net National Product (@Market Price) = NNP (@Factor Cost) + Taxes - Subsidies.

 However, the Central Statistics Office (CSO) under the Ministry of Statistics and Program

Implementation defines National Income of India as Net National Income at Market Price.
 National Income-Concept

 Gross Value Added:

 In situations where the GDP fails to measure the real economic scenario, the Gross

Value Added (GVA) is a better gauge.

 The GVA measures the total value of goods and services produced in an economy, and

the amount of value added to a product. It is defined as the output produced after the

deduction of the intermediate value of consumption. The GVA, in India, is measured at

‘basic prices’.
National Income-Concept
National Income-Concept
National Income-Concept
National Income-Concept
National Income-Concept
 National Income-Concept
 Private income:

 It is income obtained by private individuals from any source, produce or otherwise and retained
income of corporations. It can be obtained from NNP at factor cost by making certain additions
and deductions.

 Private Income = National income (NNP at factor cost) + Transfer Payments + Interest on
Public Debt – Social Security – Profits and Surpluses of Public Undertakings.
 National Income-Concept
 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 is never equal to the national income because the
former includes the transfer payments whereas they are not included in national income. Personal
income is differs than private income actually it is less than private income because it excludes
undistributed corporate profits.

 Personal Income = National Income – Undistributed Corporate Profits – Social Security

Contributions + Transfer Payments + Interest on Public Debt
 National Income-Concept
 Disposable Income:

 Disposable income or personal disposable income means the actual income which can be spent on
consumption by individuals and families.

 Disposable Income = National Income – Business Savings – Indirect taxes plus Subsidies –
Direct Taxes on persons – Direct Taxes on Business – Social Security Payments + Transfer
Payments + Net Income from Abroad (X-M).
 National Income-Concept
 Per Capita Income:

 The average income of the people of a country in a particular year is called Per Capita Income for
that year.

 Per Capita Income for 2011 = National Income for 2011 divided by Population in 2011