Macroeconomic NCERT | Marathon Session

Why do we need macroeconomics?

Till now we have studied microeconomics where we talked about an individual firm, consumer, household.
But what an individual is consuming / performing/ behaving cannot be concluded for how the economy as a whole is performing.
That is why we go to another level

Macroeconomics

Born – 16^th June of 1723
Died – 17^th July of 1790
Scottish

economics

Advocated for Laissez Faire
Author of The wealth of Nation
Created the concept of GDP

Theory provided by Adam Smith

As per the founding father of modern economics , if the buyers and sellers in each market took their own decisions as per their self interest , economists will not have to think of wealth and welfare of the country.
He advocated that the role of the government should be minimised and should be limited to just three functions –
Protecting national borders
Enforcing civil laws
Engaging in public works

School of Classic Tradition

In this school it was believed that all the laborer who are ready to work will find employment and all the factories will be working at their full

Great Depression

In 1929 came great depression
It saw the fall in output level and employment level in the countries of Europe and North America
Demand fell terribly in the market , factories were lying idle
Workers were thrown out of job
Born
5 June 1883 – 21 April 1946
Author of :- The General Theory of

Employment, Interest, and Money (1936)

He developed Keynesian theory in
He proposed that the economy, might not have the capacity to correct
John Maynard Keynes

Keynesian Theory

With him macroeconomics emerged as the separate branch of
He advocated the need of active government policy to help the country from slipping in recession and to maintain a level of overall demand in the economy.
All this was assumed keeping in mind the economy of a capitalist country.

ECONOMIC SYSTEM:

Economic systems regulate the factors of production, including land, capital, labour, and physical resources. An economic system encompasses many institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community.

TYPES:

Capitalism
Socialism
Mixed economy
Communist

CAPITALIST ECONOMY

USA
United Kingdom
Ireland
Canada

Capitalism is often thought of as an economic system in which private actors own and control property in accord with their interests, demand and supply freely set prices in market in a way that can serve the best interests of society.

ADVANTAGES

more choices are available with the individuals because firms produce as per the choice of the
Due to high competition in the market , efficient utilization of resources takes place.

DISADVANTAGES

Exploitation of labour takes place in the hands of firms.
Inequality exists because the resources are not equally
The ultimate motive is profit maximisation so less welfare activities takes place.

SOCIALIST ECONOMY

Socialism is Controlled and regulated by the government so as to ensure welfare and equal opportunity to the people.
It is a political system based on public ownership (also known as collective or common ownership) of the means of production. Those means include the machinery, tools, and factories used to produce goods that aim to directly satisfy human needs.
It is a political system based on public ownership (also known as collective or common ownership) of the means of production. Those means include the machinery, tools, and factories used to produce goods that aim to directly satisfy human needs.

Features of socialist economy

Majority of decision is taken by the government with less or no intervention by the private sector,
Government decides what will be produced and how much if it will be
The price of the products is usually determined by the government.
Example –

Advantages and disadvantages of socialist economy

ADVANTAGES

Since the planning is done centrally in such economies , it leads to better utilization of resources.
When the resources are equally spread , it leads to lesser inequalities.
Labourers are prone to less exploitation

DISADVANTAGES

Consumer has less choice in such economies because the government decides what will be produced.
Too much of rigidity exists because of central planning
Less democracy gives a sense of dictatorship to the

MIXED ECONOMY

A mixed economy is a system that combines characteristics of capitalism and It benefits from the advantages of both the cases.

ADVANTAGES

Because of less intervention by the government sector , private sector also sustains efficiently.
Both the private and the public sector works simultaneously due to which welfare is taken care of along with the efficient utilisation of

DISADVANTAGES

Because the planning does not take at the central level like Socialism, sometimes it leads to inefficient
Chances of corruption and red tapism increases because of the nexus between the private and public sector

COMMUNIST ECONOMY

A communist economic system is an economic system where, in theory, economic decisions are made by the community as a

ADVANTAGES

Everyone in the society is taken care of.
Low level of unemployment as most of the people have job.
Because of most of the people get more or less same income , less inequality exists in the

DISADVANTAGES

Since everyone gets more or less equal pay , there is no incentive to work harder.
Less competition in the market gives less room to the
Having sufficient resources does not make a country rich and wealthy .
Though the presence of natural resources are a boon for a country but the success depends on how they are transformed through production process.
And how the production process leads to the generation of income and wealth

FLOW OF PRODUCTION PROCESS

RAW MATERIAL
WORK IN PROGRESS
FINISHED GOODS

Stages of Production

Finished Goods could be classified into

Intermediate Goods
Final Goods

Features final goods

They will not undergo any further process of
They are meant for the final use
They are finally ready to be sold to the customer.
They can be further classified into – consumption goods and capital goods

Then what are intermediate goods?

Intermediate goods

These are finished goods only which are used in the process of production, but during the process of production they are completely transformed into another good.
Example – sugar could be final product for some , whereas could be an intermediate product for the one who wants to use it to make ice cream or a cake

CLASSIFICATION OF FINAL GOODS

Final goods could be further classified into –

Consumption Goods
Capital Goods

Calculating the total value of goods produced in the country
To have a comprehensive idea of the total flow of production in the economy, we need to have a quantitative measure of the aggregate level of final goods produced in the economy.
We also need a common measuring rod or a unit
The common measuring rod is money.
We cannot add the value of each and everything that is produced like adding meters of cloth produced to tonnes of rice or number of automobiles or machines
So what we do is just add the monetary value of the diverse commodities that gives us a final output.

Problem of Double Counting

We should realize that the value of the final goods already includes the value of the intermediate goods that have entered into their production as
Counting them separately will lead to the error of double counting.
Counting them will highly exaggerate the final value of our economic activity

Importance of Accounting

In order to determine the actual performance level of the
National income accounting facilitates the measurement of macro aggregates for a given economy.

Uses of National Income Accounting

Lets know the distribution amongst various factors of production .
Helps in formulating policies .
Provides data about individual sectors
Helps finding the structural changes in the economy
It also provides the assessment of strength’s and weakness of the economy.

Prerequisites for circular flow of income

There should be income/ money in the hands of people. They money would come in the following four ways –
contribution made by human labour, remuneration for which is called wage
contribution made by capital, remuneration for which is called interest
contribution made by entrepreneurship, remuneration of which is profit
contribution made by fixed natural resources (called ‘land’), remuneration for which is called rent
The money that comes in hand of people is entirely spent on the purchase of Goods and Services produced by the firms.
The households do not save
They do not pay taxes to the government- since there is no government
No export or import of goods takes place.

What is GDP

GDP refers to the final value of good and services produced in a country in the span of one year.
For better understanding of this concepts we first need to understand, how the economy works.

Two sector model

In the two-sector model, it is assumed that households spend all their incomes as consumer expenditures and purchase the goods and services produced by
Thus, there are no taxes, savings, or investments that are associated with other
There are only two types of markets – first market is for goods and services called product market and second market for factors of production called factor market.

Three sector model

In three sector model, one more entity is added that is the Financial Institution..
Financial institution are the intermediaries which channelises the savings from the households and provides it as a loan to the Firms or the business unit.
Financial Intermediaries are the backbone of any economy as they help in better utilisation of funds and helps in economic development of the country.
Households gets returns in the form of interest income from the Financial
Business units have to provide the interest to the Financial Institutions for providing them the money.

Three sector model with Financial System

Four sector model

In the four-sector model, the government is added to the model. In this model, money flows from households and businesses to the government in the form of taxes.
The government pays back in the form of government expenditures through subsidies, benefit programs, public services, etc.

our-sector model

Five sector model

In the Five sector model, External sector is added to the already existing
By the term external sector , it means dealing with the world outside the territory of the country in the form of exports and imports.
One country’s export is other countries import.
This import and export of goods and services ultimately decided what the domestic economy will gain or loose in the international trade.

our-sector model

Methods to measure of National Income

The Product Method
The Income
The Expenditure Method

The Product Method or Value added method

The economy is separated into several industries using this strategy, such as transportation, communication, agriculture, and so on.
This method calculates the GDP on the basis of value added by each sector of the economy.

What is the value of total production?

Is it 20+50+100 = 150 or Is it 30+ 50 = 80

Value added method

By doing this the figure that comes out is the GROSS VALUE ADDED.
If during the production process the machinery goes through any wear and tear process it is called as DEPRECIATION.
If we reduce DEPRECIATION from GROSS VALUE ADDED , the figure that would come is NET VALUE ADDED

Expenditure method

Another way to calculate the GDP is by looking at the demand side of the products. In this method we add the final expenditures that each entity in the economy makes.
There are three different distinct type of expenditure

By the household
By Firms
By Government

The Expenditure Method

This strategy takes into account purchases made by governments, residents, businesses, and other entities. The elements are as follows:
C = Consumer Expenditure. It is the expenditure done by the residents and the households on goods and services
G = Government expenditures .It is the expenditure done by government on goods and services
I = Investment Expenditure , It is the addition to the stock of capital during a period.
NX stands for net exports, which is defined as exports minus imports.

Income Method

In the circular flow of income we learnt that firms were paid for Factors of Production in the form of rent, wages, profits and interests.
Four categories of payment under Income Method

The four categories of payments are briefly described below: