MBA management

Macro Economic Theory Topics:

INTRODUCTION OF MACROECONOMICS


Recall that managerial macroeconomics is constituted of theory of demand and supply, theory of production and cost conditions, market structure and level of competition ,pricing principles and practices ,capital budgeting and investment decisions. The micro level managerial decisions are made generally with a short-run perspective assuming that the general economic condition and business environment of the country would continue to remain the same and the charges, if any, would not be of much significance from business point of view. Macroeconomics examines the economy as a whole to explain broad aggregates and their interactions "top down," that is, using a simplified form of general –equilibrium theory. Such aggregates include national income and output, the unemployment rate and price inflation and sub aggregates like total consumption and investment spending and their components. It also studies effects of monetary policy and fiscal policy.

WHAT IS MACROECONOMICS


It is the study of economy as a whole. The study of the economy as a whole is carried out by analyzing the behaviour of and interaction between macroeconomics variables including national output (GDP and GNP), aggregate employment, the general price level, aggregate consumption, saving and investment, price level and economics transactions with the rest of the world. Precisely, macroeconomics studies the relationship and interaction between the macroeconomic variables and other internal and external ‘factors or forces’ that determine the level and growth of national output and employment, the general price level and the balance of payments position of an economy.

Macroeconomics seeks to answer the following types of question:

• Which factors and forces determine the GDP and GNP of a country?

• How are GDP and GNP determined and which factors determine growth and depression in the economy?

• How is the aggregate employment determined and what causes unemployment?

• What causes inflation and deflation in a country and how do they affect the economy?

• How do government policies-monetary and fiscal-affect the economy and as well as business activities?

NATURE OF MACROECONOMICS


The nature of a subject is determined on the basis of whether a science has a purely positive (theoretical) or normative (policy) orientation or both. A positive science has only theoretical orientation whereas a science having normative orientation aims at setting norms for finding solution to practical problems and provides policy guidelines Macroeconomics has both positive (theoretical) and policy orientations.

IMPORTANCE OF MACROECONOMICS


Lies in providing a theoretical framework for finding solutions to three major macroeconomic problems confronting most countries of the world, viz.,(i) problems of economic growth , (ii) unemployment and (iii) inflation.

As regards the problems of economic growth, both developed and underdeveloped countries have been striving, especially after the Second World War, to achieve and maintain a high growth rate. While industrially advanced nations have succeeded in achieving a high growth rate during the post-war II period, most of them, excepting japan, are still striving to achieve a reasonably high growth of the economy and to sustain it over a long period of time.

PRE-KEYNESIAN ERA: The pre- Keynesian era refers to the period of economic thoughts of classical and pre-classical economists. Their macroeconomic thought were in the forms of certain ‘postulates’ which can be summarized .If market forces of demand and supply are allowed to have free play, i.e., the laissez-faire system, then (i)there will always be full employment in the long –run,(ii) there will be neither overproduction nor under-production and (iii) the economy will always be in equilibrium in the long-run.

THE KEYNESIAN REVOLUTION: The collapse of the classical economics necessitated a fresh look at the working of the economic system and devising corrective measures and safeguards against the failure of the market economy, it was in this background that Keynes published his General Theory which laid the foundation of macroeconomics.

THE POST-KEYNESIAN DEVELOPMENTS: Until the 1970s, the Keynesian thoughts and policies had global appeal and application. However, Keynesian economics started showing signs of failures during the 1970s. This raised the doubt about the relevance and applicability of Keynesian economics. Consequently, several other schools of macroeconomic thoughts emerged, viz., Monetarism, supply-side macroeconomics, New Classical macroeconomics and New Keynesianism.

NEW CLASSICAL MACROECONOMICS: During the 1980s, the Keynesian view was attacked by another group of economists, called radicalists led by Robert E. Lucus, the Nobel Laureate of 1995, their views known as new classical macroeconomics.

SUPPLY-SIDE ECONOMICS: Another school of macroeconomics that emerged meanwhile is called “Supply-Side Economics”. While Keynesians and monetarists have both built their arguments for ‘what determines the aggregate demand ’on the basis of the factors operating on the demand side of the market,” supply-side economists’,” led by Arthur Laffer, emphasized the role of the factors operating on the supply-side of the market.

NATIONAL INCOME


Is the final outcome of all economic activities of a nation valued in terms of money. National income is the most important macroeconomic variable and determinant of the business level and economic status of a country. National income is the money value of all final goods and services produced in a country during a period of one year. National income is the money value of all the final goods and services produced by a country during a period of one year. National income consists of a collection of different types of goods and services of different types.

In common terms, National Income means the total value of goods and services produced annually in a country.

In other words, National Income is the total amount of income accruing to a country from economic activities in a year‘s time.

National Income helps us to know the economic progress achieved and to make comparative study.

Simon Kuznets defines it 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.

JM.Keynes, a famous economist defined National Income as - ”National Income is the money value of all goods and services produced in the country during a year.”

Methods of Measuring National Income


PRODUCT METHOD

>> The total value of the final goods and services produced in a country during a year is calculated at market price.

>> All productive activities such as agricultural products, commodities produced at industries, etc are collected and assessed at market price.

>> Only final goods and services are included and the intermediary goods and services are left.

>> Money sent by Indian citizens working aboard are also added.

GROSS NATIONAL INCOME = Money Value of total goods and services + Income from abroad

INCOME METHOD

>> The net income payments received by all citizens of a country in a particular year are added up.

>> Income details are obtained from Income Tax Dept. (High Income) and Wages Bills. (Workers)

>> Income by way of net wages, net rents, net interest, net profits are added together but incomes received in form of transfer payments are exempted.

GROSS NATIONAL INCOME = Rent + Wages + Interest + Profit + Income from abroad

EXPENDITURE METHOD

The total expenditure incurred by the society in a particular year is added together. This includes personal consumption expenditure, net domestic investment, government expenditure on goods and services, net foreign investment.

GROSS NATIONAL INCOME = Individual Expenditure + Government Expenditure

VALUE ADDED METHOD
>> The difference between the value of material outputs and inputs at each stage of production is the value added.

>> All such difference are added up for all industries in the economy, to arrive at the GDP

CONCEPTS OF NATIONAL INCOME

GROSS DOMESTIC PRODUCT (GDP)
GROSS NATIONAL PRODCUT (GNP)
NATIONAL DOMESTIC PRODUCT (NDP)
NET NATIONAL PRODUCT (NNP)
PERSONAL INCOME
PER CAPITA INCOME
PERSONAL DISPOSABLE INCOME

LIMITATIONS IN MEASURING NATIONAL INCOME

o Non availability of reliable statistics
o Service of Housewives
o Owner-occupied Houses
o Self Employed persons
o Goods meant for self-consumption
o Illegal Activites
o Wages and Salaries paid in Kind
o Intermediate and Final Goods
o Second-hand Goods and Assets
o Price Changes
o Transfer Payments etc..

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Review Questions
  • 1. What is macroeconomics? How is it different from microeconomics? What are the uses and limitations of macroeconomics?
  • 2. Is macroeconomics a positive science or a normative science? Expalin in this regard the importance of macroeconomics.
  • 3. What is the scope of macroeconomics? How is it different from the scope of microeconomics?
  • 4. What are the major macroeconomics issues confronting the economies of the worlds? How do you think macroeconomics can help in solving related problems?
  • 5. What is the relevance of national income statistics in business decisions? What kinds of business decisions are influenced by the change in national income?
  • 6. Describe the various methods of measuring national income. How is a method chosen for measuring national income?
  • 7. Disntinguish between net product method and factor income method. Which of these methods is followed in India?
  • 8. Does the method of measuring national income of a 'closed economy' differe from one followed in an 'open economy'? How is foreign income treated in national income estimates?
  • 9. What is meant by economy growth? How is economic growth is measured?
  • 10. What can be the possible use of growth theories in business decisions.
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