Definitions [5]
- Kenneth Boulding: "Macro Economics deals not with individual quantities as such but with the aggregates of these quantities, not with the individual incomes but with the national income, not with individual prices but with the general price level, not with individual output but with the national output."
- J.L. Hansen: "Macroeconomics is that branch of economics which considers the relationship between large aggregates such as the volume of employment, total amount of savings, investment, national income, etc."
- Prof Carl Shapiro: "Macroeconomics deals with the functioning of the economy as a whole."
- Gardner Ackley: "Macroeconomics concerns itself with such variables as the aggregate volume of the output of any economy, within the extent to which its resources are employed with the size of the national income, with the general price level."
Define the Gross Domestic Product.
Gross Domestic Product (GDP) is the total monetary value of all final goods and services produced within a country’s borders in a specific time period, usually a year. It is an essential indicator of a nation’s economic performance.
"Gross national product may be defined as current worked out value of all goods and services produced by the economy during an income period." - W.C. Peterson
"Net National Product at market price is the market value of the net output of final goods and services produced by an economy during an accounting year and net factor income from abroad." – Peterson
Define the following: Value Addition
Value Addition: Value addition on a good refers to the increase in the value of good at each successive stage of production. Algebraically, Value Addition is the difference between the total value of the output and the total value of the intermediate consumption.
Value Addition = Total Value of Output – Total Value of Intermediate Consumption.
Formulae [6]
GNP = P × Q,
Here GNP = Gross National Product
P = Market Price
Q = Final goods and services produced
NNP at Market Prices = GNP at Market Price – Capital Consumption Allowances
NNPMP = GNPMP – CCA
National Income (NI) using this income method is expressed as:
NI = R + W + I + P + MI + (X − M) + (R − P)
Where:
- R: Rent (including imputed rent of owner-occupied houses and income from government property)
- W: Wages and salaries (compensation of employees)
- I: Interest
- P: Profits (including distributed, undistributed, and corporate tax)
- MI: Mixed income of self-employed (where labour and capital income cannot be separated)
- X−M: Net exports (exports minus imports of goods and services)
- R−P: Net receipts from abroad (net income from abroad, such as factor income received from the rest of the world minus factor income paid abroad)
In words, national income is the sum of all domestic factor incomes plus net exports and net factor receipts from abroad.
NNPFC = GDPMP − Depreciation − Net Indirect Taxes + NFIA
Where:
- Depreciation = Consumption of Fixed Capital
- Net Indirect Taxes (NIT) = Indirect Taxes − Subsidies
- NFIA = Net Factor Income from Abroad
OR (Direct Formula)
NI = C + I + G + (X − M) + (R − P)
Where:
- R − P (NFIA) = Net Receipts/Net Factor Income from Abroad
GDPMP = C + I + G + (X − M)
Where:
- C = Private Final Consumption Expenditure
- I = Gross Domestic Investment Expenditure
- G = Government Final Consumption and Investment Expenditure
- X − M = Net Exports (Exports − Imports)
Key Points
Macroeconomics = Understanding the big picture of how India's economy affects your daily life, from job opportunities to price changes to government policies.
- Two sectors: Households & Firms
- Factor market (upper), Commodity market (lower)
- Households give factors → Firms
- Firms give goods & services → Households
- Money flow: Rent, wages, interest, profit
- Income becomes expenditure
- Flow is continuous due to unlimited wants
- Circular flow = unending flow of production → income → expenditure between sectors.
- In a two-sector economy (no govt., no foreign trade, no saving): firms pay factor incomes → households spend all income back on goods.
- National income can be measured equally by the product, income, or expenditure method - all three give the same result in the simplified model.
- Three phases: Production → Income → Expenditure.
- Real flow = physical movement of goods/factor services; Money flow = monetary payments for those goods/services.
- Leakages (savings, taxes, imports) withdraw from the flow; Injections (investment, govt. spending, exports) add to it.
- Four sectors in the full model: Households, Firms, Government, and Rest of the World.
- National Income = Money value of final goods and services produced in one year.
- Circular Flow: Production → Income → Expenditure → Production.
- Output Method: Measures the value of final goods and services produced.
- Income Method: Adds wages, rent, interest, and profit.
- Expenditure Method: Adds spending on final goods and services; all three methods give the same national income.
- Income Method measures National Income by adding all factor incomes earned during an accounting year.
- NDP at Factor Cost includes Compensation of Employees, Operating Surplus, and Mixed Income.
- National Income (NNPFC) is obtained by adding NFIA to NDPFC.
Formula: NNPFC = NDPFC + NFIA - Include only factor incomes. Exclude transfer payments, capital gains, windfall gains, second-hand goods, illegal income, gifts, and household services.
- Include imputed rent and undistributed profits. Avoid double counting.
- The main difficulties are mixed income, non-marketed production, imputed values, unreported income, and lack of data.
- Steps: Identify production units → Classify factor incomes → Calculate NDPFC → Add NFIA to get NNPFC.
- Measures national income from the demand (expenditure) side of the economy.
- Based on the principle that National Income = National Expenditure.
- GDPMP = C + I + G + (X − M) is the basic expenditure equation.
- NNPFC = GDPMP − Depreciation − Net Indirect Taxes + NFIA gives National Income.
- Exports are added and imports are deducted to measure domestic production.
- Only final expenditure is included to avoid double counting.
- In India, national income is mainly estimated using a combination of the Output Method and Income Method, while the Expenditure Method is used less due to practical difficulties.
Concepts [9]
- Macroeconomics
- Two Sector Model of Circular Flow of National Income
- Gross and Net Domestic Product at Market Price
- Gross National Product at Market Price
- Net National Product (NNP)
- Circular Flow of Income and Methods of Calculating National Income
- Methods of Measurement of National Income
- Income Method
- Expenditure Method
