Macro Economics
Chapter 1
Introduction & Some basic concepts
Topics to be Covered
(1)Microeconomies Vs Macroeconomics, Types of Goods
(2) Aggregate Consumption Expenditure
(3) Investment, Gross Investment , Net Investment, Planned &
Unplanned Inventory Stock
(4) Depreciation, Stock & Flow , Factor of Income
(5)Intersectoral Flow , Injections & leakages
ECONOMY
A system provides people, the means to work and earn a
living. All organisations like factories, shops, offices, business
enterprises, transporters etc., who are involved undertaking
three economic activities, Production, Consumption and
Capital formation(Investment) are collectively called an
economy.
Origin of Term:-
The word macro originated from Greek makros ‘ large'
whereas the word micro originated from Greek mikros 'small'
John Maynard Keynes is widely regarded as the founding father
of macroeconomics. His work, particularly "The General Theory
of Employment, Interest and Money," published in 1936, laid
the foundation for the study of macroeconomic phenomena like
unemployment, inflation, and economic growth.
Economics
Microeconomics Macroeconomics
Study Of Economoic Issues/ Study Of Economoic Issues/
Problems at a individual level. Problems at a Problem as a whole
ForE.g : Individual Demand For E.g: Aggregate Demand
Individual Supply Aggregate Supply
Individual Income National Income
Topic: MICROECONOMICS & MACROECONOMICS
BASIS MICROECONOMICS Macroeconomics
Definition Microeconomics studies the behaviour Macroeconomics studies the
of individual consumers and firms. behaviour of the entire
economy based on aggregate
demand and factors.
Deals in Individual economic variables Aggregate economic variables
Tools Aggregate Demand and
Demand and Supply
Aggregate Supply
Significance Product price determination through Maintaining stability in the
prices of factors of production in the general price level and
economy. resolving major problems of
the economy such as inflation,
deflation, reflation, poverty
and unemployment.
Scope of Macroeconomics
The scope of macroeconomics is quite broad and covers a wide range of
topics related to the functioning of national and international economies.
The scope of macroeconomics includes the following:
National Income and Output: Macroeconomics studies the
measurement and analysis of national income and output, including Gross
Domestic Product (GDP), Gross National Product (GNP), and other
aggregate measures of economic activity.
Unemployment: Macroeconomics examines the causes and
consequences of unemployment, as well as the policies that can be used to
reduce unemployment rates.
Inflation: Macroeconomics studies the causes and effects of inflation, as
well as the policies that can be used to control inflation rates.
Economic Growth: Macroeconomics examines the factors that contribute
to long-term economic growth, including technological progress,
investment, and human capital development.
Meaning of circular flow:-
Circular flow of goods means the flow of goods and
services or the flow of money across different sectors of an
economy.
Types of Circular Flow:
1. Product Flow/ Real Flow:- It is the flow of product
& service across different sectors.
2. Income/Money Flow:- It is the flow of money
across different sectors.
Circular flow of Income in a Two Sector
Economy:
(I)Features of House Hold:-
• They owner of all production factors
• Their total income includes wages, rent Interest & profit.
• They household sector provides factors services.
(II) Features of Business Sector:-
• Firm sector utilizes those services
• They payment for factor services.
Topic:Difference Between Real flow & Money Flow
Basis Real flow Money Flow
Meaning It is the flow of goods and services It is the flow of money
between firms and households between firms and
households
Kind of It involves exchanges of goods and It involves exchange of
exchange services money
Difficulty in There may be difficulties of barter There is no such difficulty
exchange system in exchange of goods and in case of money flow.
services
Topic: Types of Goods produced in the Economy
Types of Goods
Intermediate goods
Final goods
Consumption Goods Capital Goods
Final Goods:-
Final goods are products that are ready for direct consumption
or use by end-users,They are the end result of production
processes and are not further processed or used as inputs in
other production cycles. Essentially, final goods are the goods
that ultimately satisfy consumer needs.
For example, television, milk, ready to eat foods, medicines,
and more.
Intermediate Goods:-
Intermediate Goods are those goods which have not crossed the
boundary line of production, Value is still to be added to those goods,
and which are yet not ready gor use by their final users.
E.g.:- shirt purchase for resale
Topic: Final Goods & Intermediate Goods
Final Goods Intermediate Goods
These are the goods which have crossed These are the goods which have not
the boundary line of production. It crossed the boundary line of
means it is out of process of production production. It means production process
is still to be done.
These goods are not used as raw These goods may be used as raw
material for the production of other material for the production of other
goods goods.
No value is to be added Value is yet to be added
These goods are not resold for profit These goods are resold for profit
Topic: Consumer Goods/Consumption Goods
Cosumer goods (consumption goods) are those goods which
are directly used for the satisfaction of human wants. These
are not used for the production.
(1) Durable Consumer Goods:
Goods which are used for several years & are of relatively
high value.
For E.g:- TV, Car Scooter, Washing Machine.etc
(2) Semi- Durable Consumer Goods:
These are the goods which can be for a period of one year
or slightly more.
E.G :- Clothes, Crockery etc
(3) Non Durable goods/Single use Consumer Goods:
These are the goods which are used for a single time
E.g:- Bread, Milk etc
(4) Services:
Which satisfies human wants
E.g: Services of Doctor, lawyer, Domestic Servants etc.
Topic: Capital Goods
These are the goods which are used in the process of
production for several years & which are high value.
Use of these goods leads to depreciation.
For E.g : Plant & Machinery, Tractor Etc.
Topic: All Machines are not Capital Goods. Explain
Capital goods are those goods which are of very high value
and which help in doing production. But machines Like
washing machine is not a capital goods as it does not help in
production. It is only an durable goods not a capital good.
Topic:Aggregate Consumption expenditure
Consumption Expenditure by house holds
+
Consumption Expenditure by Government
+
Consumption Expenditure by Non- profit
Organizations ( like NGO,Temples, Gurudwara,
Mosques Etc
Topic:Investment / Capital Formation
Increase / Change in stock of capital is known as Investment / Capital
formation
I = ∆K
Investment
Inventory
Fixed
Investment
Investment
Fixed It refer to increase in the stock of fixed assets of the
Investment producer during an accounting year. It is also known
as fixed capital formation
Fixed Investment:
Stock of fixed assets with the producer at the end of accountin year
(-)
Stock of fixed assets with producer at the beginning of accounting year
=
Increase in the stock of fixed assets with the producer accounting year
Significance of fixed investment
• Raise production capacity
• Higher level of output in the economy
• Growth of the Economy
Inventory Raw Material
Investment
Stock Semi Finished Goods
Finished Goods
Increase / Change in inventory stock during an accounting year is called as
inventory Investment.It is also known as Inventory Capital Formatiom
Significance of maintaining Inventory stock of Raw
material
• Uniterrupted supply of inputs for their output
• Producer can avoid day to day purchase from the market.
• Uncertainty of market can be avoided.
Significance of maintaining Inventory stock of Finished Goods
• Producer can meet/ fulfill the potential demand for their final
product.
Topic: Planned Inventory stock & Unplanned Inventory stock
Planned Inventory Stock : it refers to desired inventory stock.This is
maintained by the producer with a view to maximising their profits.
Unplanned Inventory Stock : it refers to undesired inventory stock.It
arises because demand for the product turns out to be lower than
expected. Accordingly, Unplanned inventory stock leds to losses.
A.Injections:-
Governments spending investment export are important
injections into the circular flow. Increase in these variables raise
the level economic activity in the economy of circular flow.
B. Leakage:-
Savings, taxes, and imports are the important withdrawals from
the circular flow. Increase in these variables reduces the level of
economic activity in the economy of circular flow.
Topic: Depreciation / Consumption of fixed assets
Reduction in the value of fixed assets
or
Loss in the value of fixed assetd due to Continuous use
Depreciation
Expected Unexpected
Obsolescence Obsolescence
Occurs due to: Occurs due to:
• Change in technology • Natural
• Change in demand Calamities(earthquake,flood,fire)
• Fall in the market value of assets due
to recession in the economy
Depreciation Reserve fund helps to cope Insurance helps to cope up with
up with expected obsolescence wnexpected obsolescence.
Depreciation Reserve fund are used for Also known capital loss.
the replacement of fixed assets.
Topic: Stock and Flow
Stock
A Stock is a quantity measured at a particular point of time
E.g: On january 1,2025,there may be RS. 20,000 in bank account.
Capital and Quantity of money are notable examples of stock variables.
Flow
A Flow is a quantity measured over a specified period of time.
E.g:You may getting RS. 1500 per month as pocket allowance.
Income, expenditure, production, consumption and interest are notable
examples of flow variables.
Topic: Diffrence Between of Stock and Flow
BASIS STOCK FLOW
Meaning It is meaured at a It is meaured at a
particular point of time particular period of time
Time dimension Stock is not time Flow is time dimensisonal
dimensional as per hour, per week,
per day, per month, per
year
Concept It is static concept It is Dynamic concept.
Example Eg;- Money deposited in Eg;- Withdrawal of
bank money from bank
Classify the following as stock or flow
variables:
(1) Wealth
(2) Expenditure of money
(3) Quantity / Supply of money in a country
(4) Bank deposits
(5) Distance between Delhi and mumbai
(6) Change in the supply of money as on jan.1.2025
(7) Labour force in india as on March 1,2025
(8) Number of births
(9) Income
(10) Interest on capital
(11)Water in the overhead tank
(12) Capital formation
(13) capital
(14) Leakage of water from the overhead tank
(15) population of a country at a point of time
(16) Rice stores in a godown
(17)Sale of rice as on January 1,2025
(18) Speed of a car going from delhi to mumbai
Stock : 1,3,4,5,6,7,11,13,15,16,17
Flow: 2,8,9,10,12,14,18
Classify the following as final good or
intermediate good:
(1) Paper purchased by a publisher
(2) machine purchased for installation in a factory
(3) coal purchased by a factory
(4) books purchased by a book seller
(5) Furniture Purchased by a school
(6) Exhaust fans used for making water coolers
(7) use of electricity to make products
(8) postage,stamps purchased by a consumer
(9) Car purchased by a house hold
(10) Sewing machine purchased by a homemaker
(11) Seeds purchased by a farmer
(12) LED TV purchaed by a dealer
(13) Milk Purchased by a hotel
(14) Soft drinks purchased by a school canteen
(15) Microwave oven purchased by a consumer household
Final Good :- 2,5,8,9,10,15
Intermediate Good:- 1,3,4,6,7,11,12,13,14
Thanks
