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Macroeconomic NCERT | Marathon Session – Free PDF Download

 

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 – 16th June of 1723
  • Died 17th 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

  1. USA
  2. United Kingdom
  3. Ireland
  4. 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 –
  1. Consumption Goods
  2. 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
  1. By the household
  2. By Firms
  3. 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:

  • (i) Wages: It is the largest component of national income..
  • (ii) Rents (iii)Interest
  • (iv) Profits
  • (v) Mixed Income

Income Method

  • So under this method GDP is the sum total of the income that flows in the economy.
  • GDP= wages + rent + Profit+ interest.

 

 

 

Indian Economy | Free PDF

 

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