Introduction to Macroeconomics

Lesson: Introduction to Macroeconomics

Lesson Developer: Dipavali Debroy
College/Department: SGGSCC, University of Delhi

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 Introduction to Macroeconomics

Table of Contents
1.Learning Outcomes
2.Introduction
3. Evolution of the Subject
4. Positive Economics and Normative Economics - Methodology
5. Art or Science
6. Scope of Economics - Related Subjects
7. Models and Hypotheses
8. Macroeconomic Variables
9. Laws of Economics
10. Market, Equilibrium, Demand, Supply
11. Markets in Macro-economics
12. Concept of Aggregate Demand and Supply
13. Closed Economy and Open Economy
14. Partial and General Equilibrium Analysis
15. Static and Dynamic Equilibrium
16. Short-Run and Long-Run Equilibrium
17. Nobel Prize in Economics
18. Summary
19. Exercises
20. Glossary
21. References
22. Activity

1.Learning Outcomes

After you have read this chapter you should be able to define Micro-
Economics, Macro-Economics, Market, Demand, Supply, Equilibrium, Partial
and General Equilibrium, Static and Dynamic Equilibrium, Long Run and
Short Run, understand the central problems of an economy, identify
variables, constants and parameters, real and nominal variables,
differentiate Micro-Economics from Macro-Economics, the scope of the
subject of Economics, apply the knowledge of basic Economics

Value Addition:
Focus of the Section
Topic Economics
This section is to make you aware of what Economics is.
The purpose of this section is to make you familiar with the various
Definitions of Economics, the Evolution of the subject, its Scope,
Methodology, Tools and Basic Concepts.

2.Introduction

Macro-Economics is the branch of Economics that studies economic issues in

aggregative and overall forms, looking at the broad picture. In contrast, Micro-
Economics is the branch of Economics that studies economic issues in minute and
individual details , as if under a microscope.

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 Introduction to Macroeconomics

The word Macro and Micro come from the Greek words macros ( long or huge) and
micros (small).
As for Economics, there are two basic definitions.

Economics

According to the famous economist Alfred Marshall, Economics is the study of

human beings as they go about their everyday life.
To quote from Marshall’s Principles of Economics (1890, "a study of mankind in the
ordinary business of life; it (Economics) examines that part of individual and social
action which is most closely connected with the attainment and with the use of the
material requisites of wellbeing. Thus it is on one side a study of wealth; and on the
other, and more important side, a part of the study of man."
Lionel Robbins has drawn our attention to another aspect and defined Economics as
the study of choice under conditions of scarcity.
"Economics is a science which studies human behavior as a relationship between
ends and scarce means which have alternative uses."
Productive Resources ( land, labour, capital goods such as machinery, technical
knowledge) are scarce or limited and the resource applied to the production of a
certain commodity or service is unavailable for the production of another alternative
one. But human wants for the Consumption of goods and services ( cereals and
pulses, meat and fish and poultry, vegetable, clothes, woolens, houses, roads, cars,
railways, airplanes, books, theatre , film, television and countless others) are
unlimited, and come from numerous members of the society .Economics is the study
of how people can choose to use the scarce or limited resources to produce various
good and services and distribute them to various members of society for their
consumption.
Any society faces three fundamental and interdependent economic problems:
1. What to Produce and How Much of them
2. How to Produce, that is, by whom and by what resources and technology
3.For Whom to Produce, that is, how is the total amount of production in the
society to be distributed among its members.
Economics helps us in analyzing and understanding these problems.

3. Evolution of the Subject

Etymologically, the word Economics derives from the Greek word oikos ( house) and
nomos ( management).
But since the second half of the 17th century, the word Economics has come to be
used in the wider context of a whole country or nation rather than the household.
Adam Smith is known as the `father’ of the subject of Economics. His book An
Inquiry into the Nature and Causes of the Wealth of Nations, first published in 1776,
is the first-ever treatise on Economics . Smith’s concern was about nations or
countries, that is, it was a Macro-type concern, although the term Macro was not in
use then.
Later T.R. Malthus, David Ricardo , and J.S.Mill wrote important treatises on the
subject, taking the same overall perspective and sweeping generalizations taking
long-run perspectives. They are known as Classical economists and have also been
described as Magnificent Economists because they dealt with big issues on a broad
background. One of the tenets of Classical economists was that in the long run there
is no unemployment in the economy. Jean-Baptiste Say (1757—1832), a French
economist, stated that “products are paid with products” which came to be popularly
interpreted as ‘Supply creates its own Demand.” Given sufficient time, imbalances in

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 Introduction to Macroeconomics

the economy will be smoothed out and people, or governments, need not be worried
about them. This was the basic standpoint of the Classical economists and is known
as the “Say’s Law”.
While the Classical approach prevailed throughout the 19 th century, a Neo-
Classical approach came to be formed towards the end of the 19th century.
economists began to study economic issues on a more specific and individual level. It
concentrated on how the price and quantity of specific goods (and services) were
determined in the market though a rational balancing of their `marginal’ costs and
benefits (`utilities and productivities).Foremost among these Neo-Classical
economists( also described as `marginalists’) were Menger, Jevons and Alfred
Marshall. It is their work that constitutes the foundation of Micro-economics, where
the individual consumer or producer was the unit concerned, not the entire national
entity.
Although the Classical economists had been concerned with the nation or the country
as a whole, and therefore are more Macro than Micro, in approach, Macro-economics
as a subject developed only after the Great Depression. On 23 October 1929, the
New York Stock Exchange ( at Wall Street) crashed. Many rich and successful people
lost their all and took their own lives in desperation. Widespread unemployment
followed the closing down of production units. Both employers and employees felt
the impact. Not just America or Europe but their colonies too suffered. It was a
global crisis.
It was then that John Maynard Keynes came up with his analysis of the
phenomenon in terms of Aggregate Demand falling short of Aggregate Supply and
emphasized the role of the Government of a country in stepping up its own
expenditure in order to correct that shortfall or gap.
His analysis laid the foundation of Macro-Economics. Later John Hicks, Milton
Friedman, James Tobin, A.W.Phillips, Edmund Phelps, Robert Lucas, T.J. Sargent,
Robert Barros and others have contributed to the subject of Macro-Economics,
bringing in the roles of Money and Expectations. Lucas, Sargent and Barros are often
called the New Keynesian economists.
To sum up in the words of Paul A. Samuelson, “Macroeconomics deals with the big
picture – with the macro aggregates of income, employment, and price levels. But do
not think that microeconomics deals with unimportant details. After all, the big
picture is made up of its parts.” ( Economics, 7th edn, p 362). So he concludes that
there is no essential opposition between the two.
Traditionally and in most universities, a course in Micro-Economics is taught prior to
one in Macro-Economics.

4. Positive Economics and Normative Economics - Methodology

According to economists like Milton Fieldman ( who wrote Essays in Positive

Economics, 1953), economists should not pass moral strictures or make `value
judgements’. In other words, Economics should just `posit’ or be Positive, and not
set any norms of behaviour to be followed by individuals or organizations.
Economics can provide policy prescriptions, but expressed in an objective way.
It would be a normative statement to say: ‘If there is economic depression, the
government of the country should increase its consumption expenditure’.
But it is permissible to make it in the following positive statement: ‘If there is
economic depression and the government increases its consumption expenditure, the
depression is likely to get corrected’.

5. Art or Science ?

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Is Economics a science or an art? Etymologically, a science ( derived from sci, to

know) provides theoretical knowledge while an art ( derived from artem, to do)
teaches us how to practice or do it. Now Economics teaches us all about, say, why
there may be unemployment in the economy.. But it does not teach him how to
generate employment From this point of view, it is a science rather than an art.
Again, the recent theoretical developments in Economics have made so much use of
Mathematics, that a sound knowledge of Mathematics is essential even for its
undergraduate Honours course, e.g., in Delhi University itself. This takes Economics
closer to being a Science subject.
However, the hallmark of science is experiment. A science must provide room for
controlled experiment so as to verify its hypotheses. But human beings cannot be
subjected to experiments just to find out the effects of , say, fiscal or monetary
policies. In this sense. Economics definitely belongs to the Humanities stream.
Most universities, regard Economics as an art and award BA and MA degrees in it.
However The London School of Economics does, in fact, award BSc and MSc degrees
to its students of Economics.
Indeed the scope of Economics is so wide that it is difficult to categories it as either
science or art. It is perhaps a mixture of both.
As Paul Samuelson put it, “ Not only is Economics at once art and a science,
economics as a subject can combine the attractive features of both the humanities
and the sciences”(Economics, 7th edn, Chapter 1,p 4).

A Social Science

Even if we use the term science to describe Economics, we must remember that it is
a Social Science. It does not study individuals in isolation, doing everything by
oneself. It studies individuals as members of a society or nation or Economy.
An economy is the same as country or society but considered only in its economic
aspects. Every society or country has numerous people engaged in activities of all
sorts. Some work in the fields, some work in factories, and yet others in offices.
Some perform agricultural activities, some industrial, and some do services. Those
who are in agriculture need to get industrial products and, say, banking services.
Those who are factory-workers, say, need to get hold of foodstuff, and use some
kind of transport services. The people engaged in the services sector need both food
and clothing . Thus all the three sectors with their separate kinds of activities need to
have relations. All the people of an economy need to act as well as inter-act. This
they do by exchanging the products of their various activities in various markets.
The epithet `Social’ covers this aspect of the subject of Economics.
However, for analytical purposes, Economics sometimes uses the concept of a
Robinson Crusoe Economy, or an economy consisting of a single person performing
all the economic activities by himself. Robinson Crusoe is the title of a book written
in 1719 by Daniel Defoe based on the life of Alexander Selkirk who was marooned on
an island and survived all by himself for 28 years. A Robinson Crusoe Economy is
thus a theoretical concept where the economy has a singleton member.

6. Scope of Economics - Related Subjects

Economics has a wide scope and has connections with various subjects.
Mathematics and Statistics are necessary for the study of Economics. Mathematics
helps economists to analyze economic realities, to and derive conclusions from
them. Statistics aids this process by systematizing the economic realities as data and
inferring from them by accepted statistical tools. In fact, the application of Statistics
to Economics had led to the development of a relatively new subject: Econometrics.

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 Introduction to Macroeconomics

It helps in empirical study and making projections both into the past and the future.
Without a sound mathematical base, it is next to impossible to cope with academic
Economics. However, to have an general awareness of the economic occurrences of
the world, basic intelligence will do. To quote Samuelson, “ Although every
introductory textbook must contain geometrical diagrams, knowledge of
mathematics itself is needed only for the higher reaches of economic theory. Logical
reasoning is the key to success in the mastery of basic economic principles, and
shrewd weighing of empirical evidence is the key to success in mastery of economic
applications.”( Economics, Ch 1. p 5)
Actually, the earlier term for Economics was Political Economy. Several universities
still have a common department for Politics and Economics. Political Science is an
useful subject to supplement a course in Economics. History is also a subject that
has a close connection with Economics. Economic History is a compulsory paper in
every course in Economics, undergraduate as well as post-graduate. Several
universities offer a post-graduate course in Economic Geography.
In recent times several subjects or courses have emerged from Economics, e.g.,
Commerce, Business Economics, Business Administration, Business Management.
While based on the fundamentals of Economics, they have their own distinctive
course contents. But both Papers on Micro-Economics and Macro-Economics figure in
all of them.

7. Models and Hypotheses

Economics has to deal with a complex mass of realities. So it sometimes puts them
into a simplified framework or Model. A Model is a theoretical construct that
represents economic realities by a set of inter-related variables. These relationships
can be logical or quantitative. But putting them in a Model helps economists to
analyze realities better and even made future predictions.
Economist often posit or propose explanations for economic phenomena. These are
known as Hypotheses. A hypothesis is not a theory. Only if a Hypothesis is verified
or found to be true, can we call it a Theory. To be verified or falsified, that is tested,
a hypothesis has to be framed in a certain way. Such a hypotheses is called a
Scientific hypothesis. Sometimes economists have no alternative but to take a
certain hypothesis to be true, and proceed on the basis of it. Such a hypothesis is
called a Working hypothesis. Statistics and Econometrics are the tools used in
verifying a hypothesis.
Economics is a complex subject, rooted in the reality but often analyzed through
abstract thinking and mathematical methods.
As symbols of that reality, Economics makes use of the Mathematical concepts :
Variables, Constants and Parameters.
Variables are entities that take different values. They are usually symbolized by x, y ,
z. and take values positive and negative ranging from minus infinity to plus infinity.
Constants are entities that , for one particular analytical exercise, take one
particular value. They are usually symbolized by a, b, c .. or alpha, beta, gamma.
And again, can take any value between plus-minus infinity but can take only one
such value during a particular analysis.
Parameters are entities that can be assigned different values for different variants of
an exercise but in any one particular variant, can take only one such value.
Variables can be dependent or independent.
An Independent variable takes on values by itself.
A Dependent variable takes on values according to or as per the Independent
variable. This relation of dependence between the Independent and the Dependent
variable(s) is known as a functional relationship, or simply, a Function. It means that

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 Introduction to Macroeconomics

the Dependent variable functions according to the Independent variable. It is a most

powerful tool in the sturdy of Economics, both Micro and Macro. E.g.,

C = f(Y) is the Consumption Function which says that consumption C depends upon
National Income Y.

In Economics, a Function may involve more than one variable. Usually, several
variables are interlinked. To examine whether any two have a causal ( cause-effect)
relationship, it may be necessary to rule out others that complicate the issue or get
in the way of analyzing it. This is done under an assumption known as the ceteris
paribus assumption.

8. Macroeconomic Variables
Important variables in Macro economics are National Income, Disposable Income,
Consumption, Saving etc. Sometimes the ratio of two variables may be regarded as
a variable in itself, e.g., Consumption/National Income is a separate variable, viz.,
the Average Propensity to Consume. Variables may be Real or Nominal.
Nominal variables are those expressed in terms of money, usually in terms of the
current prices. Real variables are those expressed in real terms, or constant prices,
which means that they are `deflated’ or corrected for possible fluctuations in the
price level. The Deflator used is usually the General Price Level.

Variables may be Stocks or Flows.

A Stock variable measures the quantity of the variable at a particular point of time.
E.g., the capital a businessman has got on such-and-such date. A Flow Variable
measures the quantity of a variable over a period of time. E.g., the investment he
has made in his business in that year or the profit he had made in course of it.

Some important Macro-economic variables are as follows:

National Income ( usually symbolized by Y)is the sum total of the money measures
of goods and services produced in a country during a year. It is also the Net
National Product at Factor cost, i.e., the sum total of income generated by an
economy during a year. It is a flow variable.

Gross Domestic Product (GDP) is the sum total of the money measures of the
goods and services produced during a year within the national boundaries of that
country.

Personal Income is that part of the National income which is actually received by
the persons or households of the economy. Corporate Income Taxes, Undistributed
Corporate Profits, Savings of Non-Departmental Enterprises, Income from Property
and Entrepreneurship of Government Administrative Departments and Social
Security contributions do not go to persons or households. They have to be deducted
from the National Income to get at its personal component.
On the other hand, Transfer Payments (pensions, unemployment doles), though they
are not earned income, add to the amount that the individuals and household have
to spend. They have to be added to the National Income so as to get at its personal
component.
Thus,
Personal Income = National Income - Corporate Income Taxes -Undistributed
Corporate Profits - Savings of Non-Departmental Enterprises - Income from Property

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and Entrepreneurship of Government Administrative Departments - Social Security

contributions + Transfer Payments

Disposable Income(Yd) is the total of income that is actually available to the

individuals and/or households to be `disposed of’, i.e., spent on consumption and
the rest saved. Individuals and households have to pay Direct Taxes ( e.g., the
Income Tax).These have to be deducted from personal income in order to arrive at
the personal Income.
Disposable Income = Personal Income – Direct Taxes

Consumption (C ) refers to the aggregate amount of private consumption in the

economy. It includes Durable goods ( long-lasting goods like houses and vehicles),
Non-Durable goods (lasting for shorter durations , e.g., eatables, clothes ) and
Services (e.g., banking, travel, consultancy, entertainment).
Consumption is a function of National Income.
C=f(Y).
More specifically, Consumption is a function of Disposable Income.
C=f(Yd).
Savings ( S) refers to the aggregate amount of private saving in the economy, i.e.,
S = Y – C.

Investment (I) includes produced means of production that make an addition to

the country’s capital. While capital is a `stock’ variable ( i.e., a quantity measured at
a point of time), investment is a `flow’ variable’ ( a quantity measured over a period
of time).
Investment has three component: Business Fixed Investment( purchases made by
firms, of new plant, machinery and equipment), Residential Investment( purchases
of houses by householders and others) and Inventory Investment ( increase in
stocks held by firms of inputs as well as of their own outputs). Investment may be
autonomous or dependent upon the interest rate.

The interest rate is the rate at which loan able funds are leant out in the economy.
In any actual economy there are several rates of interest prevailing simultaneously.
But for theoretical purposes, we take it that uniform interest rate (r or i) prevails.
The Nominal Interest Rate is deflated by he Price level to get the Real interest Rate.
Government Expenditure(G) refers to all purchases made by all governmental bodies
in an economy, e.g., on provision of infrastructure, public transport, administration,
defence, space research. G is generally taken to be autonomous.

Net Exports (NX) refer to the value of goods produced in an country and exported
abroad (X) after the deduction of the value of goods and services produced abroad
but imported (M) by the country. That is, NX= X-M.

A most important equation in Macro-economics is:

Y= C+I+G+NX.

In Macro-economics prices are not taken as individual prices of individual

commodities (px,py etc). Instead, an Index Number of all prevalent prices is
constructed to represent the price level in general (usually symbolized as P).
When any Nominal Variable is divided by this price level P, one gets the Real
variable. Thus

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Nominal Gross Domestic Product (GDP)

-------------------------------------------------- = Real GDP
General Price Level (P)

Or,
Nominal GDP
GDP Deflator = ---------------------------
Real GDP

The rate at which the General Price Level increases is known as the Inflation rate.
Thus

Pt – Pt-1
Inflation rate = ------------
Pt-1
where t refers to the present time-period and (t-1) the previous one.

Money (M) is an important variable in Macro-economic analysis. An old rhyme says:

Money is a matter of functions four:
A medium, a measure, a standard , a store.
Earlier Money was regarded only as a medium of exchange or transactions. Keynes
brought out how people can speculate with it as well as make transactions. The
definition of money is getting wider and wider. When Money supply is deflated by the
price level, the resulting ratio M/P is called Real Balances.

Another crucial variable in Macro-economics is the Unemployment rate. The

Labour force (L) of an economy is the total number of employed (E )and unemployed
(U) people in it. Then the Unemployment rate = U/L.

9. Laws of Economics

The Classical and Neoclassical economists often used the term `law’ to describe the
tendencies that they observed in functioning of the economy or society. The Law of
Demand and the law of Diminishing Returns in Micro-economics and Say’s Law , and
Okun’s law in Macro-economics are just a few examples. In no sense are these
binding or enforceable or universal laws.
However, law in the usual sense of the term does have a close connection with
Economics. It is a basic idea of neo-Classical Economics that , for the smoothing
functioning of the market, there must be law and order in the country. The law of the
land influences its economic performance.

10. Market, Equilibrium, Demand, Supply

The word Market comes from Latin mercatus which meant trading, buying or selling
at an appointed time or place. A market is not necessarily a marketplace. It is a
conjunction or coming-together of buyers and sellers. The haat, bazaar and mandi
, the shop and the mall are markets. But on line or telephonic sale and purchase ,
which is quite common these days, are also market transactions.
The distinguishing feature of the market is that market transactions are exchanges
, usually performed through the medium of money. The seller ( who is sometimes
though not always the producer) of certain commodities/ services brings them to the
market and offers certain quantities of quantities of them at a certain price . He

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 Introduction to Macroeconomics

thus supplies them in the market. The (prospective) buyer comes to the market
wanting to get certain commodities/ services at a certain price. He thus demands
them in the market. If the demand of the buyer and the supply of the seller match at
a certain configuration of price and quantity, the transaction takes place. If not, it
does not.
The transaction is thus both a sale and a purchase. It is sale from the point of view
of the Seller(producer) , that is, from the Supply side. It is purchase from the point
of view of the Buyer, that is, the Demand side.
The transaction configuration is known as the Equilibrium.
In Latin, aequus means equal and libra means scales or balances.( That is why in the
Zodiac, the sign Libra is shown by a pair of scales). When the two scales on the two
sides of a scales instrument hang steady at the same level, there is aequilibrium, or,
in English, Equilibrium.
The word Demand is from Latin demandare which means to claim or commission.
Supply is from Latin supplere, to fill up or complete.
In the context of Economics it was Adam Smith in 1776 who first used them as
corresponding concepts. Marshall has compared them to the two blades of a pair of
scissors. Just as the scissors cannot work without either of the two blades, Market
Equilibrium cannot be determined without reference to both Demand and Supply.

11. Markets in Macro-economics

Markets in Macro-economics are distinct from those in Micro-economics in the sense

that they are markets for Aggregates, not for individual items being demanded and
supplied by individuals.
Broadly , three such markets are distinguished in Macro-economics:
Goods Market – where goods and services are bought and sold, not specific goods
but the Gross Domestic Product
Labour Market – where workers are employed and remunerated, not individual
workers but the Labour Force as a whole
Money market or Financial Market – where money and financial resources are
bought and sold.
The Labour Market is studied separately, but the Goods Market and the Money
Market are brought together so as to yield an overall equilibrium defined in terms of
the National Income and the Interest Rate.

In addition there is the foreign or International market when the economies

concerned are open and trading with each other.

In Macro-economics, the overall equilibrium of the economy

12. Concept of Aggregate Demand and Supply

Aggregate Demand and Aggregate Supply are two important concepts of Macro-
economics.
Aggregate Demand refers to the overall or national demand for goods and
services. It comes not from individual persons, households or even groups, but from
all the citizens taken together.
Similarly, Aggregate Supply refers to the overall or national supply of goods and
services , or the national income it generates.
When Aggregate Demand equals Aggregate Supply , there is equilibrium in the
Macro-economic sense, in the overall or national market for goods and services, or
simply, the Goods Market. When Aggregate Demand falls short of Aggregate Supply,

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there is Depression. When Aggregate Supply falls short of Aggregate Demand, there
is Inflation. Inflation, Depression and Unemployment are fundamental concerns of
Macro-economics.

13. Closed Economy and Open Economy

Macro-economic Theory distinguishes between the Closed Economy and the Open
Economy.
A Closed Economy has no ( or negligible) interactions with the rest of the world. All
production, consumption and market exchange is internal and in the same domestic
currency. There are no Exports and Imports and Net Exports are zero. There is no
Foreign Investment in other countries or by foreign countries, and Net Foreign
Investment is zero as well. It is in this Closed Economy framework or model that the
Goods market and Money Market are analyzed to yield an overall equilibrium.
An Open Economy has transactions with the rest of the world. It exports and
imports, borrows and lends. It invests abroad and other countries invest in it. All this
involves the use of at least two, if not more, currencies.Net Exports, Net Foreign
Investment, and the Exchange Rate are thus important elements in Macro-
Economics.

14. Partial and General Equilibrium Analysis

In Economics, a Function may involve more than one variable. Usually, several
variables are interlinked. To examine whether any two have a causal ( cause-effect)
relationship, it may be necessary to rule out others that complicate the issue or get
in the way of analyzing it. Then what is done is to make an assumption known as the
ceteris paribus which means ‘other things being the same’. It qualifies or conditions
a causal relationship between an independent variable and the dependent variable
that depends on it or functions according to it. In Latin Ceteris means `other things
or the rest’ and Paribus means ` at par or equal’.
Partial Equilibrium Analysis is a study of economic occurrences where a causal
relationship is studied between two variables, keeping other related variables
constant or fixed under the assumption of ceteris paribus‘other things being the
same’ However it lets only one market (at a time) be in equilibrium and may not
capture the complexities of the real world. General Equilibrium Analysis lets the
inter-dependence of various variables play themselves out. Prices of Commodities
are determined simultaneously and mutually. All markets are simultaneously in
equilibrium. Macro-economics , as of now, uses the Partial Equilibrium analysis
rather then the General Equilibrium.

15. Static and Dynamic Equilibrium

In a static equilibrium all quantities have unchanging values but in a dynamic

equilibrium various quantities may be growing , only their ratios being unchanged.
Comparative Statics compares two static cases of equilibrium. Comparative
Dynamics compares two dynamic equilibria.
Macro-economics uses both kinds of analysis. Foe example, it includes the study of
the Dynamic Multiplier and the Dynamic Aggregate demand Curve.

16. Short-Run and Long-Run Equilibrium

A run is a length of time, not exactly specified. If all factors of production can be
varied during a length of time, it is called the Long Run. If some variables can be

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varied but others cannot, i.e., are fixed, it is the Short Run. A Short Run
Equilibrium, one that holds in the Short Run, is achieved in Macro-economics if
Aggregate Demand is equal to Aggregate Supply. But if there is a gap, there is dis-
equilibrium leading to unemployment, depression or inflation . The Classical
economists held that in the Long Run the dis-equilibrium situation will correct itself.
Wages and prices will adjust and this variable or flexible character will ensure
equilibrium in the Long Run.
It was precisely against this attitude that Keynes wrote: “The long run is a
misleading guide to current affairs. In the long run we are all dead. Economists set
themselves too easy, too useless a task if in tempestuous seasons they can only tell
us that when the storm I past the ocean is flat again” ( A Tract on Monetary Reform,
1923, Ch 3).
Wages are not so flexible in the Short Run, and this `sticky’ character of the wages
may stand in the way of restoring equilibrium in the Short Run. Keynesian analysis is
Short Run analysis.
However modern Macro-economics also includes
Study of Inflation and output in the long Run, using Dynamic Aggregate Demand
Curve and Dynamic Aggregate Supply Curve.

17. Nobel Prize in Economics

The highest recognition for economists is the “Sveriges Riksbank Prize in Economic
Sciences in Memory of Alfred Nobel” , first awarded in 1969. Among the important
Macro-economists who have received it are:
Robert Lucas in 1995, James Tobin in 1981, E.S.Phelps 2006, Friedman 1976 and
Robert A Mundell in 1999

18. Summary
 Economics studies human choice among alternative uses of scarce
resources.
 It is a Social Science has a wide scope. It aids the understanding of
the central problems of an economy.
 Demand and Supply of goods and services determine their
Equilibrium Price and Quantity in the Market.
 Aggregate Demand and Aggregate Supply determine macro-economic
Equilibrium.
 Markets can be of various types and forms.
 Equilibrium can be Partial and General, Long-Run and Short-Run,
Dynamic and Static.

19. Exercises

Short Questions

1. How would you define Macro-Economics?

2. Name some basic concerns of Macro-economics.
3. What does a function mean ?

Long Questions

1. What were the ideas and beliefs of the Classical economists?

2. What are the main ideas of Keynesian economists?

Institute of Lifelong Learning, University of Delhi

 Introduction to Macroeconomics

3. Explain the concept of Market and distinguish between different types of

Markets in an economy.
4. Define some important concepts of Macro-economics.

20. Glossary

Variables
Constants
Hypothesis
Model
Demand supply
Market
Equilibrium
Static Equilibrium
Dynamic Equilibrium
Long Run
Short run
General equilibrium
Partial Equilibrium
Consumption
National Income
Gross Domestic Product
Disposable income
Money
Consumption
Savings
Net Exports
Interest rate

21. References

1. Economics, Paul A Samuelson

2. Macroeconomics, N. Gregory Mankiw

22. Activity

From newspaper and official statistics, find out the National Income, Inflation Rate
and the Unemployment Rate for the previous two years.
Talk to some householders as well as factory workers about what they feel about
Inflation and Unemployment.

Quiz

1. What was the nationality of J.B.Say ? (English, French, Canadian)

2. Which economic event led to the development of Keynesian economics ? (
Bolshevik Revolution, Independence of India, Wall Street Crash)
3. What do Consumption and Savings together constitute? (National Income,
Unemployment, Investment)
4. What is Disposable Income is a component of ?( Exports, National Income,
Consumption)?

Institute of Lifelong Learning, University of Delhi

 Introduction to Macroeconomics

Institute of Lifelong Learning, University of Delhi