Unit 1:NATIONAL INCOME AND RELATED

AGGREGATES:
chapter 1:Some Basic Concepts of
Macroeconomics.
 Learning objectives
➢ State the meaning of macroeconomics
➢ Subjectmatter of macroeconomics
➢ Aggregates of the Economic Systems
➢ Explain the concept of consumption goods,
capital goods, final goods, and intermediate
goods. (Types of goods produced in the Economy)
Background of Macroecomics

 Lord J.M Keynes an eminent economist , has played an

important role in the development of Macroeconomics.
 He is called ‘The father of Modern Macro Economics’.
 He wrote a book on Macroeconomics named “General Theory Of
Employment, Interest and Money” published in 1936.
 Macroeconomics is also called as Income Theory or Income and
Employment Theory.
 https://www.youtube.com/watch?v=kFhoHRMVU2Y&ab_channel
=Korczyk%27sClass
Meaning of Macroeconomics

 Isthe study of the behavior of aggregates covering

the entire economy such as national income, full
employment, Unemployment, aggregate
consumption and aggregate investment,
aggregate demand, aggregate supply, general
price level.
 These are Macroeconomic variables
Aggregates of the Economic system

Aggregate consumption

Aggregate investment

Aggregate demand
Aggregates of the economic system

Aggregate supply

Domestic Income

General Price Level

 Final Goods

SEMI NON DURABLE/ SERVICES

DURABLE SINGLE USE
DURABLE
Capital goods And Consumer Goods
Final goods( crossed the boundary line
of production)
 Intermediate goods They remain within the production
boundary

They have a derived demand

Value of intermediate goods is merged

with the value of final goods

The intermediate goods used up in the same year

are treated as intermediate goods.
If they remain for more than one year than it is
treated as Final goods .
Activity:
Categorise the given items into Intermediate
and Final goods and give reason.
❖ Paper purchased by a publisher
❖ Furniture purchased by a school
❖ Milk purchased by a household
❖ Purchase of rice by a grocery shop
❖ Coal used by manufacturing firms
❖ Computers installed in office
❖ Coal used by consumer household
❖ Mobile set purchased by a mobile dealer
❖ Purchase of pulses by a consumer
❖ Chalks, dusters, etc, purchased by a school.
Exit Task

All Capital goods are producer goods,

But all producer goods are not capital
goods. Why?
CONCEPT OF INVESTMENT(Gross , Net ,
Depreciation) ❖Addition to the capital stock of the
economy
Investment

Gross Net
Investment Investment
Concept of Investment

 Increase in the stock of capital During the year is called investment

 I = K
 This change in capital stock is called as capital formation
 Investments has two components
 Fixed Investment and
 Inventory investment
Need of Investments

 Why fixed investments ?

- Increase production
- Growth and development of the economy
- Increase in the scale of production
- Raises the production capacity of the
economy

-
Why inventory investment?

-unsold /finished goods/semifinished/basic raw

materials
- This stock keeps on varying
- Demand may change
- Ensure uninterrupted supplies of inputs
Depreciation

 Reduction in the value of the asset due to normal wear and tear
 Accidental damages – machinery cannot be repaired
 Expected obsolescence – change in technology
 - Change in Demand of the
consumer
 Is managed through depreciation of reserve fund.
 It is also called as consumption of fixed capital /current
replacement cost/ replacement cost of fixed capital/ Capital
consumption allowance
Depreciation of reserve fund

 The provision made to replace the fixed investment

 For e.g Investment in a machinery cost 20,00000 say the
life of the machinery is 10 years than how much fund
should be kept aside every year?

 Why it is necessary to maintain this fund.

How would a producer cover unexpected Obsolescence
Significance of Depreciation Fund

 Worn out machinery can be replaced

 capital stock of the produces falls
 There is fall in the production capacity of the producer
 Level of output falls
 Level of income ,employment also falls
 ‘Economic slowdown’
 Low level of equilibrium trap
Gross Investment

The goods produced in the economy during one year. For e.g
say a producer produces 20 thousand machineries.
Gross investment = Net Investment + Depreciation ( two
components of gross investment)
Two functions of Gross investment
1. Add to the existing capital stock and (Net Inv)
2. Replacement of the existing capital goods (Depreciation)
Net investment

 Net investment is the actual addition made to the capital

stock of the economy in a given period of time
 Helps in increasing the scale of production
 Level of output increases
 Sign of growth and development
 Generates opportunities of employment
 Net capital formation reduces unemployment of labour
 CONCEPT of Stock and Flow:

 Some macroeconomics variables relate to Stock while

others relate to flow.
 Meaning of Stock: Is a variable which is measured at a particular
point of time. E.g Population of India as on 31.03. 18, Total number of
Maruti cars in Delhi, Money supply in circulation, Quantity of wheat
stored, National wealth.
 Meaning of Flow: is a variable which is measured over a period of
time. E.g Number of births during a year, Maruti cars manufactured
during January, 2018, Expenditure or transactions in money, Quantity
of wheat produced.
Difference between stock and flow
Activity: Classify the following into
Stock and flow variable.
➢ Amount of bank deposits as on 31.05. 2017
➢ Losses
➢ Production of cement in the year 2018
➢ Savings
➢ A family’s consumption of sugar
➢ Investment
➢ services of a tutor
➢ Monetary expenditure.
 Four sectors of the Economy. Is also called as the external
From the macro point of view sector or rest of the world Sector
Engaged in export of goods and
services

ncludes consumers of goods

and services
hey are also the owners of
factors of production Also called as the producer sect
Engaged in production activity
Production of goods and service
Hire factor of production from
households

Acts a welfare agency

Produces goods and services in public sector
Enterprises
Meaning of Circular Flow of income

 Refers to the cycle of generation of income in the

production process, its distribution among the
factors of production and finally ,its circulation
from households to firms in the form of
consumption expenditure on goods and services
produced by the firm.
Phases of circular flow of income

Generation Phase

Distribution Phase

Disposition phase
Types of circular flow

Circular
Flows

Real Money
flows flows
Real flows

 Refers to the flow of factor services from household to

firms and the corresponding flow of goods and services
from firms to households
 Also known as Physical flow
 There is only exchange of goods and services between
the two sectors without involvement of money.
 Real flow determines the magnitude of the growth
process in the economy
Money Flows

 Refers to factor payments from firms to

households for their factor services and
corresponding flow of consumption expenditure
from households to Firms for purchase of goods
and services produced by the economy.
 It is also known as Nominal flow
 It involves exchange of money between two
sectors.
Two sector economy – Circular flow in a
Simple Economy/ closed economy
 Assumptions
➢ There are only two sectors in the economy
➢ Household sector supplies services only to firms and firms
hire factor services only from household
➢ Firms produce goods and services and sell their entire
output to the household
➢ Households receive factor incomes for their services and
spend the entire amount on consumption of goods and
services
➢ There are no savings in thee economy
Simple economy CONCLUSION

TOTAL PRODUCTION =TOTAL CONSUMPTION

FACTOR PAYMENTS = FACTOR INCOME

CONSUMPTION EXPENDITURE =FACTOR INCOME

REAL FLOW =MONEY FLOWS

CIRCULAR FLOW IN A THREE SECTOR
ECONOMY
BETWEEN HOUSEHOLDS AND GOVERNMENT--

BETWEEN FIRMS AND GOVERNMENT --

ROLE OF THE GOVERNMENT --

CIRCULAR FLOW IN A FOUR SECTOR/ Five
ECONOMY and the significance of the circular
flow
 HOME WORK
 Expansion and contraction and a note has been provided of how it leads to
Injections and Leakages.
Classify the following as intermediate
goods or final goods
 Machine purchased by a firm
 Soft drinks purchased by the school canteen
 Clothes purchased by an individual
 Coal purchased by a factory
 Electricity consumption in a business
 Book purchased by a student
 Books purchased by a book seller
 Postage Stamps purchased by a business unit
 Machines purchased by a dealer of machine.
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