1.

Goals of Macroeconomics

The overarching goals of macroeconomics ar e to maximize the standard of living and

achieve stable economic growth. The goals are supported by objectives such as
minimizing unemployment, increasing productivity, controlling inflation, and more. The
macroeconomy of a country is affected by many forces, and as such, economic
indicators are invaluable to assessing different aspects of performance.
2.Macroeconomics Problems
Macroeconomics problems arise when the economy does not adequately achieve the
goals of full employment, stability, and economic growth. As a result of which there is a
cascading effect which follows. Unemployment results when full employment is not
achieved. Inflation creeps in when the economy falls short of the goal of stability. The
phase of stagnant growth arises when the economy is not adequately attaining the goal
of economic growth. All these problems are either caused by too little or too much
demand for gross production.

2.1. Inflation

Inflation is the increase of overall price levels and consequently the decrease in
purchasing power. It occurs primarily due to increased demand for products and
services, which, in turn, raises prices. Inflation, therefore, represents growth.

However, too much inflation is also harmful if purchasing power decreases much more
than inflated prices, decreasing overall spending and devaluing the currency. The target
inflation rate is usually around 1% to 3%.

2.2. Unemployment

Unemployment accounts for individuals who are jobless and are actively seeking one.
Individuals who are retired or disabled are not included as unemployed. Unemployment
is a natural occurrence and cannot be completely eliminated. We can distinguish
unemployment into different categories:

2.3.Budget and trade deficit.

Budget deficit means when the amount by which government expenditure exceeds the
tax revenue earned by government and trade deficit means when the amount of import
expenditure exceeds the export revenue earned by the economy.
3.NATIONAL INCOME
The total income of the nation is called national income. In real terms, national income is the
flow of goods and services produced in the economy in a particular period—a year.
In the measurement of national income there are various situations which we will have to study
and they are known as concepts of national income. These concepts have their significance in
national income accounting.

1. Gross National Income or Product (GNP): Gross National Product has been defined as the
total market value of all final goods and services produced in a year. It is the money value of all
the final goods and services which the labour and capital of a country working on its natural
resources have produced in a year. It includes not only the part of the production which is
brought to the market for sale but also that part of the produce which is kept for self
consumption. Factors to be taken into consideration while studying Gross National Product: 6
(i) As GNP is the measure of money, so all kinds of goods and services produced in a country
during one year are measured in terms of money at current prices and then added together. (ii)
In estimating GNP of the economy, the market price of only the final products should be taken
into account. Many of the products pass through a number of stages before they are ultimately
purchased by consumers. (iii) Goods and services rendered free of charge are not included in
the GNP, because it is not possible to have a correct estimate of their market prices. (iv) The
transactions which do not arise from the produce of current year or which do not contribute in
any way to production are not included in the GNP. The sale and purchase of old goods and of
shares, bonds are assets of existing companies are not included in GNP because they do not
make any addition to the national product and the goods are simply transferred. (v) The profits
earned or losses incurred on account of changes in capital assets as a result of fluctuations in
market prices are not included in the GNP if they are not responsible for current production or
economic activity. (vi) The income earned through illegal activities is not included in the GNP.
Although the goods sold in the black-market are priced and fulfill the needs of the people, but
as they are not useful from the social point of view, the income received from their sale and
purchase is always excluded from the GNP.

7.Macroeconomic Policies
The two main macroeconomic policies that a government may apply to bring about stability are the
monetary policy and the fiscal policy.
Monetary Policy
The monetary policy is an important process, which is under the control of the monetary authority
of a country. This monetary authority is usually the central bank or the currency board. The
monetary policy is usually implemented by the central bank to stabilize prices and to increase the
strength of a country’s currency.
The monetary policy also aims to reduce unemployment rates and stabilize GDP. It also controls the
supply of money in an economy. For example, the central bank of a country can pump money into
an economy by issuing money to buy bonds and other assets. On the other hand, the central bank of
a country can also sell bonds and take money out of circulation.
Fiscal Policy
The fiscal policy is a process that makes use of a government’s revenue generation and expenditure
as tools to control economic windfalls. The government uses the fiscal policy to stabilize the
economy during a business cycle. For instance, if production in an economy does not match the
required output, the government can spend on idle resources and help in increasing output.
Usually, economists prefer the monetary policy over the fiscal policy. This is because the monetary
policy is under the control of the central bank of a country, which is an independent organization.
The fiscal policy is under the control of the government, which can be affected by political
intentions.

5. The Business Cycle

The term “business cycle” (or economic cycle or boom-bust cycle) refers to economy-
wide fluctuations in production, trade, and general economic activity. From a conceptual
perspective, the business cycle is the upward and downward movements of levels of
GDP (gross domestic product) and refers to the period of expansions and contractions
in the level of economic activities (business fluctuations) around a long-term growth
trend.

Business Cycle Phases

Business cycles are identified as having four distinct phases: expansion, peak,
contraction, and trough.

An expansion is characterized by increasing employment, economic growth, and

upward pressure on prices. A peak is realized when the economy is producing at its
maximum allowable output, employment is at or above full employment, and inflationary
pressures on prices are evident. Following a peak an economy, typically enters into a
correction which is characterized by a contraction, growth slows, employment declines
(unemployment increases), and pricing pressures subside. The slowing ceases at the
trough and at this point the economy has hit a bottom from which the next phase of
expansion and contraction will emerge.

The GDP Deflator and the Consumer Price Index (CPI)

There are other indexes out there that also measure inflation.

The GDP Deflator

The GDP deflator is a price index that measures inflation or deflation in an economy by
calculating a ratio of nominal GDP to real GDP.
The CPI
The CPI is a measure of the average change over time in the prices paid by urban consumers for
a constant-quality market basket of goods and services—that is, a sample of goods and services
that consumers purchase for day-to-day living. Produced monthly, the CPI weights the price of
each item in the market basket on the basis of the amount of spending reported by a sample of
families and individuals

Like the Consumer Price Index (CPI), the GDP deflator is a measure of price
inflation/deflation with respect to a specific base year. Similar to the CPI, the GDP
deflator of the base year itself is equal to 100. Unlike the CPI, the GDP deflator is not
based on a fixed basket of goods and services; the “basket” for the GDP deflator is
allowed to change from year to year with people’s consumption and investment
patterns. However, trends in the GDP deflator will be similar to trends in the CPI.

Calculating the GDP Deflator

The GDP deflator is calculated by dividing nominal GDP by real GDP and multiplying by
100.

3. Nominal GDP versus Real GDP

Nominal GDP, or unadjusted GDP, is the market value of all final goods produced in a
geographical region, usually a country. That market value depends on the quantities of
goods and services produced and their respective prices. Therefore, if prices change
from one period to the next but actual output does not, nominal GDP would also change
even though output remained constant.

In contrast, real gross domestic product accounts for price changes that may have
occurred due to inflation. In other words, real GDP is nominal GDP adjusted for inflation.
If prices change from one period to the next but actual output does not, real GDP would
be remain the same. Real GDP reflects changes in real production. If there is no
inflation or deflation, nominal GDP will be the same as real GDP.

Gross Domestic Product

The Gross domestic Product (GDP) is the market value of all final goods and services
produced within a country in a given period of time. The GDP is the officially recognized
totals. The following equation is used to calculate the GDP:
GDP=C+I+G+(X−M)GDP=C+I+G+(X−M)
Written out, the equation for calculating GDP is:
GDP = private consumption + gross investment + government investment + government
spending + (exports – imports).

For the gross domestic product, “gross” means that the GDP measures production
regardless of the various uses to which the product can be put. Production can be used
for immediate consumption, for investment into fixed assets or inventories, or for
replacing fixed assets that have depreciated. “Domestic” means that the measurement
of GDP contains only products from within its borders.

Nominal GDP

The nominal GDP is the value of all the final goods and services that an economy
produced during a given year. It is calculated by using the prices that are current in the
year in which the output is produced. In economics, a nominal value is expressed in
monetary terms. For example, a nominal value can change due to shifts in quantity and
price. The nominal GDP takes into account all of the changes that occurred for all goods
and services produced during a given year. If prices change from one period to the next
and the output does not change, the nominal GDP would change even though the
output remained constant.
. Types of Inflation: As the nature of inflation is not uniform in an economy for all the time, it is wise to
distinguish between different types of inflation. Such analysis is useful to study the distributional and
other effects of inflation as well as to recommend anti-inflationary policies. Inflation may be caused by a
variety of factors. Its intensity or pace may be different at different times. It may also be classified in
accordance with the reactions of the government toward inflation. A. On the Basis of Causes: (i)
Currency inflation: This type of inflation is caused by the printing of currency notes. (ii) Credit inflation:
Being profit-making institutions, commercial banks sanction more loans and advances to the public than
what the economy needs. Such credit expansion leads to a rise in price level. (iii) Deficit-induced
inflation: The budget of the government reflects a deficit when expenditure exceeds revenue. To meet
this gap, the government may ask the central bank to print additional money. Since pumping of
additional money is required to meet the budget deficit, any price rise may the be called the deficit-
induced inflation. (iv) Demand-pull inflation: An increase in aggregate demand over the available output
leads to a rise in the price level. Such inflation is called demand-pull inflation (henceforth DPI). But why
does aggregate demand rise? Classical economists attribute this rise in aggregate demand to money
supply. If the supply of money in an economy exceeds the available goods and services, DPI appears. It
has been described by Coulborn as a situation of ―too much money chasing too few goods.‖ Keynesians
hold a different argument. They argue that there can be an autonomous increase in aggregate demand
or spending, such as a rise in consumption demand or investment or government spending or a tax cut
or a net increase in exports (i.e., C + I + G + X – M) with no 44 increase in money supply. This would
prompt upward adjustment in price. Thus, DPI is caused by monetary factors (classical adjustment) and
non-monetary factors (Keynesian argument). DPI can be explained in terms of Fig. 4.2, where we
measure output on the horizontal axis and price level on the vertical axis. In Range 1, total spending is
too short of full employment output, YF. There is little or no rise in the price level. As demand now rises,
output will rise. The economy enters Range 2, where output approaches towards full employment
situation. Note that in this region price level begins to rise. Ultimately, the economy reaches full
employment situation, i.e., Range 3, where output does not rise but price level is pulled upward. This is
demand-pull inflation. The essence of this type of inflation is that ―too much spending chasing too few
goods.‖ Cost-push inflation: Inflation in an economy may arise from the overall increase in the cost of
production. This type of inflation is known as cost-push inflation (henceforth CPI). Cost of production
may rise due to an increase in the prices of raw materials, wages, etc. Often trade unions are blamed for
wage rise since wage rate is not completely market-determinded. Higher wage means high cost of
production. Prices of commodities are thereby increased. A wage-price spiral comes into operation. But,
at the same time, firms are to be blamed also for the price rise since they simply raise prices to expand
their profit margins. Thus, we have two important variants of CPI wage-push inflation and profit-push
inflation. B. On the Basis of Speed or Intensity: (i) Creeping or Mild Inflation: If the speed of upward
thrust in prices is slow but small then we have creeping inflation. What speed of annual price rise is a
creeping one has not been stated by the economists. To some, a creeping or mild inflation is one when
annual price rise varies between 2 p.c. and 3 p.c. If a rate of price rise is kept at this level, it is considered
to be helpful for economic development. Others argue that if annual price rise goes slightly beyond 3
p.c. mark, still then it is considered to be of no danger. (ii) Walking Inflation: If the rate of annual price
increase lies between 3 p.c. and 4 p.c., then we have a situation of walking inflation. When mild inflation
is allowed to fan out, walking inflation appears. These two types of inflation may be described as
‗moderate inflation‘. 45 Often, one-digit inflation rate is called ‗moderate inflation‘ which is not only
predictable, but also keep people‘s faith on the monetary system of the country. Peoples‘ confidence
get lost once moderately maintained rate of inflation goes out of control and the economy is then
caught with the galloping inflation. (iii) Galloping and Hyperinflation: Walking inflation may be converted
into running inflation. Running inflation is dangerous. If it is not controlled, it may ultimately be
converted to galloping or hyperinflation. It is an extreme form of inflation when an economy gets
shattered.‖Inflation in the double or triple digit range of 20, 100 or 200 p.c. a year is labelled ―galloping
inflation‖. (iv) Government’s Reaction to Inflation: Inflationary situation may be open or suppressed.
Because of anti-inflationary policies pursued by the government, inflation may not be an embarrassing
one. For instance, increase in income leads to an increase in consumption spending which pulls the price
level up. If the consumption spending is countered by the government via price control and rationing
device, the inflationary situation may be called a suppressed one. Once the government curbs are lifted,
the suppressed inflation becomes open inflation. Open inflation may then result in hyperinflation