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Macroeconomic Concepts

Macro-economics studies the economy as a whole, focusing on aggregates like income, consumption, and employment. It evolved from early contributions by economists such as Malthus and Marx, with Keynes being pivotal in developing a general theory during the Great Depression. Understanding macro-economics is essential for analyzing economic activity, formulating policies, and achieving goals like economic growth and price stability.

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8 views12 pages

Macroeconomic Concepts

Macro-economics studies the economy as a whole, focusing on aggregates like income, consumption, and employment. It evolved from early contributions by economists such as Malthus and Marx, with Keynes being pivotal in developing a general theory during the Great Depression. Understanding macro-economics is essential for analyzing economic activity, formulating policies, and achieving goals like economic growth and price stability.

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Principles of Economics

- Macro
- Prof. Srilekha Bhattacharjee
Macro-economics

The term ‘macro’ is derived from the Greek word ‘makros’


which means ‘large’

It deals with the economy as a whole. It studies the


behaviour of economic aggregates such as aggregate income,
consumption, investment, national output, national
employment, and the overall level of prices.
Evolution of the concept Macro-
economics
 The term macro was first used in economics by Ragnar Frisch in
1933. Malthus and Marx dealt with macro economics problems in
the 19th century. Walras, Wicksell and Irving Fisher were the
modern contributors to the development of macro economic
analysis before Keynes. But it was Keynes who was credited with
systematically developing a general theory of income, output and
employment in the wake of the Great Depression of 1929.
 The Great Depression was a period of severe economic contraction
and high unemployment that began in 1929 and continued
throughout the 1930s.
Major concerns of Macro-economics
 Aggregate Demand
 Aggregate Supply
 Saving
 Inflation/Deflation
 Unemployment
 Economic Growth
 Unemployment
 Trade Cycle
 International Trade
 Economic Planning (Fiscal & Monetary Policy)
Why should we study Macro-economics
 To understand what is happening to the economy as a whole.
 To try to figure out why overall economic activity rises and falls
(value of production, total income, unemployment, inflation, etc).
 To understand intermediate variables like interest rates, stock
market values, and exchange rates.
 How businesses tends to gain or loss considerable amounts of
money when their economic environment changes, regardless of
how well they are managed.
 It also helps the governments to avoid the worst economic crisis that
have afflicted modern industrial societies in the past centuries –
depressions and hyper-inflations.
Importance of Macro-Economics
 It explains the working of an economy as a whole.
 It examines the aggregate behaviour of Macro economics entities
like firms, households and the government.
 It is very useful to the planner for preparing economic plans for the
country’s development.
 It is helpful in international comparison at macro level. It has been
possible to formulate correct economic policies and also coordinate
international economic policies.
 Its knowledge is indispensable for the policy-makers for formulating
macro-economic policies such as monetary policy, fiscal policy,
industrial policy, exchange rate policy, income policy, etc.
 It explains economic dynamism and intricate inter-relationship among
macro-economic variable such as price level, income, output and
employment.
 It helps us understanding the functioning of a complicated modern
economic system. It described how the economy as a whole functions
and how the level of national income and employment is determined
on the basis of aggregate demand and aggregate supply.
 It helps to achieve the goal of economic growth, a higher GDP level,
and higher level of employment. It analyses the forces which
determine economic growth of a country and explains how to reach
the highest state of economic growth and sustain it.
 It helps to bring stability in price level and analyses fluctuations in
business activities. It suggests policy measures to control inflation and
deflation.
Economic Growth

 Definition: Economic growth refers to the increase in the production


and consumption of goods and services in an economy over time. It
is commonly measured by the growth in Gross Domestic Product
(GDP), which represents the total value of all goods and services
produced within a country's borders.
 Importance: Economic growth is crucial for improving living
standards, reducing poverty, and providing opportunities for
employment. It allows a society to enjoy a higher standard of living
as more goods and services become available.
Factors contributing to Economic Growth

 Investment
 Innovation and Technology
 Labor Force Growth
 Improvements in living standard
 Job Creation
 Poverty Reduction
 Government Policies
Full employment
Definition: Full employment occurs when all available resources,
especially labor, are utilized to their maximum potential, and the
unemployment rate is at its natural rate. This does not mean zero
unemployment, as some level of unemployment is considered normal
due to factors like frictional and structural unemployment.
Importance: Full employment is a key goal for policymakers because it
signifies a more efficient allocation of resources and a thriving job
market. It contributes to social stability and reduces income inequality.
Price stability
Definition: Price stability refers to a situation where the general level of
prices in an economy remains relatively constant over time. It means
avoiding excessive inflation (a sustained increase in the general price
level) or deflation (a sustained decrease in the general price level).
Importance: Price stability is crucial for a well-functioning economy
because it provides a stable environment for businesses to plan and
invest. Moderate inflation is generally considered acceptable as it
encourages spending and investment, but high or unpredictable
inflation can erode purchasing power and create economic uncertainty.
Key points:
1. Inflation and deflation
2. Purchasing power stability
Price stability
3. Interest rates and monetary policy
4. Cost of living
5. International trade

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