Unit -I
Nature and scope of macroeconomics
Q1) Explain the Macroeconomic Theories.
Ans. The government is understood to be the national regulator. Consider various aspects that are important and have a direct impact on the lives of citizens. There are six theories within the scope of macroeconomics.
Theory of Economic Growth and Development:
Economic growth is also under the study of macroeconomics. Economic resources and capabilities are assessed based on the scope of macroeconomics. It plans to increase levels of national income, output, and environmental levels. They have a direct impact on the economic development of the economy.
Money theory:
Macroeconomics assesses the impact of reserve banks on the economy, capital inflows and outflows, and its impact on employment rates. Frequent changes in the value of money caused by inflation and deflation have many negative effects on the country's economy. They can be exacerbated by monetary policy, fiscal policy, and direct control of the economy as a whole.
National Income Theory:
This includes various topics related to measuring national income, such as revenue, spending, and budget. As a macroeconomic study, it is essential to assess the overall performance of the economy in terms of national income. At the beginning of the Great Depression of the 1930s, it was essential to investigate the triggers of general overproduction and general unemployment.
This led to the creation of data on national income. Helps predict the level of economic activity. It also helps to understand the income distribution among different classes of citizens.
International Trade Theory:
This is a research area focused on the import and export of products or services. Simply put, it points to the economic impact of cross-border commerce and tariffs.
Employment theory:
This macroeconomic scope helps determine the level of unemployment. It also determines the conditions that lead to such unemployment. Therefore, this affects production supply, consumer demand, consumption, and spending behavior.
General Price level theory:
The most important of these are research on commodity prices and how inflation or deflation fluctuates a particular price rate.
Macroeconomic policy:
The RBI and the Government of India are working together to imply macroeconomic policies for national improvement and development.
It falls into two sections:
Fiscal policy:
It refers to how spending fills deficit income and describes itself as a form of budgeting under macroeconomics.
Financial policy:
The Reserve Bank is working with the government to establish monetary policy. These policies are measures taken to maintain the stability and growth of a country's economy by regulating various interest rates.
Q2) “Macroeconomics is an important concept that considers the whole country”. Justify the statement.
Ans. Macroeconomics is an important concept that considers the whole country and works for the welfare of the economy.
1. Business cycle analysis
Timing of economic fluctuations helps prevent or prepare for financial crises and long-term negative situations.
2. Formulation of economic policy
The fiscal and monetary policy system relies entirely on the widespread analysis of macroeconomic conditions in the country.
3. Reduce the effects of inflation and deflation
Macroeconomics is primarily aimed at helping governments and financial institutions prepare for economic stability in a country.
4. Promote material welfare
This stream of economics provides a broader perspective on social or national issues. Those who want to contribute to the welfare of society need to study macroeconomics.
5. Regulate the economic system
It continues to guarantee or check the proper functioning and actual position of the country's economy.
6. Solve economic problems
Macroeconomic theory and problem analysis help economists and governments understand the causes and possible solutions to such macro-level problems.
7. Economic development
By utilizing macroeconomic data to respond to various economic conditions, the door to national growth will be opened.
Q3) What are the basic Problems related to macroeconomics?
Ans. Economists need to analyze the following issues while studying macroeconomics.
1. Issues related to government policy
Business activities also bring social costs such as deforestation and land degradation. To regulate this social cost, the government has clear laws and laws in place. These regulations act as barriers for corporate organizations.
2. Problems related to macroeconomic trends in the economy
The economic situation of a country has immeasurable impact on the activities of all organizations, directly or indirectly. The various economic patterns or variables that affect the industry include gross domestic product (GDP), employment rates and conditions, revenue incentives, banks, and pricing policies.
3. Problems related to foreign trade
Many organizations trade (export or import goods) in the international market. They are sensitive to economic fluctuations, exchange rates, prices, and many other factors in other countries. Therefore, such changes can affect the economic situation of the country. This can also affect your business organization.
Q4) State the differences between Microeconomics and Macroeconomics.
Ans. Microeconomics:
As mentioned above, microeconomics is a branch of economics that deals with individual units of the economy. It includes research areas on individual units such as consumers and homes. The subject deals with issues related to determining the price of goods. These direct or indirect factors affect the supply and demand of goods and the procurement of individual satiety levels. The main purpose of microeconomics is to maximize profits and minimize costs incurred. It is used for future generations to be available and balanced.
Macroeconomics
The term macroeconomics was coined by Ragnar Frisch in 1933. However, the approach to economic problems began in the 16th and 17th centuries. As a result, this originated from mercantilists. It is the field of science that deals with the whole economy or the whole, including macro factors. The hope of macroeconomics does not involve studying individual units of the economy. But the whole economy studies the whole economy and the average. National income, total employment, total savings and investment, aggregate supply and demand, and general price levels
The differences between microeconomics and macroeconomics can be seen in the following points. Microeconomics is the study of the economic activity of individuals and small groups of individuals. This includes specific households, specific companies, specific industries, specific products, and individual prices.
Macroeconomics is also derived from Macross, which means "big" in Greek. The purpose of microeconomics on the demand side is to maximize utility, while on the supply side it is to minimize profits at the lowest cost. On the other hand, the main objectives of macroeconomics are full employment, price stability, economic growth and a good balance of payments.
The basis of microeconomics is a price mechanism that works with the help of the power of supply and demand. These forces help determine the equilibrium price of the market. On the other hand, the basis of macroeconomics is national income, output, and employment, which are determined by aggregate demand and aggregate supply.
Microeconomics is based on various assumptions about the rational behavior of individuals. In addition, the phrase "ceteris paribus" is used to describe economic law. Macroeconomics, on the other hand, makes assumptions based on variables such as the total output of the economy, the extent to which its resources are used, the size of national income, and general price levels.
Microeconomics is based on partial equilibrium analysis that helps explain the equilibrium conditions of individuals, businesses, industries, and factors. Macroeconomics, on the other hand, is based on general equilibrium analysis, which is an extensive study of many economic variables, their interrelationships and their interdependencies, to understand the workings of the entire economic system.
In microeconomics, equilibrium studies are analyzed at specific times. But it does not explain the time element. Therefore, microeconomics is considered static analysis. Macroeconomics, on the other hand, is based on time lags, rate of change, past and expected values of variables. This rough division between microeconomics and macroeconomics is not rigorous, as parts affect the whole and whole influences the parts.
Q5) How can we say that macroeconomic theory also relies on microeconomic?
Ans. On the other hand, macroeconomic theory also relies on microeconomic analysis. The total is made up of parts. National income is the sum of personal, household, corporate and industrial incomes. Total savings, total investment and total consumption are the result of individual industry, business, household and individual savings, and investment and consumption decisions.
A typical price level is the average of all prices for individual goods and services. Similarly, the economic output is the sum of the outputs of all individual production units.
Let's look at some concrete examples of this macro dependence on microeconomics. When the economy concentrates all its resources on the production of agricultural products only, the total production of the economy decreases because other parts of the economy are ignored.
The total level of output, income and employment in the economy also depends on income distribution. If there is an unequal distribution of income and the income is concentrated in the hands of a few rich people, it tends to reduce the demand for consumer goods.
Profit, investment and output will decline, unemployment will widen and the economy will eventually face a recession. Therefore, both macro and micro approaches to economic problems are interrelated and interdependent.
Macro dynamics:
Economic dynamics, on the other hand, is the study of changes in acceleration or deceleration. It is an analysis of the process of change that continues over time.
The economy can change over time in two ways.
(A) Without changing the pattern
(B) By changing the pattern.
Economic dynamics are associated with the latter type of change. When there are changes in population, capital, production technology, the form of business organizations, and people's tastes, the economy takes different patterns in any or all of them, and the economic system changes its direction.
In the attached figure, given the initial value of the economy, D was moving along path AB, but suddenly at A the index changed pattern and the direction of equilibrium changed towards C. Proceed to D again. But in C, the pattern and orientation change to E. Therefore, economic dynamics investigates the path from one equilibrium position to another, that is, the path from A to C and from C to E.
Therefore, economic dynamics is related to time lag, rate of change, past and expected values of variables. In a dynamic economy, data changes and the economic system take time to adjust accordingly. . It can be seen as a" movie "of the progressive overall economic function. "
In Figure 2, C + 1 is the aggregate demand function and the 45 ° line is the aggregate supply function. Starting from a period when the income equilibrium level is OY0, the investment increases by ∆I, and in the period t, the income increases by the amount of increased investment (t0 to t). The increase in investment is indicated by the new aggregate demand function C + I + ∆I.
However, in period t, consumption is delayed and is the same as income at E0. In period t + I, consumption increases and new investment increases even higher income up to OY1.
This process of income propagation continues until the aggregate demand function C + I + ∆I crosses the line of aggregate supply function 45 ° at En in the nth period, and the new equilibrium level is determined by OYn. Curve step t0 to En shows the macrodynamic equilibrium path.
Q6) What are the components of GNP?
Ans. Indirect taxes have been eliminated and solid subsidies. In addition, NNP generates national income at base prices. After this, the national income ,Retained earnings, corporate tax, social security ,Contribution and household income.Government we will also send money to your household. In addition, we earn personal income. In the case of income tax when deducted, you get an individual's disposable income.
Is GDP a good measure of welfare?
- Consumer surplus;
- Externalities (positive and negative).
- Non-market exchanges (housework, underground Economy);
- Depreciation of capital (physical, human and environment);
- Inflation, changes in quality.
- Exchange rate, PPP
- Inequality.
- Keep up with Jones.
- Happiness.
Injections and Withdrawals
- In equilibrium, planned spending should be equal to actual spending. Economy. Pre-expenditure must be equal to post-expenditure.
- Expenditure is the sum of its components.
Y≡ C + I + G + NX
- Consumption C , investment I government expenditure G , NX is a net export (export minus imports).
- Injections into the income cycle must be equal drawer:
S + T + M ≡ I + G + X
- S is savings, T is taxes, M is imports, I is investments, G is Government spending, and X is export Injections and Withdrawals
Q7) Explain the following:
- Gross National Product (GNP)
- Net Gross National Product
Ans. Gross National Product (GNP):
This is the sum of all final goods and services produced in the economy in a year. In W.C.'s words, Peterson, "Gross National Product may be defined as the current market value of all goods and services produced by the economy during the period of income." There are two ways to avoid double counting when estimating GNP.
- One is to exclude all intermediate goods and count only final goods and services. Final goods and services directly meet consumer needs, and intermediate goods are intended to be exhausted in the production process itself.
- The second way to avoid double calculation is to calculate the "value added" of each production sector in the economy. The value added in a production process over a period of time is calculated by subtracting the input value from the total value of the products leaving the process. The sum of the values added by all processes will give us the value of GNP.
GNP calculated in this way excludes the value of the import because the cost is automatically deducted from the production value of the industry using the value of the import. To get Gross National Product, you need to deduct depreciation from the total "value added". The "added value" method and the "final product" method give the same result. The former considers the flow of production through each process while the "final product" method counts the quantity of goods delivered at the end of a particular period and appropriates the goods still in transit at the beginning and end. Adjust to. Of the period The "added value" method follows normal corporate accounting procedures because all companies record the value of their products and the value of the materials used. The "final product" method suffers from many difficulties in that it requires the actual production of consumer goods and producers' goods to be split.
Net Gross Domestic Product:
Subtracting renewal, repair, and obsolescence depreciation from GNP gives you gross national product at market prices. Therefore:
GNP at MP – Depreciation = NNP at Market Price
Depreciation is the loss of value that a country's fixed capital (buildings, machinery, equipment, etc.) inventory suffers from wear and tear. The issue of valuing the depreciation of capital stock is one of the most annoying issues in the field of national accounts. The convention was to accept business records as a measure of depreciation without having to re-estimate in terms of current replacement costs. Therefore, a purely domestic product means the market value of all final goods and services after depreciation. The big advantage of the NNP concept is that it reveals a net increase in total production, in addition to current consumption and current alternative investments. This means a long-term improvement in the physical productivity of capital. The concept of NNP has the great advantage of showing a net increase in total products. It emphasizes the long-term importance of maintaining the productivity of the economy. Therefore, it is very useful for researching economic growth.
Q8) What are the main components of national income at factor cost ?
Ans. the main components of national income at factor cost are:
- All wages, salaries, and supplementary income earned by employees for the productive services provided, and
- Interest paid to individuals plus
- Net rent for all individuals. Including attribution payments such as rent for private housing
- Income of individual businesses such as farmers, partnerships, professionals such as lawyers, net income of corporations including dividend payments, undistributed income and net income of all types of businesses including corporate tax Minus
- Transfer payments, that is, income payments that do not provide productive services in return. In other words, these are not payments for the production of goods or services, but state or similar public payments from one individual to another, such as interest paid on national debt, social security payments (such as unemployment allowances and old ones). Represents the transfer of income through a target institution (age pension), etc
These remittance payments must be deducted from the total national income determined by adding the total payments made to the factor of production. In addition to the concept of net national income, it is useful to have ideas for certain other income concepts needed for a particular purpose.
Q9) Write down the steps involved in calculating personal income.
Ans. The steps involved in calculating personal income are displayed as follows:
- National income
- Small corporate profit
- Employers' contribution to social insurance is small
- Plus government. Money transfer
- Plus business transfer payment
- Plus net interest paid by the government
- Plus interest paid by consumers
- Plus dividend
- Employees' contribution to social insurance is small
- Equal to personal income
- Disposable income:
Personal income as defined above is not income that a person has the full command to spend, save, or give in any way he or she likes. Income tax and national insurance premiums are mandatory payments and must be deducted in order to obtain what is called personal disposable income.
This income also includes fixed commitments such as contributions such as pensions and installment payments for employment purchases to further reduce individual disposable income.
Therefore, disposable personal income is obtained by deducting personal tax from personal income. These personal taxes are in the form of income tax, wealth tax, expenditure tax and occupational tax. Disposable income consists of personal spending and personal savings.
Disposable income = personal income – personal tax = personal consumption + personal savings.
The concept of disposable income is especially useful in estimating the expected demand for goods and services for personal use by individuals. In times of national emergencies and shortages, this concept helps predict the gap between available supplies and expected demand for goods and services.
Q10. How do we measure national income?
Ans. The output approach focuses on finding the total output of a country by directly finding the total value of all goods and services produced by the country.
Due to the complexity of multiple stages in the production of a good or service, only the ultimate value of the good or service is included in the total production. This avoids a problem called "double counting" where the total value of goods is included several times in a country's production by repeatedly counting at several stages of production. In the meat production example, the value of goods from a farm could be $ 10, then $ 30 from a butcher, and $ 60 from a supermarket. The value that should be included in the final national production should be $ 60, not the sum of all these numbers, $ 100. The added values at each stage of production compared to the previous stage are $ 10, $ 20, and $ 30, respectively. The sum of them provides another way to calculate the value of the final output.
The main formulas are:
- GDP (Gross Domestic Product) at market price = production value in a particular year's economy minus intermediate consumption
- GDP at Factor Cost = GDP at Market Price-Depreciation + NFIA (Net Factor Revenue from Overseas)-Net Indirect Tax (GNP)
- NDP at Factor Cost = Employee Compensation + Net Interest + Rental and Loyalty Income + Income and Unincorporated NDP Profit at Factor Cost
Spending
The spending approach is basically an output accounting method. It focuses on finding the country's total production by finding the total amount spent. This is acceptable to economists, as the sum of all commodities, as well as income, is equal to the total amount spent on the commodities. The basic formula for domestic output is to take all the various fields in which money is spent in the region and combine them to obtain the total output.
{\ displaystyle \ mathrm {GDP} = C + G + I + \ left (\ mathrm {X} -M \ right)} {\ mathrm {GDP}} = C + G + I + \ left ({\ mathrm { X}} -M \ right)
Where:
C = consumption household expenditure / consumption expenditure personal
I = total private sector investment
G = Government consumption and total investment expenditure
X = total export of goods and services
M = Total import of goods and services
Note: (X-M) is often described as XN or NX, both representing "net exports".
The name of the measure consists of either the word "Gross" or "Net", the word "National" or "Domestic", or the word "Product", "Income", or "Expenditure". Will be done. ". All of these terms can be explained individually."Gloss" means the entire product, regardless of its subsequent use. That is, the depletion or obsolescence of a country's fixed capital assets. The "net" indicates the amount of product that is actually available for consumption or new investment.
"Domestic" means that the boundaries are geographical. That is, it counts all goods and services produced within the border, regardless of who they are.
"Nationality" means that boundaries are defined by citizenship (nationality). We count all goods and services produced by the people of the country (or the companies they own), regardless of where their production physically takes place.
The production of French-owned cotton factories in Senegal is counted as part of Senegal's national figures, but as part of France's national figures.
"Product," "Income," and "Expenditure" refer to the three counting methods described earlier: the product, income, and expenditure approach. However, these terms are used loosely.
"Product" is a general term and is often used when one of the three approaches is actually used. The word "product" may be used, followed by additional symbols or phrases to indicate the methodology. So, for example, you get structures such as "Gross Domestic Product", "GDP (Income)", and "GDP (I)".
"Income" here is the income approach was used.
"Expenditure" specifically means that the spending approach was used.
Note that in theory, all three counting methods give the same final number. However, in reality, there are subtle differences from the three methods for several reasons, such as inventory level changes and statistical errors. For example, one problem is that an in-stock item has been produced (and therefore included in the product) but not yet sold (and therefore not yet included in the expenditure). Similar timing issues are due to the value (product) of the product produced and the factors that produced it, especially when the input is purchased with credit and wages are often collected after a period of time. Of production that can cause slight discrepancies between (income).
Unit -I
Nature and scope of macroeconomics
Q1) Explain the Macroeconomic Theories.
Ans. The government is understood to be the national regulator. Consider various aspects that are important and have a direct impact on the lives of citizens. There are six theories within the scope of macroeconomics.
Theory of Economic Growth and Development:
Economic growth is also under the study of macroeconomics. Economic resources and capabilities are assessed based on the scope of macroeconomics. It plans to increase levels of national income, output, and environmental levels. They have a direct impact on the economic development of the economy.
Money theory:
Macroeconomics assesses the impact of reserve banks on the economy, capital inflows and outflows, and its impact on employment rates. Frequent changes in the value of money caused by inflation and deflation have many negative effects on the country's economy. They can be exacerbated by monetary policy, fiscal policy, and direct control of the economy as a whole.
National Income Theory:
This includes various topics related to measuring national income, such as revenue, spending, and budget. As a macroeconomic study, it is essential to assess the overall performance of the economy in terms of national income. At the beginning of the Great Depression of the 1930s, it was essential to investigate the triggers of general overproduction and general unemployment.
This led to the creation of data on national income. Helps predict the level of economic activity. It also helps to understand the income distribution among different classes of citizens.
International Trade Theory:
This is a research area focused on the import and export of products or services. Simply put, it points to the economic impact of cross-border commerce and tariffs.
Employment theory:
This macroeconomic scope helps determine the level of unemployment. It also determines the conditions that lead to such unemployment. Therefore, this affects production supply, consumer demand, consumption, and spending behavior.
General Price level theory:
The most important of these are research on commodity prices and how inflation or deflation fluctuates a particular price rate.
Macroeconomic policy:
The RBI and the Government of India are working together to imply macroeconomic policies for national improvement and development.
It falls into two sections:
Fiscal policy:
It refers to how spending fills deficit income and describes itself as a form of budgeting under macroeconomics.
Financial policy:
The Reserve Bank is working with the government to establish monetary policy. These policies are measures taken to maintain the stability and growth of a country's economy by regulating various interest rates.
Q2) “Macroeconomics is an important concept that considers the whole country”. Justify the statement.
Ans. Macroeconomics is an important concept that considers the whole country and works for the welfare of the economy.
1. Business cycle analysis
Timing of economic fluctuations helps prevent or prepare for financial crises and long-term negative situations.
2. Formulation of economic policy
The fiscal and monetary policy system relies entirely on the widespread analysis of macroeconomic conditions in the country.
3. Reduce the effects of inflation and deflation
Macroeconomics is primarily aimed at helping governments and financial institutions prepare for economic stability in a country.
4. Promote material welfare
This stream of economics provides a broader perspective on social or national issues. Those who want to contribute to the welfare of society need to study macroeconomics.
5. Regulate the economic system
It continues to guarantee or check the proper functioning and actual position of the country's economy.
6. Solve economic problems
Macroeconomic theory and problem analysis help economists and governments understand the causes and possible solutions to such macro-level problems.
7. Economic development
By utilizing macroeconomic data to respond to various economic conditions, the door to national growth will be opened.
Q3) What are the basic Problems related to macroeconomics?
Ans. Economists need to analyze the following issues while studying macroeconomics.
1. Issues related to government policy
Business activities also bring social costs such as deforestation and land degradation. To regulate this social cost, the government has clear laws and laws in place. These regulations act as barriers for corporate organizations.
2. Problems related to macroeconomic trends in the economy
The economic situation of a country has immeasurable impact on the activities of all organizations, directly or indirectly. The various economic patterns or variables that affect the industry include gross domestic product (GDP), employment rates and conditions, revenue incentives, banks, and pricing policies.
3. Problems related to foreign trade
Many organizations trade (export or import goods) in the international market. They are sensitive to economic fluctuations, exchange rates, prices, and many other factors in other countries. Therefore, such changes can affect the economic situation of the country. This can also affect your business organization.
Q4) State the differences between Microeconomics and Macroeconomics.
Ans. Microeconomics:
As mentioned above, microeconomics is a branch of economics that deals with individual units of the economy. It includes research areas on individual units such as consumers and homes. The subject deals with issues related to determining the price of goods. These direct or indirect factors affect the supply and demand of goods and the procurement of individual satiety levels. The main purpose of microeconomics is to maximize profits and minimize costs incurred. It is used for future generations to be available and balanced.
Macroeconomics
The term macroeconomics was coined by Ragnar Frisch in 1933. However, the approach to economic problems began in the 16th and 17th centuries. As a result, this originated from mercantilists. It is the field of science that deals with the whole economy or the whole, including macro factors. The hope of macroeconomics does not involve studying individual units of the economy. But the whole economy studies the whole economy and the average. National income, total employment, total savings and investment, aggregate supply and demand, and general price levels
The differences between microeconomics and macroeconomics can be seen in the following points. Microeconomics is the study of the economic activity of individuals and small groups of individuals. This includes specific households, specific companies, specific industries, specific products, and individual prices.
Macroeconomics is also derived from Macross, which means "big" in Greek. The purpose of microeconomics on the demand side is to maximize utility, while on the supply side it is to minimize profits at the lowest cost. On the other hand, the main objectives of macroeconomics are full employment, price stability, economic growth and a good balance of payments.
The basis of microeconomics is a price mechanism that works with the help of the power of supply and demand. These forces help determine the equilibrium price of the market. On the other hand, the basis of macroeconomics is national income, output, and employment, which are determined by aggregate demand and aggregate supply.
Microeconomics is based on various assumptions about the rational behavior of individuals. In addition, the phrase "ceteris paribus" is used to describe economic law. Macroeconomics, on the other hand, makes assumptions based on variables such as the total output of the economy, the extent to which its resources are used, the size of national income, and general price levels.
Microeconomics is based on partial equilibrium analysis that helps explain the equilibrium conditions of individuals, businesses, industries, and factors. Macroeconomics, on the other hand, is based on general equilibrium analysis, which is an extensive study of many economic variables, their interrelationships and their interdependencies, to understand the workings of the entire economic system.
In microeconomics, equilibrium studies are analyzed at specific times. But it does not explain the time element. Therefore, microeconomics is considered static analysis. Macroeconomics, on the other hand, is based on time lags, rate of change, past and expected values of variables. This rough division between microeconomics and macroeconomics is not rigorous, as parts affect the whole and whole influences the parts.
Q5) How can we say that macroeconomic theory also relies on microeconomic?
Ans. On the other hand, macroeconomic theory also relies on microeconomic analysis. The total is made up of parts. National income is the sum of personal, household, corporate and industrial incomes. Total savings, total investment and total consumption are the result of individual industry, business, household and individual savings, and investment and consumption decisions.
A typical price level is the average of all prices for individual goods and services. Similarly, the economic output is the sum of the outputs of all individual production units.
Let's look at some concrete examples of this macro dependence on microeconomics. When the economy concentrates all its resources on the production of agricultural products only, the total production of the economy decreases because other parts of the economy are ignored.
The total level of output, income and employment in the economy also depends on income distribution. If there is an unequal distribution of income and the income is concentrated in the hands of a few rich people, it tends to reduce the demand for consumer goods.
Profit, investment and output will decline, unemployment will widen and the economy will eventually face a recession. Therefore, both macro and micro approaches to economic problems are interrelated and interdependent.
Macro dynamics:
Economic dynamics, on the other hand, is the study of changes in acceleration or deceleration. It is an analysis of the process of change that continues over time.
The economy can change over time in two ways.
(A) Without changing the pattern
(B) By changing the pattern.
Economic dynamics are associated with the latter type of change. When there are changes in population, capital, production technology, the form of business organizations, and people's tastes, the economy takes different patterns in any or all of them, and the economic system changes its direction.
In the attached figure, given the initial value of the economy, D was moving along path AB, but suddenly at A the index changed pattern and the direction of equilibrium changed towards C. Proceed to D again. But in C, the pattern and orientation change to E. Therefore, economic dynamics investigates the path from one equilibrium position to another, that is, the path from A to C and from C to E.
Therefore, economic dynamics is related to time lag, rate of change, past and expected values of variables. In a dynamic economy, data changes and the economic system take time to adjust accordingly. . It can be seen as a" movie "of the progressive overall economic function. "
In Figure 2, C + 1 is the aggregate demand function and the 45 ° line is the aggregate supply function. Starting from a period when the income equilibrium level is OY0, the investment increases by ∆I, and in the period t, the income increases by the amount of increased investment (t0 to t). The increase in investment is indicated by the new aggregate demand function C + I + ∆I.
However, in period t, consumption is delayed and is the same as income at E0. In period t + I, consumption increases and new investment increases even higher income up to OY1.
This process of income propagation continues until the aggregate demand function C + I + ∆I crosses the line of aggregate supply function 45 ° at En in the nth period, and the new equilibrium level is determined by OYn. Curve step t0 to En shows the macrodynamic equilibrium path.
Q6) What are the components of GNP?
Ans. Indirect taxes have been eliminated and solid subsidies. In addition, NNP generates national income at base prices. After this, the national income ,Retained earnings, corporate tax, social security ,Contribution and household income.Government we will also send money to your household. In addition, we earn personal income. In the case of income tax when deducted, you get an individual's disposable income.
Is GDP a good measure of welfare?
- Consumer surplus;
- Externalities (positive and negative).
- Non-market exchanges (housework, underground Economy);
- Depreciation of capital (physical, human and environment);
- Inflation, changes in quality.
- Exchange rate, PPP
- Inequality.
- Keep up with Jones.
- Happiness.
Injections and Withdrawals
- In equilibrium, planned spending should be equal to actual spending. Economy. Pre-expenditure must be equal to post-expenditure.
- Expenditure is the sum of its components.
Y≡ C + I + G + NX
- Consumption C , investment I government expenditure G , NX is a net export (export minus imports).
- Injections into the income cycle must be equal drawer:
S + T + M ≡ I + G + X
- S is savings, T is taxes, M is imports, I is investments, G is Government spending, and X is export Injections and Withdrawals
Q7) Explain the following:
- Gross National Product (GNP)
- Net Gross National Product
Ans. Gross National Product (GNP):
This is the sum of all final goods and services produced in the economy in a year. In W.C.'s words, Peterson, "Gross National Product may be defined as the current market value of all goods and services produced by the economy during the period of income." There are two ways to avoid double counting when estimating GNP.
- One is to exclude all intermediate goods and count only final goods and services. Final goods and services directly meet consumer needs, and intermediate goods are intended to be exhausted in the production process itself.
- The second way to avoid double calculation is to calculate the "value added" of each production sector in the economy. The value added in a production process over a period of time is calculated by subtracting the input value from the total value of the products leaving the process. The sum of the values added by all processes will give us the value of GNP.
GNP calculated in this way excludes the value of the import because the cost is automatically deducted from the production value of the industry using the value of the import. To get Gross National Product, you need to deduct depreciation from the total "value added". The "added value" method and the "final product" method give the same result. The former considers the flow of production through each process while the "final product" method counts the quantity of goods delivered at the end of a particular period and appropriates the goods still in transit at the beginning and end. Adjust to. Of the period The "added value" method follows normal corporate accounting procedures because all companies record the value of their products and the value of the materials used. The "final product" method suffers from many difficulties in that it requires the actual production of consumer goods and producers' goods to be split.
Net Gross Domestic Product:
Subtracting renewal, repair, and obsolescence depreciation from GNP gives you gross national product at market prices. Therefore:
GNP at MP – Depreciation = NNP at Market Price
Depreciation is the loss of value that a country's fixed capital (buildings, machinery, equipment, etc.) inventory suffers from wear and tear. The issue of valuing the depreciation of capital stock is one of the most annoying issues in the field of national accounts. The convention was to accept business records as a measure of depreciation without having to re-estimate in terms of current replacement costs. Therefore, a purely domestic product means the market value of all final goods and services after depreciation. The big advantage of the NNP concept is that it reveals a net increase in total production, in addition to current consumption and current alternative investments. This means a long-term improvement in the physical productivity of capital. The concept of NNP has the great advantage of showing a net increase in total products. It emphasizes the long-term importance of maintaining the productivity of the economy. Therefore, it is very useful for researching economic growth.
Q8) What are the main components of national income at factor cost ?
Ans. the main components of national income at factor cost are:
- All wages, salaries, and supplementary income earned by employees for the productive services provided, and
- Interest paid to individuals plus
- Net rent for all individuals. Including attribution payments such as rent for private housing
- Income of individual businesses such as farmers, partnerships, professionals such as lawyers, net income of corporations including dividend payments, undistributed income and net income of all types of businesses including corporate tax Minus
- Transfer payments, that is, income payments that do not provide productive services in return. In other words, these are not payments for the production of goods or services, but state or similar public payments from one individual to another, such as interest paid on national debt, social security payments (such as unemployment allowances and old ones). Represents the transfer of income through a target institution (age pension), etc
These remittance payments must be deducted from the total national income determined by adding the total payments made to the factor of production. In addition to the concept of net national income, it is useful to have ideas for certain other income concepts needed for a particular purpose.
Q9) Write down the steps involved in calculating personal income.
Ans. The steps involved in calculating personal income are displayed as follows:
- National income
- Small corporate profit
- Employers' contribution to social insurance is small
- Plus government. Money transfer
- Plus business transfer payment
- Plus net interest paid by the government
- Plus interest paid by consumers
- Plus dividend
- Employees' contribution to social insurance is small
- Equal to personal income
- Disposable income:
Personal income as defined above is not income that a person has the full command to spend, save, or give in any way he or she likes. Income tax and national insurance premiums are mandatory payments and must be deducted in order to obtain what is called personal disposable income.
This income also includes fixed commitments such as contributions such as pensions and installment payments for employment purchases to further reduce individual disposable income.
Therefore, disposable personal income is obtained by deducting personal tax from personal income. These personal taxes are in the form of income tax, wealth tax, expenditure tax and occupational tax. Disposable income consists of personal spending and personal savings.
Disposable income = personal income – personal tax = personal consumption + personal savings.
The concept of disposable income is especially useful in estimating the expected demand for goods and services for personal use by individuals. In times of national emergencies and shortages, this concept helps predict the gap between available supplies and expected demand for goods and services.
Q10. How do we measure national income?
Ans. The output approach focuses on finding the total output of a country by directly finding the total value of all goods and services produced by the country.
Due to the complexity of multiple stages in the production of a good or service, only the ultimate value of the good or service is included in the total production. This avoids a problem called "double counting" where the total value of goods is included several times in a country's production by repeatedly counting at several stages of production. In the meat production example, the value of goods from a farm could be $ 10, then $ 30 from a butcher, and $ 60 from a supermarket. The value that should be included in the final national production should be $ 60, not the sum of all these numbers, $ 100. The added values at each stage of production compared to the previous stage are $ 10, $ 20, and $ 30, respectively. The sum of them provides another way to calculate the value of the final output.
The main formulas are:
- GDP (Gross Domestic Product) at market price = production value in a particular year's economy minus intermediate consumption
- GDP at Factor Cost = GDP at Market Price-Depreciation + NFIA (Net Factor Revenue from Overseas)-Net Indirect Tax (GNP)
- NDP at Factor Cost = Employee Compensation + Net Interest + Rental and Loyalty Income + Income and Unincorporated NDP Profit at Factor Cost
Spending
The spending approach is basically an output accounting method. It focuses on finding the country's total production by finding the total amount spent. This is acceptable to economists, as the sum of all commodities, as well as income, is equal to the total amount spent on the commodities. The basic formula for domestic output is to take all the various fields in which money is spent in the region and combine them to obtain the total output.
{\ displaystyle \ mathrm {GDP} = C + G + I + \ left (\ mathrm {X} -M \ right)} {\ mathrm {GDP}} = C + G + I + \ left ({\ mathrm { X}} -M \ right)
Where:
C = consumption household expenditure / consumption expenditure personal
I = total private sector investment
G = Government consumption and total investment expenditure
X = total export of goods and services
M = Total import of goods and services
Note: (X-M) is often described as XN or NX, both representing "net exports".
The name of the measure consists of either the word "Gross" or "Net", the word "National" or "Domestic", or the word "Product", "Income", or "Expenditure". Will be done. ". All of these terms can be explained individually."Gloss" means the entire product, regardless of its subsequent use. That is, the depletion or obsolescence of a country's fixed capital assets. The "net" indicates the amount of product that is actually available for consumption or new investment.
"Domestic" means that the boundaries are geographical. That is, it counts all goods and services produced within the border, regardless of who they are.
"Nationality" means that boundaries are defined by citizenship (nationality). We count all goods and services produced by the people of the country (or the companies they own), regardless of where their production physically takes place.
The production of French-owned cotton factories in Senegal is counted as part of Senegal's national figures, but as part of France's national figures.
"Product," "Income," and "Expenditure" refer to the three counting methods described earlier: the product, income, and expenditure approach. However, these terms are used loosely.
"Product" is a general term and is often used when one of the three approaches is actually used. The word "product" may be used, followed by additional symbols or phrases to indicate the methodology. So, for example, you get structures such as "Gross Domestic Product", "GDP (Income)", and "GDP (I)".
"Income" here is the income approach was used.
"Expenditure" specifically means that the spending approach was used.
Note that in theory, all three counting methods give the same final number. However, in reality, there are subtle differences from the three methods for several reasons, such as inventory level changes and statistical errors. For example, one problem is that an in-stock item has been produced (and therefore included in the product) but not yet sold (and therefore not yet included in the expenditure). Similar timing issues are due to the value (product) of the product produced and the factors that produced it, especially when the input is purchased with credit and wages are often collected after a period of time. Of production that can cause slight discrepancies between (income).
