Macro 1to3 English Colour
Macro 1to3 English Colour
Macro 1to3 English Colour
➔ In USA,from 1929 to 1933, unemployment rate Durable Goods: Long lasting goods are known as durable
rose from 3 per cent to 25 per cent. goods. Eg: TV, Car
➔ Over the same period GDP of USA fell by about Non Durable Goods: Goods that lasts only short period of
33 per cent. time. Eg: Food items like milk, vegetables etc
➔ These events made economists think about the ➢ Producer Goods or Capital Goods:
functioning of the economy in a new way. Goods once produced and which can be used again
➔ That leads to the emergence of a new branch of for Production are called Producer or Capital Goods.
economics (Macro Economics) Eg. Machines, buildings.
Flow Variable :A Variable that is measured in a specific Transfer Payment or Transfer Income or Transfer
period of time is called a flow. It is a dynamic concept. It is Returns: It is a unilateral payment for which no services
measured over a period of time. Eg. Consumption, income, are rendered. Usually It is paid by the government.
change in inventory. Eg.Old age pension, Scholarship,Widow pension etc.
Value Added OR Gross value added = Value of output – It is the difference between the value of Export minus
Value of intermediate Consumption import.
Value of output = market price × quantity of output The sum of all these expenditures are the total income
earned by all firms in the economy. Therefore.
Under value added method we calculate NI by
adding GVA of all firms in the economy during a financial n n n n n
year. We assume that there are N firms in an economy. The GDP= ∑ Ci +∑ Ii+∑ Gi +∑ Xi-∑ Mi
i=1 i=1 i=1 i=1 i=1
NI can be written as follows.
or GDP=C+I+G+X-M
GDP ≡ GVA1 + GVA2 + · · · + GVAN
n
National Income (NNPFC)=GDP+NFIA-Depreciation-NIT
Therefore, GDP= ∑ GVAi Conclusion
i=1
We used three different methods to calculate GDP
NVAi = GVAi – Di here Di= depreciation. or NI. Whatever be the method, we get identical results
There fore, because the value we get through production is the value of
factor rewards such as Rent,Wages and salaries, Interest
National Income (NNPFC)=GDP+NFIA-Depreciation - NIT. and Profit. These income is spent for different
expenditures.
Income Method
National income concepts (Macro Economic Identities/
Under this method NI is calculated by adding all
aggregates)
the factor income received by owners of factors of
production. Income received by land is called Important Macro Economic concepts are.
Rent(Ri),Income received by labour is called Wages and
salaries (Wi),Income received by Capital is called ➔ Personal Income (PI): It is the part of National
Interest(Ini) and Income received by entrepreneurship is Income received by each household of a Country is
called Gross Profit(Pi).Here depreciation charges and Net called Personal Income. It can be written as
Indirect Taxes are included in Gross Profit. Thus GDP can follows.
be written as follows. Personal Income (PI) :≡ NI – Undistributed profits –
n n n n Net interest payments made by households –
GDP= ∑ Wi +∑ Ri +∑ Ini +∑ Pi or Corporate tax + Transfer payments made to the
i=1 i=1 i=1 i=1 households from the government and firms.
GDP=W+R+In+P
➔ Personal Disposable Income(PDI): If we deduct the
There Fore, Personal Tax Payments(income tax, for example)
and Nontax Payments (such as fines) from PI, we
National Income (NNPFC)=GDP+NFIA-Depreciation-NIT. obtain what is known as the Personal Disposable
Income. Thus
➔ GDP Factor Cost (GDPFC): It is the difference Eg: Stamp duty, Registration fee etc.
between GDPMP and Net Indirect Tax
GDP and Prices: GDP is affected by changes in
GDPFC≡GDPMP-NIT GDP FC price level. An increase in price level, results an
≡NDPFC+Depreciation increase in the value of GDP and vice versa. To
eliminate the of change in price level, Economists
➔ Net Domestic Product (NDP): NDP is the total calculate Nominal and Real GDP.
money value of all final goods and services
produced in the domestic territory of a Country Nominal GDP: The value of GDP calculated on the
less Depreciation. basis of current year prices is called Nominal GDP.
It is denoted with ‘GDP'.
NDP ≡ GDP- Depreciation
Real gdp: The value of GDP calculated on the basis
➔ NDP at factor cost: NDP at factor cost is the for base year prices is called Real GDP. It is
income earned by the factors in the form of wages, denoted with ‘gdp'.
profits, rent, interest, etc., within the domestic
territory of a country. GDP Deflator: It is the ratio between nominal GDP
and Real gdp. It can be written as follows
➔ NDP FC = NDP MP - Net Product Taxes - Net
ProductionTaxes 𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟=𝐺𝐷𝑃/𝑔𝑑𝑝 or 𝐺𝐷𝑃/𝑔𝑑𝑝×100
➔ Gross National Product (GNP): GNP is defined as Consumer Price Index (CPI): This is the index of prices of
the sum of GDP and Net Factor Income from a given basket of commodities which are bought by the
abroad. It can be written as follows. representative consumer.CPI is generally expressed in
percentage terms. We have two years under consideration –
GNP ≡ GDP+ NFIA one is the base year, the other is the current year. The
➔ GNP at factor cost measures value of output following are the main differences between GDP deflator
received by the factors of production belonging to and CPI
a country in ayear.
Takes all consumers Takes representatives only Measure of value : Another important function of
money is that the money serves as a common
Whole Sale Price Index (WPI):It measures the relative measure of value or a unit of account. Under
changes in Whole sale prices. It is also called Producers barter system there was no common measure of
Price Index. value and the value of different goods were
measured and compared with each other.
Why GDP is not considered as a good indicator of welfare?
Store of value : Money acts as a store of value.
There are at least three reasons why GDP is not considered
Money being the most liquid of all assets is a
as a good indicator of welfare. They are the following.
convenient form in which to store wealth. Thus
1. Distribution of GDP – how uniform is it: If the GDP of money is used to store wealth without causing
the country is rising,the welfare may not rise as a deterioration.
consequence. This is because the rise in GDP may be
Standard of deferred payments : Another
concentrated in the hands of very few individuals or firms.
important function of money is that it serves as a
2. Non-monetary exchanges: Many activities in an economy standard for deferred payments. Deferred
are not evaluated in monetary terms. For example, the payments are those payments which are to be
domestic services women perform at home are not paid for. made in future. If a loan is taken today, it would be
paid back after a period of time.
3. Externalities: It refers to the benefits (or harms) a firm
or an individual causes to another for which they are not Transfer of value: Money helps to transfer value
paid (or penalised).Externalities do not have any market in from one place to another.
which they can be bought and sold.
Demand for money
4. Harmful goods: The production of harmful goods like
The desire of a person to hold money in hand is
tobacco, alcohol etc. are included in GDP. But we cannot
simply called demand for money or liquidity preference.
say that will increase welfare.
Demand for money arise because money is the most liquid
Chapter-3 and generally accepted medium of exchange. According to
J.M Keynes the demand for money is the sum of the money
Money and Banking required for three motives.
Barter system:It is a system of exchange in which one good 1-Transaction Motive
is exchanged for other.
2-Speculative Motive
Limitations of Barter system
3-Precaution Motive
➢ Absence of double coincidence of wants
Transaction Motive:
➢ Absence of common measure of value
People hold Money in hand for meeting their day
➢ Lack of store of value to day expenses is called Transaction Motive. Transaction
motive depends on the volume of transactions. When the
➢ Lack of standard of deferred payment
volume of transaction increases, Transaction Demand for
➢ Problem of indivisibility. Money also increases. Transaction Demand For Money is a
fraction of the volume of transactions in the economy over
Money-Definition a period of time. It can be written as follows.
According to Robertson, "Money can be defined as M d T = k.T
anything which is commonly accepted in exchange
for goods and services and discharging other kinds Here, MdT = Transaction demand for money.
of obligations."
T = Total volume of transaction
According to W.A.Walker, "Money is what money
k = A positive fraction.
does."
In other words k is the inverse of velocity of
Functions of Money : The major functions of money are:
circulation of money(v). Velocity of money is the number of
Speculative demand for money can be written as follows. As they circulate because of the order of the govt. they are
called fiat money.
They are also called legal tender money because of the legal
backing of the monetary authority.
M1 = CU + DD
Lender of Last Resort: Central bank extend its It is clear from this example that an initial deposit
helps to Commercial Banks in the time of financial of Rs 100 in the bank becomes a deposit of Rs 500. That is
difficulties. we can see five times increase in deposit with the bank. This
Commercial Bank is also known as money multiplier.
When a bank lend, a particular amount of money In an example of initial deposit of Rs 100 and CRR-
to a person, a new deposit is opened with the same amount 20% .Money
in that bank in the name of the borrower. Thus money
supply increases (old deposits plus new deposit). This
1
Multiplier= =5
feature of commercial banks is known as credit creation by 0.2
banks. This is an important factor determining the total
This means that total increase in money supply is
money supply in an economy.
5x100=500.
Policies undertaken by the central bank of a ➢ Some times central bank may sell securities
country, to control the money supply is called monetary through an agreement which has a specification
policy. Monetary policy aim at controlling of money supply. about the date and price at which it will be
During inflation money supply was high and then central repurchased. This is Reverse Repo .
bank reduces money supply. During deflation money
supply has to be reduced. ➢ During inflation the central bank raises the repo
rate to reduce money supply. During deflation the
The RBI uses quantitative and qualitative tools for central bank reduces repo rate.
controlling money supply.
B. In qualitative measures the central bank uses its moral
A. Central bank uses the following quantitative tools to authority to persuade banks to act in a particular way.
control money supply. Which is done through moral suasion, margin
requirement etc.
1- Reserve Ratios (CRR and SLR)
Demonetisation
2-Bank Rate
Demonetisation was a new initiative taken by
3-Open Market Operations government of India on 8th November 2016. As per this old
1.Reserve Ratios (CRR and SLR) currency notes of Rs 500 and Rs1000 were withdrawn,
because these currency notes have no longer legal tender.
Cash Reserve Ratio (CRR) is the Percentage of deposits
which a bank must keep as cash reserves with the bank. Objectives of Demonetisation
Banks are also required to keep some reserves in liquid • Tackle the problems of Corruption , Black Money,
form in the short term(in the form of government securities Terrorism and
or such liquid assets). This ratio is called Statutory • Circulation of fake currencies in the economy.
Liquidity Ratio or SLR.
Problems in connection with Demonetisation (Criticisms)
During inflation both CRR and SLR will increase
and there by control inflation by reducing money supply. • Long queues outside Banks and ATMs created
During deflation SLR and CRR should increase. difficulties in Normal life.
During inflation RBI increase bank rate lead to • It improved tax compliance as a large number of
increase rate of interest and reduce credit creation and people were bought in the tax ambit.
money supply. During deflation RBI reduce bank rate. • The savings of an individual were channelised into
3.Open Market Operation : the formal financial system.
Open market operations are another quantitative • banks have more resources at their disposal which
method of credit control. This method refers to the sale and can be used to provide more loans at lower interest
purchase of securities, bills and bonds of government and rates.
private financial institutions by the central bank from the • Tax evasion will no longer be tolerated and will
open market. During the inflation time RBI Sells securities result in financial penalty and social
and the time of deflation RBI purchase securities. condemnation.
There are two types of open market operations: outright • Households and firms have begun to shift from
and repo: cash to electronic payment technologies.
Outright open market operations:When the central bank *********************
buys or sells securities without any promise to sell or buy
them later is called Outright open market operations.
Outright open market operations are permanent in nature.