{"id":450,"date":"2018-10-31T04:59:11","date_gmt":"2018-10-31T04:59:11","guid":{"rendered":"http:\/\/mgmtp11.epgpbooks.inflibnet.ac.in\/?post_type=chapter&p=450"},"modified":"2018-10-31T05:15:19","modified_gmt":"2018-10-31T05:15:19","slug":"macroeconomic-aggregates-and-concepts","status":"publish","type":"chapter","link":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/chapter\/macroeconomic-aggregates-and-concepts\/","title":{"rendered":"Macroeconomic Aggregates and Concepts"},"content":{"raw":"
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  1. Learning Outcome<\/strong><\/li>\r\n<\/ol>\r\n \r\n

    After completing this module the students will be able to:<\/p>\r\n \r\n

    Meaning and definitions of macroeconomics.<\/p>\r\n \r\n

    Understand various aggregates used in macroeconomics.<\/p>\r\n \r\n

    Know the meaning of various concepts used in macroeconomics.<\/p>\r\n\r\n

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    1. Meaning & Definitions of Macroeconomics<\/strong><\/li>\r\n<\/ol>\r\n \r\n

      Any body of knowledge acquired through using scientific methods is called Science. Science is divided into two parts, namely, natural science and social science. The study of naturally occurring objects and phenomena is called natural science. Therefore, naturally occurring objects and phenomena such as lights, objects, matters, earth, human body etc. formulates the subject matter of natural sciences. In contrast to this, we have social science which is the science of people or group of people living in a society. Therefore, social sciences focus on individuals, groups, societies, economies and their behaviour either individually or collectively. Economics is a discipline of social sciences which studies the economic aspect of life. So it is often called science of firms, markets, and economies. Further, it is associated with the study of production, consumption and distribution of wealth. Traditionally, economics was divided into two parts-microeconomics and macroeconomics. The simple difference between microeconomics and macroeconomics is that whereas the former studies the behaviour of individual units in the economy, the latter studies the economy as a whole. The term \u2018macro\u2019 in macroeconomics comes from the Greek word \u2018makros\u2019 which means large. So macroeconomics is always associated with the study of the behaviour of the economy as a whole. This discipline of economics was first introduces by Ragnar Anton Kittil Frisch, a Norwegian economist, in 1933. However, John Maynard Keynes, with his publication of General Theory of Employment, Interest and Money (<\/em>1936), contributed a lot to the development of macroeconomics. Following are some of the definitions of macroeconomics.<\/p>\r\n \r\n

      According to Gardner Ackley, \u201cMacroeconomics is concerned with the over-all dimensions of economic life.<\/p>\r\n\r\n

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      • \u2026. More specifically, macroeconomics concerns itself with such variables as aggregate volume of an economy, with the extent to which its resources are employed, with size of the national income, with general price level\u201d.<\/li>\r\n<\/ul>\r\n

        Kenneth Ewart Boulding defines Macroeconomics as \u201cthe study of the nature, relationships and behaviour of aggregate economic quantities\u2026. Macroeconomics \u2026 deals not with individual quantities as such, but<\/p>\r\n \r\n

        with aggregates of these quantities \u2026 not with individual incomes, but with the national income, not with individual prices, but with the price levels, not with individual output, but with the national output\u201d.<\/p>\r\n \r\n

        According to J.M. Culbertson \u201cMacroeconomic theory is the theory of income, employment, prices and money\u201d.<\/p>\r\n \r\n

        Paul Anthony Samuelson, an American economist, states that \u201cMacroeconomics is the study of the behaviour of the economy as a whole. It examines the overall level of a nation\u2019s output, employment, prices, and foreign trade\u201d.<\/p>\r\n \r\n

        Before we go into the discussion of macroeconomic aggregates, we need to know the need for knowing these aggregates. And one of the most important reasons to possess knowledge of macroeconomic aggregates is the very issues that are covered in macroeconomics. The issues covered in this discipline are called macroeconomic issues or problems that all most all the countries face over time and tackling these issues or solving these problems forms the objective of macroeconomists or policy makers. And macroeconomic aggregates are used a tool to gauge, explain, and analyse macroeconomic issues and designing policy prescriptions to tackle these issues. So let us first discuss the macroeconomic issues or problems.<\/p>\r\n \r\n

        First, the level of growth for any country is of prime significance. Every country wants to prosper or grow over a period of time. On the basis of income only we group countries into developed, developing, or underdeveloped category. It is this parameter (income level) that enables us to say that India, China, Brazil and South Africa are developing countries; United States, Japan, United Kingdom are developed countries; and Uganda, Bolivia, Senegal etc. are underdeveloped countries. Therefore, how to achieve or maintain a high rate of growth of national income has been a key macroeconomic issue. To understand this issue, knowledge on such macroeconomic aggregates as gross domestic product (GDP), national income, per capita income, nominal and real income are needed.<\/p>\r\n \r\n

        Second, growth of income in no country follows a smooth path. It goes through huge fluctuation and this fluctuation in the economy constitutes a macroeconomic issue in the name of business cycles. For example, world economy saw a massive slowdown in 1930s and during the recent financial crises of 2008-09. Similarly, in India the famous \u2018Hindu rate of growth\u2019 occurred during 1951-1975 and in this period India grew at a meagre rate of 3.5 per cent, whereas during 2000-2007, India\u2019s income grew at a rate of 7 to 8 per cent per annum. Therefore, every country sees prosperity followed by recession and then again prosperity. This recurrence of prosperity and recession in the economy is called business cycle. To understand this phenomenon, macroeconomic aggregates like peak, trough, recession, recovery are useful.<\/p>\r\n \r\n

        Third, instability in the general level of prices in the economy is another macroeconomic problem. More specifically, economists use the term inflation to describe this. Inflation, in simple words, is the sustained and persistent increase in the general level of prices over a period of time. Inflation erodes the purchasing power or value of currency. For example, if India faces inflation, purchasing power or value of Indian rupee decreases. Mismatch between aggregate demand and aggregate supply is the main reason behind inflation. Broadly, there are three types of measures of inflation-consumer price index, producer price index and GDP deflator. These three measures along with aggregate demand and aggregate supply may also be put under macroeconomic aggregates.<\/p>\r\n \r\n

        Fourth, issue of unemployment of resources, mainly of labour force, is one of the serious issues faced by both underdeveloped and developing countries traditionally, and now after the global recession of 2008-09, faced by developed countries too. Unemployed workers can be defined as those workers who want to work but could not find any job. This problem limits the potential of a country so far as production of goods and services are concerned because of the very fact that its chief resource (i.e. labour) is unemployed. Further, the relationships between growth, inflation, and unemployment have been one of the controversial issues of macroeconomics. To have a better understanding of this issue, we need to know some more macroeconomic aggregates like labour force, unemployment rate, and labour force participation rate.<\/p>\r\n \r\n

        Finally, with the extent of globalization that we see today, entire world has become a village and hence do transactions with each other. The external sector (through exports and imports) also plays a vital role today in the development of a country. External sector\u2019s health is measures by the balance of payments (BOPs) deficit\/surplus. As BOPs records the annual transaction of one country with the rest of the world, exchange rate influences value of these transactions.<\/p>\r\n \r\n

        Therefore, under macroeconomic aggregates we need to discuss, BOPs deficit\/ surplus, nominal exchange rate and real exchange rate.<\/p>\r\n \r\n

        After presenting the justification of knowing macroeconomic aggregates, the following section deals specifically with these aggregates which are often called macroeconomic variables.<\/p>\r\n\r\n

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        1. Macroeconomic Aggregates<\/strong><\/li>\r\n<\/ol>\r\n

          Macroeconomic aggregates are used to understand the health of the economy as a whole through the total or aggregate values of macroeconomic variables. In simple words, these are the variables using which performance of an economy is commented on. The following are the macroeconomic aggregates.<\/p>\r\n \r\n

          3.1 <\/strong>Gross domestic product (GDP)<\/strong><\/p>\r\n \r\n

          GDP is a measure of the value of all final goods and services produced in a country within a given period of time. There are three important aspects of this definition- the value, final goods and services, and produced within a given period of time- that needs separate clarification. GDP includes only those goods and services that are currently produced within a time interval say per quarter or per year. For example, to calculate India\u2019s GDP in 2015-16, only those goods that are produced in 2015-16 are considered. As such, goods and services (like cars, buildings, financial services etc.) produced prior to 2015-16 are not included in this year\u2019s GDP. Therefore, exchanges of second hand goods, exchanges of stocks and bonds previously issued-for they do not enter the current production of goods and services, are not included in GDP. Second, only final goods and services enter GDP. Goods that are used to produce other goods (known as intermediate goods) do not enter GDP. However, only two types of intermediate goods- capital goods or part of capital goods (i.e. depreciation) and inventories (stocks of final products and\/or raw materials) are included in GDP. Capital goods are the goods such as factories, machinery, and equipments used to produce other goods. Depreciation is that part of the capital stock that wears out each year. Inventory investments measure the net change in inventories of final goods awaiting sale or of material used in the production process. Third, GDP is the value of all final goods and services and this value is arrived at by using market prices of each final good and service. As such, GDP is sensitive to variations in market prices. There may be situation where change in GDP is brought about by change in prices but not physical quantity of goods and services. To check this, economists use another measure real GDP where value of all currently produced final goods and services are calculated using a base year price.<\/p>\r\n \r\n

          3.2 <\/strong>National income<\/strong><\/p>\r\n \r\n

          National income is arrived at when we aggregate the incomes of all the factors of production from the current production of goods and services. These factors are land, labour and capital. And their incomes are categorized as compensation of employees, corporate profits, proprietor\u2019s income, rental income of persons, and net interest. For calculation of national income, gross national product (GNP) is considered not GDP. GNP, simply put, is the income of nationals of a country. For example, to get India\u2019s GNP we include in its GDP income earned abroad by Indian residents and firms and exclude from it the earnings of foreign residents and firms from production in India. When depreciation is deducted from GNP, we get net national product (NNP). National income is arrived at by excluding indirect taxes and other (bad debts to business sector are included in other category) from NNP.<\/p>\r\n \r\n\r\n3.3 Growth rate of Economy<\/strong>\r\n\r\n \r\n

          Generally, growth rate of GDP is meant as growth rate of the economy. Annual Growth rate of the economy in period \u2018t\u2019 is calculated by the following formula.<\/p>\r\n \r\n

          g =\u00a0 \u00a0 \u2212\u00a0 \u00a0\u22121\u00a0 \u00a0\u22121 x 100<\/p>\r\n \r\n

          Here \u2018g\u2019 is the growth rate of the economy; \u2018Yt\u2019 is the GDP in period \u2018t\u2019; \u2018Yt-1\u2019 is the GDP in the just previous period \u2018t-1\u2019.<\/p>\r\n \r\n

          In similar way, quarterly growth rate is calculated by taking different quarters in a year (1st quarter, 2nd quarter etc.) as\u2018t\u2019.<\/p>\r\n \r\n\r\n3.4 Personal Income<\/strong>\r\n\r\n \r\n

          Income received by persons from all sources is called personal income. From national income, we can calculate personal income by subtracting corporate profits tax payments, undistributed profits, and valuation adjustment; and contribution to social security and by adding transfer payments to persons and personal interest income.<\/p>\r\n \r\n\r\n3.5 Personal Disposable Income<\/strong>\r\n\r\n \r\n

          Consumption depends upon personal disposable income. It is with this income individuals make their decision on consumption expenditure. When personal taxes are deducted from personal income, we get Personal Disposable Income.<\/p>\r\n \r\n\r\n3.6 Per capita Income (PCI)<\/strong>\r\n\r\n \r\n

          It is the average income per person. Therefore, per capita income is the national income divided by the population.<\/p>\r\n \r\n\r\n\"\"\r\n\r\n3.7 <\/strong>Nominal GDP versus Real GDP<\/strong>\r\n\r\n \r\n

          GDP measured in current prices is known as nominal GDP. Here the value of currently produced goods and services are calculated by using market prices. Nominal GDP can change when actual volume of production changes, or when market prices change, or when both volume of production and market prices change. Real GDP is used when we want to measure GDP that varies only with quantity, not prices, of goods produced. Real GDP measures output in terms of constant prices or prices from a base year.<\/p>\r\n \r\n\r\n3.8 <\/strong>The business cycle<\/strong>\r\n\r\n \r\n

          For every country, there is a trend growth path of GDP and it is the path GDP would take if factors of production are fully employed. Business cycle expresses the recurring of expansion (recovery) and contraction (recession) in economic activity around the path of trend growth. According to the National Sample Survey (NSS) of India, the term \u2018economic activity\u2019 includes \u201call the market activities performed for pay or profit which result in production of goods and services for exchange and the non-market activities such as all the activities relating to the agriculture, forestry, fishing, mining and quarrying which result in production of primary goods for own consumption and activities relating to the own-account production of fixed assets, which include production of fixed assets including construction of own houses, roads, wells, etc., and of machinery, tools, etc., for household enterprise and also construction of any private or community facilities free of charge\u201d. Adding economic activity of industry and service sector to the above definition, we can get a sense of economic activity that is considered for business cycle. Figure-1 presents a picture of business cycle. When economic activity (or simply growth rate of GDP) is high relative to trend we call it a peak and when economic activity is lowest we call it trough.<\/p>\r\n \r\n\r\nFigure-1: Business Cycle<\/strong>\r\n\r\n\"\"\r\n\r\n3.9 <\/strong>Inflation measures in India<\/strong>\r\n\r\n \r\n

          In India, we normally come across three types of inflation measures such as wholesale price Index (WPI), otherwise known as producer\u2019s price index (PPI); Consumer price index (CPI), otherwise known as retail price inflation; and the GDP deflator.<\/p>\r\n \r\n\r\n3.9.1 <\/strong>Wholesale price Index (WPI)<\/strong>\r\n\r\n \r\n

          WPI measures price changes from the perspective of producers or sellers. It measures the average change in selling prices received by domestic producers for their output. PPI is different from WPI only in the coverage of goods and industries. In the calculation of WPI in India, changes in prices of manufactured products, primary articles, fuel and power items are considered and these are given a weight of 64.97 per cent, 20.12 per cent, and 14.91 per cent respectively. Laspayer\u2019s index is used to calculate WPI in India and 2004-05 is the current base year for its calculation. Primary articles are divided into three categories such as food articles, non-food articles, and minerals. Food articles include cereals & pulses; fruits & vegetables; milk, egg, fish, & meat; and spices, tea\u00a0& In the non-food articles, fibres, oil seeds, raw hide, tobacco, fodder, flowers are included. Metallic, non-metallic, & crude petroleum consists of minerals. Under fuel & power items, changes in prices of electricity, coals, mineral oil & LPG are considered. Items included in manufactured products are beverages, tobacco, textiles, wood & paper, chemicals, non-metalic minerals, metal & alloy, machine tools, and transport equipment. There are, in total, 676 items that are considered in the calculation of WPI in India.<\/p>\r\n \r\n

          Headline WPI measures the changes in the price level of all the above three categories of products (manufactured products, primary articles, and fuel & power items) compared to its prices in base year.<\/span><\/p>\r\n \r\n

          Core inflation measures the changes in the price level of all products except food and fuel & power items compared to its prices in base year. Hence it only measures the changes in the price level of non-food manufactured products.<\/p>\r\n \r\n

          3.9.2 <\/strong>Consumer Price Index (CPI)<\/strong><\/p>\r\n \r\n

          CPI measures the changes in the general price level from the consumer\u2019s perspective. It is very important as it measures the changes in the prices of a representative basket of goods and services that a typical household in India consumes. Currently it is calculated by using laspeyer\u2019s formula taking 2010 as base year and five categories of goods and services are considered for this purpose. Each category is given a weight based on the importance of that category in the consumption basket of a household. CPI calculated for rural area is called rural CPI, CPI calculated for urban area is called urban CPI, and CPI for both rural & urban area is called combined CPI. Rural CPI is constructed on the basis of five categories of commodities such as food, beverages & tobacco; health, education & other services; fuel & light; and clothing, bedding, & footwear with weights 59.31 per cent, 24.91 per cent, 10.42 per cent and 5.36 per cent respectively. Urban CPI includes prices changes in four categories included in rural CPI plus prices changes in housing. Weights given to each category is different from rural CPI where food, beverages & tobacco is assigned a weight of 37.15 per cent; health, education & other services is assigned a weight of 28 per cent; housing is assigned a weight of 22.53 per cent; fuel & light is assigned a weight of 8.4 per cent; and clothing, bedding, & footwear is assigned a weight of 3.91 per cent. Combined CPI includes all the above five categories with a different weight assigned to each category. For combined CPI, food, beverages & tobacco is assigned a weight of 49.71 per cent; health, education & other services is assigned a weight of 26.31 per cent; housing is assigned a weight of 9.77 per cent; fuel & light is assigned a weight of 9.49 per cent; and clothing, bedding, & footwear is assigned a weight of 4.73 per cent.<\/p>\r\n \r\n

          3.9.3 <\/strong>GDP Deflator<\/strong><\/p>\r\n \r\n

          It defined as\u00a0 __________.<\/p>\r\n \r\n

          3.10 Aggregate demand and Supply<\/strong><\/p>\r\n \r\n

          Given the resources and technology of a country, the level of aggregate supply is the amount of output that economy can produce. The quantity of output that firms are willing to supply for each given price level is called aggregate supply (AS) curve. Therefore, the position of AS curve depends on the productive capacity of the economy. Similarly, the level of aggregate demand is the aggregate of demand for goods to consume, demand for new investments, government\u2019s demand for goods and demand for net exports. Net exports are total exports minus total imports. The aggregate demand (AD) curve gives us the level of output for each given price level at which the goods market and money market are simultaneously in equilibrium. The position of AD curve depends on monetary and fiscal policy. The intersection of aggregate supply and aggregate demand results in equilibrium price and quantity.<\/p>\r\n \r\n

          3.11 Employed and Unemployed persons<\/strong><\/p>\r\n \r\n

          According to national sample survey (NSS) of India, \u201cEmployed or workers are those persons who were engaged in any economic activity or who, despite their attachment to economic activity, abstained themselves from work for reason of illness, injury or other physical disability, bad weather, festivals, social or religious functions or other contingencies necessitating temporary absence from work, constituted workers. Unpaid household members who assisted in the operation of an economic activity in the household farm or non-farm activities were also considered as workers\u201d.<\/p>\r\n \r\n

          As per NSS \u201cUnemployed are those Persons who, owing to lack of work, had not worked but either sought work through employment exchanges, intermediaries, friends or relatives or by making applications to prospective employers or expressed their willingness or availability for work under the prevailing conditions of work and remuneration, were considered as those \u2018seeking or available for work\u2019 (or unemployed)\u201d.<\/p>\r\n \r\n

          3.11.1 Labour Force<\/strong><\/p>\r\n \r\n

          In India, labour force includes persons who were either 'working' (or employed) or 'seeking or available for work' (or unemployed) constituted the labour force<\/p>\r\n \r\n

          3.11.2 Key Indicators regarding Employment and Unemployment in India<\/strong><\/p>\r\n \r\n\r\n\"\"\r\n\r\n3.12 Balance of Payments (BOPs)<\/strong>\r\n\r\n \r\n

          In the globalised world that we are living in today, every country carry out transactions with other countries on commodities, labour, capital, and technology. In BOPs of a country, these transactions are recorded in monetary terms. So BOPs records the transactions of one country (say India) with the rest of the world in given year. It merely records the receipts and payments arising out of international transaction of one country. In this sense, BOPs is an application of double entry book-keeping where credits and debits are recorded in different accounts. In India, BOPs consist of current account and capital account. Current account records transactions of merchandise trade (or visible goods trade) and invisibles which includes different services,transfers, and income. Credits to this account come from foreign countries when merchandise goods and invisible services are exported, when official & private transfers are made from abroad, and when incomes come from abroad from investment and through compensation of employees. Debits from this account happen payments are made to foreigners for import of merchandise goods and invisible services. Debits also take place when India and foreign nationals in India transfer income to abroad and income from foreign investment and compensation of foreign employees are repatriated abroad. When credit is more than debit in this account, we call it current account surplus and when debit is more than credit, we term it current account deficit. Capital account of India\u2019s BOPs consists of foreign investment (both direct & portfolio), loans, banking capital, rupee debt service, and other capital. Capital account surplus and deficit is defines on the basis of credit and debit on these items. Last errors & omissions are included to other headings (current account & capital account) to get the overall balance in BOPs.<\/p>\r\n \r\n\r\n3.13 Exchange Rate<\/strong>\r\n\r\n \r\n

          Exchange rate is the price of one currency in terms of another currency. Like any other commodities, exchange rate of one currency is determined by the demand for and supply of that currency. To give you an example, if 60 Indian rupees are needed to buy 1 US dollar, then we say 1 US dollar equals 60 Indian rupees. In this case, exchange rate of US dollar in terms of rupees is 60 and conversely exchange rate of Indian rupee in terms of dollar is 0.0166. When Indian rupee appreciates or its value rises relative to other currencies, Indian goods abroad become more expensive and foreign goods in India becomes cheaper if domestic prices in two countries remain constant. Appreciation of Indian rupee occurs when, let\u2019s say, 55 rupees are needed now to buy 1 US dollar. In this case exchange rate of Indian rupee in terms of dollar becomes 0.0181 (higher than previously 0.0166) and hence it appreciates. In contrast to this, when Indian rupee depreciates then its goods abroad become cheaper and foreign goods in India become dearer. Depreciation of Indian rupee occurs when, let\u2019s say, 65 rupees are needed now to buy 1 US dollar. In this case exchange rate of Indian rupee in terms of dollar becomes 0.0153 (lower than previously 0.0166) and hence it depreciates.<\/p>\r\n\r\n

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          1. Concepts in macroeconomics<\/strong><\/li>\r\n<\/ol>\r\n \r\n

            Following are the concepts used in macroeconomics. The understanding of these concepts is necessary for a student to understand the interpretation of various macroeconomic aggregates listed above.<\/p>\r\n \r\n

            4.1 <\/strong>Economic Models<\/strong><\/p>\r\n \r\n

            In economics, you would come across numerous theories. These theories are nothing but an abstraction from the real world. Economic theories, apart from other things, mainly describe\/record common properties and explain interrelationships of particular economic phenomena under study. For example, theory of consumption gives us an idea about how the process of consumption takes place in the economy, the factors that affect consumption and what happens to consumption when these factors change. A model is a simplified description of reality or in other words, theories are presented through models. Models can be presented verbally and in terms of equations and\/or diagrams. We, economists in most of the times, use equations and diagrams to express the relationship among economic variables.<\/p>\r\n \r\n

            Variables can be of two types- exogenous and endogenous variables. Exogenous variables are given from outside the model and hence the values of these variables are not determined inside the model or the values are given the moment they enter the model. In contrast, endogenous variables are come from inside the model meaning the values are determined within the model.<\/p>\r\n \r\n

            An Example:<\/strong><\/p>\r\n \r\n

            Consider the following model of income which consists of three equations where equation-1 gives consumption function; equation-2 is investment function; and equation-3 gives income identity.<\/p>\r\n\r\n

              \r\n \t
            • Ct = a1 + a2Yt + et ;<\/li>\r\n \t
            • It = b1 + b2rt + ut<\/li>\r\n \t
            • Yt = Ct + It + Gt<\/li>\r\n<\/ul>\r\n \r\n

              In the above set of equations, Ct, It and Yt representing consumption, investment and income respectively are endogenous variables; and rt & Gt representing interest rate and government expenditure respectively are endogenous variables.<\/p>\r\n \r\n

              The relationships of variables expressed in economic models or simply equations of economic models can be divided into following three types.<\/p>\r\n \r\n

              First type of equation is behavioural. Example of this could be consumption function C = C(Y), which states that consumption (C) is a function of Income (Y)<\/p>\r\n \r\n

              Second, equations could be technical meaning relationship between variables is influenced by technology. Best example of this type is the production function Q = f(L,K) where production (Q) is function of capital (K) and labour (L). But we all know that this function is largely influenced by the level of technology underlying the production process.<\/p>\r\n \r\n

              Third, when in a equation, relationship between variables are definitional, it is called definitional equation. Revenue function R = P\u00d7Q where P is price & Q is quantity; and Real interest rate IR = IN\u2013 r where IN is nominal interest rate & r is rate of inflation are examples of definitional equations.<\/p>\r\n \r\n\r\n4.1.1 Variables, Constants, and Parameters<\/strong>\r\n\r\n \r\n

              A properly constructed economic model consists of three things- variables, constants, and parameters. A variable is something that can assume different values. The magnitudes of variables are liable to change. Examples of variables frequently used in macroeconomics are national income, national saving, investment, exports, imports, money supply, employment etc. normally, symbols are used to represent variables. For example national income is represented by Y, Saving is represented by S, investment is represented by I and so on.<\/p>\r\n \r\n

              The antithesis of a variable is a constant whose magnitude does not change. When a constant is tied to a variable, it is called the coefficient of that variable. In the Saving equation S = 0.5 Y, 0.5 is the coefficient of income (Y). Coefficients can be represented by a number (like the saving equation example) or by a symbol (like \u03b1, \u03b2 and so on) or English alphabet (like a, b, c and so on). Here it is worth mentioning that coefficient of Y can take any value or in other words, coefficient is a constant that is a variable. Considering its special nature, we can name such constants parametric constant or simply parameters.<\/p>\r\n \r\n

              4.1.2 Equation and Identity<\/strong><\/p>\r\n \r\n

              The functional relationship between variables can be written in an equation format. It would be called an equation, not identity, when the relationship is true for some specific values but not for all values of the variables. In mathematics, Y = 7X + 9 is an equation as it may not be true for all values of X and Y. For example, if Y is 23 then the relation is true only when X is 2 not for all values of X. An equation is denoted by \u2018=\u2019 sign. Take the example of a linear consumption function C = a + bY; where C is consumption, Y is income; and a & b are parameters. This is an equation for it can be tested which is the other criterion of making distinction between equation and identity. Normally, in economics hypotheses are represented in equation form. Only behavioural relationships can be called equations.<\/p>\r\n \r\n

              Identity, denoted by \u2018\u2261\u2019, represents relation between several variables and it is true for all possible values. By definition an identity is true. In mathematics, one famous identity is (a+b)2 = a2 + b2 + 2ab as it is true for all values of a and b. In macroeconomics, one identity could be Y \u2261 C + I + G + (X-M) where Y is total income, I is total investment, G is government expenditure, and (X-M) is net exports.<\/p>\r\n \r\n

              4.2 Ex-ante and Ex-post<\/strong><\/p>\r\n \r\n

              An economic variable can have both Ex-ante and Ex-post value. The value of a variable which is planned or desired is called Ex-ante value of that variable. As such these values are only projected\u00a0values. Every year government of India, Reserve Bank of India (RBI), International Monetary Fund (IMF), among many others forecast about India\u2019s GDP, savings, investment, and so on. These values are the examples of Ex-ante values.<\/span><\/p>\r\n\r\n

              \r\n\r\n \r\n

              Ex-post values refer to actual or realised values of a variable. The values of GDP, savings, investment and so on presented every year in the Economic Survey of India records the actual magnitudes of these variables pertaining to the concerned year. Therefore, these can be called Ex-post GDP, Ex-post savings, Ex-post investment and so on. It is not necessary that Ex-post magnitudes are equal to Ex-ante magnitudes.<\/p>\r\n \r\n\r\n4.3 Static and dynamic analysis<\/strong>\r\n\r\n \r\n

              Static analysis is used to analyse a model involving variables pertaining to same point in time or same time period. When inflation in a year depends upon the money supply of that year, we say there is static relationship between inflation and money supply. And the analysis of this kind of relationship is called static analysis. Similarly, analysis of simple Keynesian model of income determination is an example of static analysis as all the variables of the model (consumption & investment) refer to the same period of time. But dynamic analysis is needed for a model whose variables refer to different points of time or different periods of time altogether. Effectiveness of monetary policy in checking inflation is an example of dynamic model for a change in monetary policy today would start to show its effect after a lag of 8 to 9 months and we apply dynamic analysis to this model.<\/p>\r\n \r\n

              Static analysis is otherwise known as comparative statics. In comparative statics, we only compare one equilibrium state with another or more specifically, a comparison is done between initial equilibrium state and final equilibrium state. In this analysis, there is always possibility of attaining new equilibrium. One disadvantage of the static analysis is that the in between process of two equilibrium stages are not analysed as we only compare between two equilibrium positions. But when we start from disequilibrium positions and then want to answer whether or not the system can move towards equilibrium, dynamic analysis is needed. Second, when there are lags involved or when adjustments of one variable(s) take time to change other variables(s) and when variables are depended upon each other, dynamic analysis is more appropriate.<\/p>\r\n \r\n\r\n4.4 Stocks and Flows<\/strong>\r\n\r\n \r\n

              The economic variables that are measurable can be either stock variable or flow variable. Stock variables are variables which are measurable at a point in time whereas flow variables are variables which are measurable over a period of time. Therefore, it is the dimension of time (at a point of time or over a period of time) that distinguishes a stock variable from a flow variable. One\u00a0famous example that is cited to explain this is the water tank. Suppose a family has one water tank with a capacity of 2000 litres. Every evening, water is pumped to the tank at a rate of 500 litres per hour. If a family member wants to measure the level of water at 6 am in the morning he\/she measures exact level of water left in the tank at 6 am. Here water level at 6 am is stock variable and pumping rate of water is flow variable. Similarly money supply is a stock variable. But production is a flow variable as it is presented as some value (like 100 crore or 200 crore) per year or per month or per quarter and so on. Stock variable is a number while flow variable is number or rate per time period. Rate of growth of GDP, growth rate of savings, growth rate of investment are examples of stock variable and capital stock, money supply, wealth are examples of stock variables.<\/span><\/p>\r\n\r\n<\/div>\r\n \r\n\r\n4.5 Cross section and Time series data<\/strong>\r\n\r\n \r\n

              Cross section data are the data collected from multiple individuals at the same point of time. These individuals could be people, states, nations, firms or any group. For example, the data collected on income of all the nations in the world (like India, Australia, Japan and so on.) in 2015 are cross sectional data. The basic characteristic of this data is that it refers to a single point of time. Savings of women employees in 2015, value of macroeconomic variables like saving, investment, employment, GDP in 1st quarter of 2015, quantity of all agricultural products in India in 2015 are some examples of cross sectional data.<\/p>\r\n \r\n

              Time series data are collected form single individual at multiple points in time. Again these individuals could be any variable, people, state, and nation and so on. For example, GDP of India from 19950 to 1991, employment data of India since independence, yearly investment data of India are time series data. High frequency of time series data are collected at multiple points in time and the interval among the time periods are very small. Examples of this include, stock price data, temperature data, investment in stock market data etc. Similarly, low frequency time series data are collected at multiple points in time and the interval among the time periods are fairly large. Yearly data are examples of this. Combination of cross section and time series data are called panel data or pooled data.<\/p>\r\n\r\n

                \r\n \t
              1. Summary<\/strong><\/li>\r\n<\/ol>\r\n \r\n

                This module has focused on the meaning and definitions of macroeconomics. Along with this various macroeconomic aggregates and concepts are elaborated for the benefit of readers. The above aggregates and concepts would be preparing students for further reading in macroeconomics. With this knowledge, readers would be able in a better position to understand the complex relationships between macroeconomic variables in the economy.<\/p>\r\n \r\n\r\nOnline Resources<\/strong>\r\n

                  \r\n \t
                • Central Statistical\u00a0 Organisation\u00a0 (CSO).\u00a0 National\u00a0 Accounts\u00a0 Statistics.\u00a0 Central\u00a0 Statistical<\/li>\r\n \t
                • Organisation, Ministry of Statistics and Programme Implementation[http:\/\/mospi.nic.in\/Mospi_New\/upload\/nas_13.html]<\/li>\r\n \t
                • National Sample Survey Office (NSSO). Employment & Unemployment Situation in India (68th Round). Ministry of Statistics and Programme Implementation. Government of India. [http:\/\/mospi.nic.in\/Mospi_New\/upload\/nss_report_554_31jan14.pdf]<\/li>\r\n \t
                • Reserve Bank of India (RBI). Handbook of Statistics on Indian Economy 2014-15. Reserve<\/li>\r\n \t
                • Bank of India. [https:\/\/www.rbi.org.in\/scripts\/annualPublications.aspx?head=Handbook%20of%20Statistics %20on%20Indian%20Economy]<\/li>\r\n<\/ul>","rendered":"
                    \n
                  1. Learning Outcome<\/strong><\/li>\n<\/ol>\n

                     <\/p>\n

                    After completing this module the students will be able to:<\/p>\n

                     <\/p>\n

                    Meaning and definitions of macroeconomics.<\/p>\n

                     <\/p>\n

                    Understand various aggregates used in macroeconomics.<\/p>\n

                     <\/p>\n

                    Know the meaning of various concepts used in macroeconomics.<\/p>\n

                      \n
                    1. Meaning & Definitions of Macroeconomics<\/strong><\/li>\n<\/ol>\n

                       <\/p>\n

                      Any body of knowledge acquired through using scientific methods is called Science. Science is divided into two parts, namely, natural science and social science. The study of naturally occurring objects and phenomena is called natural science. Therefore, naturally occurring objects and phenomena such as lights, objects, matters, earth, human body etc. formulates the subject matter of natural sciences. In contrast to this, we have social science which is the science of people or group of people living in a society. Therefore, social sciences focus on individuals, groups, societies, economies and their behaviour either individually or collectively. Economics is a discipline of social sciences which studies the economic aspect of life. So it is often called science of firms, markets, and economies. Further, it is associated with the study of production, consumption and distribution of wealth. Traditionally, economics was divided into two parts-microeconomics and macroeconomics. The simple difference between microeconomics and macroeconomics is that whereas the former studies the behaviour of individual units in the economy, the latter studies the economy as a whole. The term \u2018macro\u2019 in macroeconomics comes from the Greek word \u2018makros\u2019 which means large. So macroeconomics is always associated with the study of the behaviour of the economy as a whole. This discipline of economics was first introduces by Ragnar Anton Kittil Frisch, a Norwegian economist, in 1933. However, John Maynard Keynes, with his publication of General Theory of Employment, Interest and Money (<\/em>1936), contributed a lot to the development of macroeconomics. Following are some of the definitions of macroeconomics.<\/p>\n

                       <\/p>\n

                      According to Gardner Ackley, \u201cMacroeconomics is concerned with the over-all dimensions of economic life.<\/p>\n

                        \n
                      • \u2026. More specifically, macroeconomics concerns itself with such variables as aggregate volume of an economy, with the extent to which its resources are employed, with size of the national income, with general price level\u201d.<\/li>\n<\/ul>\n

                        Kenneth Ewart Boulding defines Macroeconomics as \u201cthe study of the nature, relationships and behaviour of aggregate economic quantities\u2026. Macroeconomics \u2026 deals not with individual quantities as such, but<\/p>\n

                         <\/p>\n

                        with aggregates of these quantities \u2026 not with individual incomes, but with the national income, not with individual prices, but with the price levels, not with individual output, but with the national output\u201d.<\/p>\n

                         <\/p>\n

                        According to J.M. Culbertson \u201cMacroeconomic theory is the theory of income, employment, prices and money\u201d.<\/p>\n

                         <\/p>\n

                        Paul Anthony Samuelson, an American economist, states that \u201cMacroeconomics is the study of the behaviour of the economy as a whole. It examines the overall level of a nation\u2019s output, employment, prices, and foreign trade\u201d.<\/p>\n

                         <\/p>\n

                        Before we go into the discussion of macroeconomic aggregates, we need to know the need for knowing these aggregates. And one of the most important reasons to possess knowledge of macroeconomic aggregates is the very issues that are covered in macroeconomics. The issues covered in this discipline are called macroeconomic issues or problems that all most all the countries face over time and tackling these issues or solving these problems forms the objective of macroeconomists or policy makers. And macroeconomic aggregates are used a tool to gauge, explain, and analyse macroeconomic issues and designing policy prescriptions to tackle these issues. So let us first discuss the macroeconomic issues or problems.<\/p>\n

                         <\/p>\n

                        First, the level of growth for any country is of prime significance. Every country wants to prosper or grow over a period of time. On the basis of income only we group countries into developed, developing, or underdeveloped category. It is this parameter (income level) that enables us to say that India, China, Brazil and South Africa are developing countries; United States, Japan, United Kingdom are developed countries; and Uganda, Bolivia, Senegal etc. are underdeveloped countries. Therefore, how to achieve or maintain a high rate of growth of national income has been a key macroeconomic issue. To understand this issue, knowledge on such macroeconomic aggregates as gross domestic product (GDP), national income, per capita income, nominal and real income are needed.<\/p>\n

                         <\/p>\n

                        Second, growth of income in no country follows a smooth path. It goes through huge fluctuation and this fluctuation in the economy constitutes a macroeconomic issue in the name of business cycles. For example, world economy saw a massive slowdown in 1930s and during the recent financial crises of 2008-09. Similarly, in India the famous \u2018Hindu rate of growth\u2019 occurred during 1951-1975 and in this period India grew at a meagre rate of 3.5 per cent, whereas during 2000-2007, India\u2019s income grew at a rate of 7 to 8 per cent per annum. Therefore, every country sees prosperity followed by recession and then again prosperity. This recurrence of prosperity and recession in the economy is called business cycle. To understand this phenomenon, macroeconomic aggregates like peak, trough, recession, recovery are useful.<\/p>\n

                         <\/p>\n

                        Third, instability in the general level of prices in the economy is another macroeconomic problem. More specifically, economists use the term inflation to describe this. Inflation, in simple words, is the sustained and persistent increase in the general level of prices over a period of time. Inflation erodes the purchasing power or value of currency. For example, if India faces inflation, purchasing power or value of Indian rupee decreases. Mismatch between aggregate demand and aggregate supply is the main reason behind inflation. Broadly, there are three types of measures of inflation-consumer price index, producer price index and GDP deflator. These three measures along with aggregate demand and aggregate supply may also be put under macroeconomic aggregates.<\/p>\n

                         <\/p>\n

                        Fourth, issue of unemployment of resources, mainly of labour force, is one of the serious issues faced by both underdeveloped and developing countries traditionally, and now after the global recession of 2008-09, faced by developed countries too. Unemployed workers can be defined as those workers who want to work but could not find any job. This problem limits the potential of a country so far as production of goods and services are concerned because of the very fact that its chief resource (i.e. labour) is unemployed. Further, the relationships between growth, inflation, and unemployment have been one of the controversial issues of macroeconomics. To have a better understanding of this issue, we need to know some more macroeconomic aggregates like labour force, unemployment rate, and labour force participation rate.<\/p>\n

                         <\/p>\n

                        Finally, with the extent of globalization that we see today, entire world has become a village and hence do transactions with each other. The external sector (through exports and imports) also plays a vital role today in the development of a country. External sector\u2019s health is measures by the balance of payments (BOPs) deficit\/surplus. As BOPs records the annual transaction of one country with the rest of the world, exchange rate influences value of these transactions.<\/p>\n

                         <\/p>\n

                        Therefore, under macroeconomic aggregates we need to discuss, BOPs deficit\/ surplus, nominal exchange rate and real exchange rate.<\/p>\n

                         <\/p>\n

                        After presenting the justification of knowing macroeconomic aggregates, the following section deals specifically with these aggregates which are often called macroeconomic variables.<\/p>\n

                          \n
                        1. Macroeconomic Aggregates<\/strong><\/li>\n<\/ol>\n

                          Macroeconomic aggregates are used to understand the health of the economy as a whole through the total or aggregate values of macroeconomic variables. In simple words, these are the variables using which performance of an economy is commented on. The following are the macroeconomic aggregates.<\/p>\n

                           <\/p>\n

                          3.1 <\/strong>Gross domestic product (GDP)<\/strong><\/p>\n

                           <\/p>\n

                          GDP is a measure of the value of all final goods and services produced in a country within a given period of time. There are three important aspects of this definition- the value, final goods and services, and produced within a given period of time- that needs separate clarification. GDP includes only those goods and services that are currently produced within a time interval say per quarter or per year. For example, to calculate India\u2019s GDP in 2015-16, only those goods that are produced in 2015-16 are considered. As such, goods and services (like cars, buildings, financial services etc.) produced prior to 2015-16 are not included in this year\u2019s GDP. Therefore, exchanges of second hand goods, exchanges of stocks and bonds previously issued-for they do not enter the current production of goods and services, are not included in GDP. Second, only final goods and services enter GDP. Goods that are used to produce other goods (known as intermediate goods) do not enter GDP. However, only two types of intermediate goods- capital goods or part of capital goods (i.e. depreciation) and inventories (stocks of final products and\/or raw materials) are included in GDP. Capital goods are the goods such as factories, machinery, and equipments used to produce other goods. Depreciation is that part of the capital stock that wears out each year. Inventory investments measure the net change in inventories of final goods awaiting sale or of material used in the production process. Third, GDP is the value of all final goods and services and this value is arrived at by using market prices of each final good and service. As such, GDP is sensitive to variations in market prices. There may be situation where change in GDP is brought about by change in prices but not physical quantity of goods and services. To check this, economists use another measure real GDP where value of all currently produced final goods and services are calculated using a base year price.<\/p>\n

                           <\/p>\n

                          3.2 <\/strong>National income<\/strong><\/p>\n

                           <\/p>\n

                          National income is arrived at when we aggregate the incomes of all the factors of production from the current production of goods and services. These factors are land, labour and capital. And their incomes are categorized as compensation of employees, corporate profits, proprietor\u2019s income, rental income of persons, and net interest. For calculation of national income, gross national product (GNP) is considered not GDP. GNP, simply put, is the income of nationals of a country. For example, to get India\u2019s GNP we include in its GDP income earned abroad by Indian residents and firms and exclude from it the earnings of foreign residents and firms from production in India. When depreciation is deducted from GNP, we get net national product (NNP). National income is arrived at by excluding indirect taxes and other (bad debts to business sector are included in other category) from NNP.<\/p>\n

                           <\/p>\n

                          3.3 Growth rate of Economy<\/strong><\/p>\n

                           <\/p>\n

                          Generally, growth rate of GDP is meant as growth rate of the economy. Annual Growth rate of the economy in period \u2018t\u2019 is calculated by the following formula.<\/p>\n

                           <\/p>\n

                          g =\u00a0 \u00a0 \u2212\u00a0 \u00a0\u22121\u00a0 \u00a0\u22121 x 100<\/p>\n

                           <\/p>\n

                          Here \u2018g\u2019 is the growth rate of the economy; \u2018Yt\u2019 is the GDP in period \u2018t\u2019; \u2018Yt-1\u2019 is the GDP in the just previous period \u2018t-1\u2019.<\/p>\n

                           <\/p>\n

                          In similar way, quarterly growth rate is calculated by taking different quarters in a year (1st quarter, 2nd quarter etc.) as\u2018t\u2019.<\/p>\n

                           <\/p>\n

                          3.4 Personal Income<\/strong><\/p>\n

                           <\/p>\n

                          Income received by persons from all sources is called personal income. From national income, we can calculate personal income by subtracting corporate profits tax payments, undistributed profits, and valuation adjustment; and contribution to social security and by adding transfer payments to persons and personal interest income.<\/p>\n

                           <\/p>\n

                          3.5 Personal Disposable Income<\/strong><\/p>\n

                           <\/p>\n

                          Consumption depends upon personal disposable income. It is with this income individuals make their decision on consumption expenditure. When personal taxes are deducted from personal income, we get Personal Disposable Income.<\/p>\n

                           <\/p>\n

                          3.6 Per capita Income (PCI)<\/strong><\/p>\n

                           <\/p>\n

                          It is the average income per person. Therefore, per capita income is the national income divided by the population.<\/p>\n

                           <\/p>\n

                          \"\"<\/p>\n

                          3.7 <\/strong>Nominal GDP versus Real GDP<\/strong><\/p>\n

                           <\/p>\n

                          GDP measured in current prices is known as nominal GDP. Here the value of currently produced goods and services are calculated by using market prices. Nominal GDP can change when actual volume of production changes, or when market prices change, or when both volume of production and market prices change. Real GDP is used when we want to measure GDP that varies only with quantity, not prices, of goods produced. Real GDP measures output in terms of constant prices or prices from a base year.<\/p>\n

                           <\/p>\n

                          3.8 <\/strong>The business cycle<\/strong><\/p>\n

                           <\/p>\n

                          For every country, there is a trend growth path of GDP and it is the path GDP would take if factors of production are fully employed. Business cycle expresses the recurring of expansion (recovery) and contraction (recession) in economic activity around the path of trend growth. According to the National Sample Survey (NSS) of India, the term \u2018economic activity\u2019 includes \u201call the market activities performed for pay or profit which result in production of goods and services for exchange and the non-market activities such as all the activities relating to the agriculture, forestry, fishing, mining and quarrying which result in production of primary goods for own consumption and activities relating to the own-account production of fixed assets, which include production of fixed assets including construction of own houses, roads, wells, etc., and of machinery, tools, etc., for household enterprise and also construction of any private or community facilities free of charge\u201d. Adding economic activity of industry and service sector to the above definition, we can get a sense of economic activity that is considered for business cycle. Figure-1 presents a picture of business cycle. When economic activity (or simply growth rate of GDP) is high relative to trend we call it a peak and when economic activity is lowest we call it trough.<\/p>\n

                           <\/p>\n

                          Figure-1: Business Cycle<\/strong><\/p>\n

                          \"\"<\/p>\n

                          3.9 <\/strong>Inflation measures in India<\/strong><\/p>\n

                           <\/p>\n

                          In India, we normally come across three types of inflation measures such as wholesale price Index (WPI), otherwise known as producer\u2019s price index (PPI); Consumer price index (CPI), otherwise known as retail price inflation; and the GDP deflator.<\/p>\n

                           <\/p>\n

                          3.9.1 <\/strong>Wholesale price Index (WPI)<\/strong><\/p>\n

                           <\/p>\n

                          WPI measures price changes from the perspective of producers or sellers. It measures the average change in selling prices received by domestic producers for their output. PPI is different from WPI only in the coverage of goods and industries. In the calculation of WPI in India, changes in prices of manufactured products, primary articles, fuel and power items are considered and these are given a weight of 64.97 per cent, 20.12 per cent, and 14.91 per cent respectively. Laspayer\u2019s index is used to calculate WPI in India and 2004-05 is the current base year for its calculation. Primary articles are divided into three categories such as food articles, non-food articles, and minerals. Food articles include cereals & pulses; fruits & vegetables; milk, egg, fish, & meat; and spices, tea\u00a0& In the non-food articles, fibres, oil seeds, raw hide, tobacco, fodder, flowers are included. Metallic, non-metallic, & crude petroleum consists of minerals. Under fuel & power items, changes in prices of electricity, coals, mineral oil & LPG are considered. Items included in manufactured products are beverages, tobacco, textiles, wood & paper, chemicals, non-metalic minerals, metal & alloy, machine tools, and transport equipment. There are, in total, 676 items that are considered in the calculation of WPI in India.<\/p>\n

                           <\/p>\n

                          Headline WPI measures the changes in the price level of all the above three categories of products (manufactured products, primary articles, and fuel & power items) compared to its prices in base year.<\/span><\/p>\n

                           <\/p>\n

                          Core inflation measures the changes in the price level of all products except food and fuel & power items compared to its prices in base year. Hence it only measures the changes in the price level of non-food manufactured products.<\/p>\n

                           <\/p>\n

                          3.9.2 <\/strong>Consumer Price Index (CPI)<\/strong><\/p>\n

                           <\/p>\n

                          CPI measures the changes in the general price level from the consumer\u2019s perspective. It is very important as it measures the changes in the prices of a representative basket of goods and services that a typical household in India consumes. Currently it is calculated by using laspeyer\u2019s formula taking 2010 as base year and five categories of goods and services are considered for this purpose. Each category is given a weight based on the importance of that category in the consumption basket of a household. CPI calculated for rural area is called rural CPI, CPI calculated for urban area is called urban CPI, and CPI for both rural & urban area is called combined CPI. Rural CPI is constructed on the basis of five categories of commodities such as food, beverages & tobacco; health, education & other services; fuel & light; and clothing, bedding, & footwear with weights 59.31 per cent, 24.91 per cent, 10.42 per cent and 5.36 per cent respectively. Urban CPI includes prices changes in four categories included in rural CPI plus prices changes in housing. Weights given to each category is different from rural CPI where food, beverages & tobacco is assigned a weight of 37.15 per cent; health, education & other services is assigned a weight of 28 per cent; housing is assigned a weight of 22.53 per cent; fuel & light is assigned a weight of 8.4 per cent; and clothing, bedding, & footwear is assigned a weight of 3.91 per cent. Combined CPI includes all the above five categories with a different weight assigned to each category. For combined CPI, food, beverages & tobacco is assigned a weight of 49.71 per cent; health, education & other services is assigned a weight of 26.31 per cent; housing is assigned a weight of 9.77 per cent; fuel & light is assigned a weight of 9.49 per cent; and clothing, bedding, & footwear is assigned a weight of 4.73 per cent.<\/p>\n

                           <\/p>\n

                          3.9.3 <\/strong>GDP Deflator<\/strong><\/p>\n

                           <\/p>\n

                          It defined as\u00a0 __________.<\/p>\n

                           <\/p>\n

                          3.10 Aggregate demand and Supply<\/strong><\/p>\n

                           <\/p>\n

                          Given the resources and technology of a country, the level of aggregate supply is the amount of output that economy can produce. The quantity of output that firms are willing to supply for each given price level is called aggregate supply (AS) curve. Therefore, the position of AS curve depends on the productive capacity of the economy. Similarly, the level of aggregate demand is the aggregate of demand for goods to consume, demand for new investments, government\u2019s demand for goods and demand for net exports. Net exports are total exports minus total imports. The aggregate demand (AD) curve gives us the level of output for each given price level at which the goods market and money market are simultaneously in equilibrium. The position of AD curve depends on monetary and fiscal policy. The intersection of aggregate supply and aggregate demand results in equilibrium price and quantity.<\/p>\n

                           <\/p>\n

                          3.11 Employed and Unemployed persons<\/strong><\/p>\n

                           <\/p>\n

                          According to national sample survey (NSS) of India, \u201cEmployed or workers are those persons who were engaged in any economic activity or who, despite their attachment to economic activity, abstained themselves from work for reason of illness, injury or other physical disability, bad weather, festivals, social or religious functions or other contingencies necessitating temporary absence from work, constituted workers. Unpaid household members who assisted in the operation of an economic activity in the household farm or non-farm activities were also considered as workers\u201d.<\/p>\n

                           <\/p>\n

                          As per NSS \u201cUnemployed are those Persons who, owing to lack of work, had not worked but either sought work through employment exchanges, intermediaries, friends or relatives or by making applications to prospective employers or expressed their willingness or availability for work under the prevailing conditions of work and remuneration, were considered as those \u2018seeking or available for work\u2019 (or unemployed)\u201d.<\/p>\n

                           <\/p>\n

                          3.11.1 Labour Force<\/strong><\/p>\n

                           <\/p>\n

                          In India, labour force includes persons who were either ‘working’ (or employed) or ‘seeking or available for work’ (or unemployed) constituted the labour force<\/p>\n

                           <\/p>\n

                          3.11.2 Key Indicators regarding Employment and Unemployment in India<\/strong><\/p>\n

                           <\/p>\n

                          \"\"<\/p>\n

                          3.12 Balance of Payments (BOPs)<\/strong><\/p>\n

                           <\/p>\n

                          In the globalised world that we are living in today, every country carry out transactions with other countries on commodities, labour, capital, and technology. In BOPs of a country, these transactions are recorded in monetary terms. So BOPs records the transactions of one country (say India) with the rest of the world in given year. It merely records the receipts and payments arising out of international transaction of one country. In this sense, BOPs is an application of double entry book-keeping where credits and debits are recorded in different accounts. In India, BOPs consist of current account and capital account. Current account records transactions of merchandise trade (or visible goods trade) and invisibles which includes different services,transfers, and income. Credits to this account come from foreign countries when merchandise goods and invisible services are exported, when official & private transfers are made from abroad, and when incomes come from abroad from investment and through compensation of employees. Debits from this account happen payments are made to foreigners for import of merchandise goods and invisible services. Debits also take place when India and foreign nationals in India transfer income to abroad and income from foreign investment and compensation of foreign employees are repatriated abroad. When credit is more than debit in this account, we call it current account surplus and when debit is more than credit, we term it current account deficit. Capital account of India\u2019s BOPs consists of foreign investment (both direct & portfolio), loans, banking capital, rupee debt service, and other capital. Capital account surplus and deficit is defines on the basis of credit and debit on these items. Last errors & omissions are included to other headings (current account & capital account) to get the overall balance in BOPs.<\/p>\n

                           <\/p>\n

                          3.13 Exchange Rate<\/strong><\/p>\n

                           <\/p>\n

                          Exchange rate is the price of one currency in terms of another currency. Like any other commodities, exchange rate of one currency is determined by the demand for and supply of that currency. To give you an example, if 60 Indian rupees are needed to buy 1 US dollar, then we say 1 US dollar equals 60 Indian rupees. In this case, exchange rate of US dollar in terms of rupees is 60 and conversely exchange rate of Indian rupee in terms of dollar is 0.0166. When Indian rupee appreciates or its value rises relative to other currencies, Indian goods abroad become more expensive and foreign goods in India becomes cheaper if domestic prices in two countries remain constant. Appreciation of Indian rupee occurs when, let\u2019s say, 55 rupees are needed now to buy 1 US dollar. In this case exchange rate of Indian rupee in terms of dollar becomes 0.0181 (higher than previously 0.0166) and hence it appreciates. In contrast to this, when Indian rupee depreciates then its goods abroad become cheaper and foreign goods in India become dearer. Depreciation of Indian rupee occurs when, let\u2019s say, 65 rupees are needed now to buy 1 US dollar. In this case exchange rate of Indian rupee in terms of dollar becomes 0.0153 (lower than previously 0.0166) and hence it depreciates.<\/p>\n

                            \n
                          1. Concepts in macroeconomics<\/strong><\/li>\n<\/ol>\n

                             <\/p>\n

                            Following are the concepts used in macroeconomics. The understanding of these concepts is necessary for a student to understand the interpretation of various macroeconomic aggregates listed above.<\/p>\n

                             <\/p>\n

                            4.1 <\/strong>Economic Models<\/strong><\/p>\n

                             <\/p>\n

                            In economics, you would come across numerous theories. These theories are nothing but an abstraction from the real world. Economic theories, apart from other things, mainly describe\/record common properties and explain interrelationships of particular economic phenomena under study. For example, theory of consumption gives us an idea about how the process of consumption takes place in the economy, the factors that affect consumption and what happens to consumption when these factors change. A model is a simplified description of reality or in other words, theories are presented through models. Models can be presented verbally and in terms of equations and\/or diagrams. We, economists in most of the times, use equations and diagrams to express the relationship among economic variables.<\/p>\n

                             <\/p>\n

                            Variables can be of two types- exogenous and endogenous variables. Exogenous variables are given from outside the model and hence the values of these variables are not determined inside the model or the values are given the moment they enter the model. In contrast, endogenous variables are come from inside the model meaning the values are determined within the model.<\/p>\n

                             <\/p>\n

                            An Example:<\/strong><\/p>\n

                             <\/p>\n

                            Consider the following model of income which consists of three equations where equation-1 gives consumption function; equation-2 is investment function; and equation-3 gives income identity.<\/p>\n

                              \n
                            • Ct = a1 + a2Yt + et ;<\/li>\n
                            • It = b1 + b2rt + ut<\/li>\n
                            • Yt = Ct + It + Gt<\/li>\n<\/ul>\n

                               <\/p>\n

                              In the above set of equations, Ct, It and Yt representing consumption, investment and income respectively are endogenous variables; and rt & Gt representing interest rate and government expenditure respectively are endogenous variables.<\/p>\n

                               <\/p>\n

                              The relationships of variables expressed in economic models or simply equations of economic models can be divided into following three types.<\/p>\n

                               <\/p>\n

                              First type of equation is behavioural. Example of this could be consumption function C = C(Y), which states that consumption (C) is a function of Income (Y)<\/p>\n

                               <\/p>\n

                              Second, equations could be technical meaning relationship between variables is influenced by technology. Best example of this type is the production function Q = f(L,K) where production (Q) is function of capital (K) and labour (L). But we all know that this function is largely influenced by the level of technology underlying the production process.<\/p>\n

                               <\/p>\n

                              Third, when in a equation, relationship between variables are definitional, it is called definitional equation. Revenue function R = P\u00d7Q where P is price & Q is quantity; and Real interest rate IR = IN\u2013 r where IN is nominal interest rate & r is rate of inflation are examples of definitional equations.<\/p>\n

                               <\/p>\n

                              4.1.1 Variables, Constants, and Parameters<\/strong><\/p>\n

                               <\/p>\n

                              A properly constructed economic model consists of three things- variables, constants, and parameters. A variable is something that can assume different values. The magnitudes of variables are liable to change. Examples of variables frequently used in macroeconomics are national income, national saving, investment, exports, imports, money supply, employment etc. normally, symbols are used to represent variables. For example national income is represented by Y, Saving is represented by S, investment is represented by I and so on.<\/p>\n

                               <\/p>\n

                              The antithesis of a variable is a constant whose magnitude does not change. When a constant is tied to a variable, it is called the coefficient of that variable. In the Saving equation S = 0.5 Y, 0.5 is the coefficient of income (Y). Coefficients can be represented by a number (like the saving equation example) or by a symbol (like \u03b1, \u03b2 and so on) or English alphabet (like a, b, c and so on). Here it is worth mentioning that coefficient of Y can take any value or in other words, coefficient is a constant that is a variable. Considering its special nature, we can name such constants parametric constant or simply parameters.<\/p>\n

                               <\/p>\n

                              4.1.2 Equation and Identity<\/strong><\/p>\n

                               <\/p>\n

                              The functional relationship between variables can be written in an equation format. It would be called an equation, not identity, when the relationship is true for some specific values but not for all values of the variables. In mathematics, Y = 7X + 9 is an equation as it may not be true for all values of X and Y. For example, if Y is 23 then the relation is true only when X is 2 not for all values of X. An equation is denoted by \u2018=\u2019 sign. Take the example of a linear consumption function C = a + bY; where C is consumption, Y is income; and a & b are parameters. This is an equation for it can be tested which is the other criterion of making distinction between equation and identity. Normally, in economics hypotheses are represented in equation form. Only behavioural relationships can be called equations.<\/p>\n

                               <\/p>\n

                              Identity, denoted by \u2018\u2261\u2019, represents relation between several variables and it is true for all possible values. By definition an identity is true. In mathematics, one famous identity is (a+b)2 = a2 + b2 + 2ab as it is true for all values of a and b. In macroeconomics, one identity could be Y \u2261 C + I + G + (X-M) where Y is total income, I is total investment, G is government expenditure, and (X-M) is net exports.<\/p>\n

                               <\/p>\n

                              4.2 Ex-ante and Ex-post<\/strong><\/p>\n

                               <\/p>\n

                              An economic variable can have both Ex-ante and Ex-post value. The value of a variable which is planned or desired is called Ex-ante value of that variable. As such these values are only projected\u00a0values. Every year government of India, Reserve Bank of India (RBI), International Monetary Fund (IMF), among many others forecast about India\u2019s GDP, savings, investment, and so on. These values are the examples of Ex-ante values.<\/span><\/p>\n

                              \n

                               <\/p>\n

                              Ex-post values refer to actual or realised values of a variable. The values of GDP, savings, investment and so on presented every year in the Economic Survey of India records the actual magnitudes of these variables pertaining to the concerned year. Therefore, these can be called Ex-post GDP, Ex-post savings, Ex-post investment and so on. It is not necessary that Ex-post magnitudes are equal to Ex-ante magnitudes.<\/p>\n

                               <\/p>\n

                              4.3 Static and dynamic analysis<\/strong><\/p>\n

                               <\/p>\n

                              Static analysis is used to analyse a model involving variables pertaining to same point in time or same time period. When inflation in a year depends upon the money supply of that year, we say there is static relationship between inflation and money supply. And the analysis of this kind of relationship is called static analysis. Similarly, analysis of simple Keynesian model of income determination is an example of static analysis as all the variables of the model (consumption & investment) refer to the same period of time. But dynamic analysis is needed for a model whose variables refer to different points of time or different periods of time altogether. Effectiveness of monetary policy in checking inflation is an example of dynamic model for a change in monetary policy today would start to show its effect after a lag of 8 to 9 months and we apply dynamic analysis to this model.<\/p>\n

                               <\/p>\n

                              Static analysis is otherwise known as comparative statics. In comparative statics, we only compare one equilibrium state with another or more specifically, a comparison is done between initial equilibrium state and final equilibrium state. In this analysis, there is always possibility of attaining new equilibrium. One disadvantage of the static analysis is that the in between process of two equilibrium stages are not analysed as we only compare between two equilibrium positions. But when we start from disequilibrium positions and then want to answer whether or not the system can move towards equilibrium, dynamic analysis is needed. Second, when there are lags involved or when adjustments of one variable(s) take time to change other variables(s) and when variables are depended upon each other, dynamic analysis is more appropriate.<\/p>\n

                               <\/p>\n

                              4.4 Stocks and Flows<\/strong><\/p>\n

                               <\/p>\n

                              The economic variables that are measurable can be either stock variable or flow variable. Stock variables are variables which are measurable at a point in time whereas flow variables are variables which are measurable over a period of time. Therefore, it is the dimension of time (at a point of time or over a period of time) that distinguishes a stock variable from a flow variable. One\u00a0famous example that is cited to explain this is the water tank. Suppose a family has one water tank with a capacity of 2000 litres. Every evening, water is pumped to the tank at a rate of 500 litres per hour. If a family member wants to measure the level of water at 6 am in the morning he\/she measures exact level of water left in the tank at 6 am. Here water level at 6 am is stock variable and pumping rate of water is flow variable. Similarly money supply is a stock variable. But production is a flow variable as it is presented as some value (like 100 crore or 200 crore) per year or per month or per quarter and so on. Stock variable is a number while flow variable is number or rate per time period. Rate of growth of GDP, growth rate of savings, growth rate of investment are examples of stock variable and capital stock, money supply, wealth are examples of stock variables.<\/span><\/p>\n<\/div>\n

                               <\/p>\n

                              4.5 Cross section and Time series data<\/strong><\/p>\n

                               <\/p>\n

                              Cross section data are the data collected from multiple individuals at the same point of time. These individuals could be people, states, nations, firms or any group. For example, the data collected on income of all the nations in the world (like India, Australia, Japan and so on.) in 2015 are cross sectional data. The basic characteristic of this data is that it refers to a single point of time. Savings of women employees in 2015, value of macroeconomic variables like saving, investment, employment, GDP in 1st quarter of 2015, quantity of all agricultural products in India in 2015 are some examples of cross sectional data.<\/p>\n

                               <\/p>\n

                              Time series data are collected form single individual at multiple points in time. Again these individuals could be any variable, people, state, and nation and so on. For example, GDP of India from 19950 to 1991, employment data of India since independence, yearly investment data of India are time series data. High frequency of time series data are collected at multiple points in time and the interval among the time periods are very small. Examples of this include, stock price data, temperature data, investment in stock market data etc. Similarly, low frequency time series data are collected at multiple points in time and the interval among the time periods are fairly large. Yearly data are examples of this. Combination of cross section and time series data are called panel data or pooled data.<\/p>\n

                                \n
                              1. Summary<\/strong><\/li>\n<\/ol>\n

                                 <\/p>\n

                                This module has focused on the meaning and definitions of macroeconomics. Along with this various macroeconomic aggregates and concepts are elaborated for the benefit of readers. The above aggregates and concepts would be preparing students for further reading in macroeconomics. With this knowledge, readers would be able in a better position to understand the complex relationships between macroeconomic variables in the economy.<\/p>\n

                                 <\/p>\n

                                Online Resources<\/strong><\/p>\n

                                  \n
                                • Central Statistical\u00a0 Organisation\u00a0 (CSO).\u00a0 National\u00a0 Accounts\u00a0 Statistics.\u00a0 Central\u00a0 Statistical<\/li>\n
                                • Organisation, Ministry of Statistics and Programme Implementation[http:\/\/mospi.nic.in\/Mospi_New\/upload\/nas_13.html]<\/li>\n
                                • National Sample Survey Office (NSSO). Employment & Unemployment Situation in India (68th Round). Ministry of Statistics and Programme Implementation. Government of India. [http:\/\/mospi.nic.in\/Mospi_New\/upload\/nss_report_554_31jan14.pdf]<\/li>\n
                                • Reserve Bank of India (RBI). Handbook of Statistics on Indian Economy 2014-15. Reserve<\/li>\n
                                • Bank of India. [https:\/\/www.rbi.org.in\/scripts\/annualPublications.aspx?head=Handbook%20of%20Statistics %20on%20Indian%20Economy]<\/li>\n<\/ul>\n","protected":false},"author":3,"menu_order":28,"template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":["amit-kumar-basantaray"],"pb_section_license":""},"chapter-type":[],"contributor":[63],"license":[],"class_list":["post-450","chapter","type-chapter","status-publish","hentry","contributor-amit-kumar-basantaray"],"part":3,"_links":{"self":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/wp-json\/pressbooks\/v2\/chapters\/450","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/wp-json\/wp\/v2\/users\/3"}],"version-history":[{"count":9,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/wp-json\/pressbooks\/v2\/chapters\/450\/revisions"}],"predecessor-version":[{"id":462,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/wp-json\/pressbooks\/v2\/chapters\/450\/revisions\/462"}],"part":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/wp-json\/pressbooks\/v2\/parts\/3"}],"metadata":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/wp-json\/pressbooks\/v2\/chapters\/450\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/wp-json\/wp\/v2\/media?parent=450"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/wp-json\/pressbooks\/v2\/chapter-type?post=450"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/wp-json\/wp\/v2\/contributor?post=450"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/ebooks.inflibnet.ac.in\/mgmtp11\/wp-json\/wp\/v2\/license?post=450"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}