Unit I: Introduction to Macro Economics:

• Unit I: Introduction to Macro Economics: 

 Meaning, Nature and Scope of Macro Economics.

  Importance of Macro Economics.

  Growth v/s Development, Economic Growth: 

 Factors Influencing Economic Growth and development, Challenges for

Economic Growth and development. 

 Concepts of Stock and Flow, Static, Dynamic and Comparative

analysis. 

 Introduction to different schools of Macro Economic thoughts.

 Meaning, Nature and Scope of Macro Economics
• Economics is a subject that deals with every situation what’s
happening in the whole world. This subject finds its use at many
instances in our lives. For example, Your mother does all the
work at your home. From doing all the household chores,
keeping a budget for the rations to fulfilling all your needs. Thus,
it is one subject that deals in our day to day working of our life.
The same subject has two broad categories – microeconomics
and macroeconomics. The former deals with the individual units
of an economy like the consumer or a household. But, the latter
deals with an economy as a whole. It deals with studies of
national income and output. The understanding of this science
is vast and at different lengths. But for the sake of simplicity,
this  course will only focus on the scope of Macroeconomics
and its need.
• The term macroeconomics came into existence in 1933 by Ragnar Frisch
made study of economics as Micro & Macro economics.
• However, its approach towards economic problems came in the 16th and
17th centuries. 
• According to M.H. Shapiro” Macro Economics deals with the functioning of
economy as a whole”
• It is that branch of science which deals with the economy as a whole or in
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totality including the Macro factors. The
Click to add text scope of macroeconomics does not
involve studying the individual units of an economy. But, the economy as a
whole, studies the total and average of the entire economy. Such as
the national income, total employment, total saving and Investments,
total demand and supply, and the general price level.
• The subject of macroeconomics revolves around the determination of
income and employment. Therefore, it is known as the “Theory of
income and employment.”
• Prof. Gardner Ackley distinguished between micro and macro  and
says that, Macro economics concerns itself with  such variables such
as  aggregate volume of the output of an economy with the extent to
which  its resources are employed, with the size of the national income
with the general price level. 
• The subject matter of macro economics  is to explain what determines
the level of  total economic activity and fluctuations in it in the short
run.
• It also explains what  causes the general price level to rise  and
determine the  rate of inflation in the economy. 
• Also modern Macro economics  analyses those factors which
determine the increase in  productive capacity  and national income
over time  in the long run is referred as “Economic Growth”. What
determines growth is also the concern of Macroeconomics.
• Control over the inflation and deflation cycle was only made possible by
choosing the current economic policies. To over come these issues
Policies were formulated at the macro level. Moreover, governments’
participation through monetary and fiscal measures in the economy has
increased. Therefore, the use of macro analysis is irrefutable.
• On these lines macro economics studies how the large aggregates
such as total employment, national product, national income of an
economy the general price level are determined.
• Therefore, it is the study of Aggregate economic variables.
• Also it explains how the productive capacity and national income of
the country increase over time in the long run.
 The main features of Macro Economics

• Short run nature of Macro economics

• Study of the whole economy
• A systematized and comprehensive body of thought
• Macro economics Reformed capitalism.
• A monetary economics as a mainly institutional.
• Importance of state intervention
• Crucial role of investment.
• Comparative static analysis
• A theory of shifting equilibrium
• Role of expectation in economics
• Role of consumption
• Role of National Income
 Major issues and concerns of macro economics
• Employment & un employment
• Determination of National Income
• General price level & Inflation
• Business cycle
• Stagflation
• Economic growth
 The Scope of Macro Economics
• Macro Economics is divided in to two parts:
• Theories
• Policies
Theories consists of
• The economic growth & development
• Theory of national Income
• Theory of money
• Theory of International Trade
• Theory of employment.
• Theory of general prices
Policies to tackle macro economic issues
• Fiscal Policy
• Monetary Policy
 Importance of Macro Economics

• To understand the working of Macro economy: Macro Economic

Paradoxes. What is true of an individual may not be true for a
nation. 1.Wage cut policy of AC Pigou.
• Macro economic Paradox relates to Saving. Paradox of Thrift.
• It analyses  and understand the changes in Trade cycles.
• To frame suitable  Macro economic policies
• To determine the effect of Inflation and deflation
• To regulate economic system.  
• To solve the economic issues
• To check over the proper functioning of the economy.
 Limitations of macro economics

• It considers aggregates as homogeneous but individual data may not

be similar.
• Misleading: Application of measures seems to be irrelevant when
aimed at 100% result.
• Fallacy of deductive inference: As macro deals with aggregates
interpretation of individual activities may not be same.
• Conceptual and statistical complexities: When individual units have
different unit it becomes complex to draw conclusion.
• When individual element need to be examined separately aggregative
value cannot be used.
• Neglects individual consumers.
• Too much generalization: Conclusions drawn from macro is
generally taken for all individuals which is not always true.
• Aggregate tendency may not affect all sectors equally.
 Development Vs Growth
• From1950s and in 1960s two concepts were evolved for every economy
i.e, Growth and development which were used interchangeably then.
But
• Today there is distinction between the two.
• Growth is defined as sustained annual increase in an economy’s real
national income over a long period of time.
Or
• Growth means the growth of output per head of population ( A.W.Lewis)
• More precisely, Economic growth means sustained increase in National
Income(GNP) or per capita income over a sufficiently long period of time.
Means an increase in the capacity of an economy to produce goods and
services, compared from one period of time to another.
• Economic growth can be measured in nominal terms, which include
inflation, or in real terms, which are adjusted for inflation.
Economic growth Vs Development

• Economic growth is a narrow concept than Economic development.

• It is an increase in a country’s, real level of National output or an increase in

the production of goods and services produced by every sector of the economy.
• Growth is measured by an increase in a country’s GDP

• Economic Development is wider and holistic approach.

• It is a process where by an economy's real national income as well as per capita

income increases over a long period of time.
• The process implies the impact of certain forces which operate over a long
period and embody changes in dynamic elements.
• It contains changes in resource supplies, in the rate of capital formation, in
 Definition of Development
• Economic development is a more inclusive concept than economic growth.
Development means apart from increase in NI or PC poverty, unemployment,
inequality must also be considered Development implies growth with
structural change.
• Structural changes of Economic Development. refers to changes in
technological and intuitional factors which cause shift of labour force from
Agricultural to modern manufacturing and services sectors and also generate
self sustaining growth of output.(occupational,Industrial Structure,Foreign Trade structure, Structure of Technology)
• Modern view: The concept of development has undergone changes as per
the requirements, the modern definition as per the world development report
asserts, “The challenge of development is to improve the quality of life,
especially in the world’s poor countries, a better quality of life, generally
calls for higher incomes, but it involves much more. It encompasses as
ends in themselves, better education, higher standards of health and
nutrition, less poverty, a cleaner environment and more equality of
opportunity”
• Economic Development is policy intervention which aims at development of :
• Human capital, Literacy ratio, Infrastructure, Health, Education & general welfare
of the citizens.
• Thus Development means building up capabilities of the poor and enlargement of the
opportunities to gain freedom in these respects.
• Economic development is:
• Quantitative and Qualitative changes in the economy
• Promoting the standard of living and Economic health
• Human Development Index is one of the most accurate method for measuring it, which
takes into account the literacy rates & life expectancy  is a phenomenon of market
productivity and rise in GDP.
• Modernization and industrialization plays important role for economic development of a
nation.
• Economic Growth = Annual increase in Per capita Income
• Economic Development = Economic Growth + Structural Changes.
 Indicators of Economic Growth
• Using measures of economic performance in terms of the value of income, expenditure and
output.
• GDP – Gross Domestic Product:
The value of output produced within a country during a given time period.
• GNP – Gross National Product:
 The value of output produced within a country plus net property income from abroad
• GDP/GNP per head/per capita
• Takes account of the size of the population
• Real GDP/GNP : Accounts for differences in price levels in different countries.
• GDP at market prices for the year 2016, 2017 and 2018 as 8.2% 7.2% 6.8% respectively. (CSO, 2018-19), it
has declined drastically due to pandemic Covid 19
• India’s real GDP (Gross Domestic Product)is estimated to contract by 7.7% in 2020-21, compared to a
growth rate of 4.2% in 2019-20, with Real GVA (Gross Valued added) shrinking by 7.2%, as per advance
estimates released by the National Statistical Office (NSS)
• Except Ag & utility (Gas, Electricity. Water) other sectors are worst hit.
• Sharpest decline was in Trade, Transport, Hotel, Tourism, communication. Mining, quarrying etc.
 Human Development Index
• The most accurate method of measuring development is HDI which takes in to account the literacy

• Rate, life expectancy which effect productivity and could lead to Economic growth.

• It also creates more opportunities for in the sectors of education, health and employment and the conservation of the
environment. Thus it implies the rise in real Per capita income.

• The health dimension is assessed by life expectancy at birth.

• The education dimension is measured by mean of years of schooling for
adults aged 25 years and more and expected years of schooling for
children of school entering age.
• The standard of living dimension is measured by gross national income
per capita.
• The HDI uses the logarithm of income, to reflect the diminishing
importance of income with increasing GNI. The scores for the three HDI
dimension indices are then aggregated into a composite index using
geometric mean
• United States
• GDP: $19.48 trillion
• GDP Growth: 2.27%
• GDP per Capita: $59,939
• Share of World GDP: 24.08%
• China
• GDP: $12.23 trillion
• GDP Growth: 6.9%
• GDP per Capita: $8,612
• Share of World GDP: 15.12%
• Japan India
• GDP: $4.87 trillion GDP: $2.65 trillion
• GDP Growth: 1.71% GDP Growth:6.68%
• GDP per Capita: $38,214 GDP per Capita: $1980
• Share of World GDP: 6.02% Share of World GDP: 3.28%
• Germany
• GDP: $3.69 trillion
• GDP Growth: 2.22%
• GDP per Capita: $44,680
• Share of World GDP: 4.56%
 Factors affecting Economic Development
• Inflation distorts business decisions as buying capacity of consumer
reduces.
• Tax Levels Income tax and sales tax (eg VAT) affect how much consumer
have to spend, hence the demand.
• Interest Rates can impact the growth of an industry. For ex. High car loan
interest rate will discourage vehicle industry.
• Governmental Policies provides a friendly environment for businesses to
move into and operate within a community.
•  Currency Strength is important even for companies that do not import or
export goods.
• Government Intervention: Many industries are regulated by the
government which ensures safety of consumers, employees & natural
resources
• Overall Economic Health The economic state of the country and consumer
confidence can also spur development or harm it.
• Social and Cultural Values affect economic development through attitude
 The Importance of Economic Growth

• Economic growth is important because it is a necessary

ingredient for both higher incomes and higher living standards.
• GDP is a measure of both output and income.
• Growth of output is necessary for growth of income.
• Per capita GDP is the nation’s GDP divided by its population.
• Growth of per capita GDP means more goods and services per
person.
• In most cases, higher levels of per capita GDP will mean that
the typical person has a better diet, improved health and access
to medical services, a longer life expectancy, and greater
educational opportunity.
 Challenges for economic growth

• The Indian economy is going through a turbulent period with key

indicators hinting at a prolonged slowdown. The coronavirus
pandemic has weakened all sectors of the Indian economy since April
and a recovery seems unlikely this year.
• From contraction in growth to rising inflation and unemployment,
challenges are aplenty. The sharply surging coronavirus cases make
the case for recovery worse.
• India’s GDP growth is expected to remain in negative zone for the
entire year and projections are showing how adversely Covid-19 has
disrupted the livelihood, particularly of the informal & poor.
 Major challenges for India
• Low demand
• Stagnated demand seems to be the biggest challenge for the economy at the moment.
Demand for key goods and commodities like fuel, food, consumer goods and electricity has
fallen over the last few months.
• While India’s demand woes began in 2019, the coronavirus pandemic only worsened the
scenario. India’s consumer demand is declining due to drop in household incomes in the
wake of major job losses in the wake of a raging pandemic that has forced closures of
factories and businesses.
• Rising unemployment
• The latest unemployment figures, released by the Centre for Monitoring Indian Economy
(CMIE), are another evidence of economic weakness. The CMIE data show that nearly five
million or 50 lakh salaried jobs were lost in July, taking the total number of layoffs in the
formal sector to over 1.8 crore.
• While some businesses in the informal sector have reopened post-lockdown relaxations,
they are struggling to survive due to lack of demand, and constrained by the lack of
available workforce.
• Experts say most informal businesses depend on the cash flowing from the formal
economy i.e. salaried jobs. The economic situation could worsen further if more salaried
jobs are lost.
• Lack of fiscal stimulus
• Many noted economists have made it clear that India needs another
round of fiscal stimulus to support growth. While the government, at the
start of the pandemic, announced a fiscal stimulus package of nearly
Rs 21 lakh crore, most of it was focused on bank credit for businesses.
• Experts say, the government’s inability to provide direct fiscal stimulus,
like many other countries, is due to India’s stretched fiscal deficit. The
fiscal deficit has already hit a record $88.5 billion over April to June,
which is over 83 per cent of the target for the current financial year.
• Lower tax collections and front-loaded spending are some of the
reasons pushing the fiscal deficit higher. Finance Minister Nirmala
Sitharaman has, however, promised to take some steps for businesses
that have been hurt most — travel, tourism, hospitality — once they are
allowed to completely reopen.
• Rising inflation
• Rising inflation has complicated the economic situation further. The retail
inflation rose to 6.93 per cent, way above the RBI’s medium-term target of 4
per cent.
• Economists say it is an unusual situation where prices of food items like
vegetables, pulses, meat and fish are on the rise despite low demand.
• Rising coronavirus cases
• There is an emerging view that it will not be possible for India to tackle the
economic crisis unless it manages to bring the alarming Covid-19 situation
under control in the country. India went for a strict lockdown on March 25 and
decided to gradually reopen.
• However, by the end of June, many states again announced similar lockdowns
in the high-risk zones due to a surge in the number of coronavirus cases. This
came as a huge blow to businesses which had to shut down again.
 ECONOMIC DEVELOPMENT IN INDIA
1.• After fundamental reforms since 1991 and their renewal in the 2000s, India has
progressed towards a free market economy
Some key highlights of Indian economy are listed below:
• India ranks second in agriculture or farm output. India have a large and diverse
agricultural sector, accounting, on average, for about 16% of GDP and 10% of export
earnings.
• Manufacturing sector in addition to mining, quarrying , electricity and gas together
account for 27.6% of the GDP and employ 17% of the total workforce.
• India is fifteenth in services output. The Indian service industry has emerged as one of the
largest and fastest-growing sectors on the global landscape and hence has made substantial
contribution towards global output and employment.
This sector, accounting for 60 per cent of the GDP, grew 5 per cent in the FY2013.
• Human Development Report 2013 released by the United Nations Development
Programmers (UNDP), ranked the country at a low 136 among 186 countries on human
development (HDI) — a composite measure of life expectancy, access to education and
income levels,
India drops two ranks to 131 in UN human development index 2020.
Amartya Sen's view regarding economic growth and
development:
Economic growth is not an end in itself and has to enhance the
lives people lead and the freedoms that they enjoy.
• Capability to function is what matters for status as a poor/non-
poor person and it goes beyond availability of commodities.
• Capabilities: ―freedom that a person has in terms of the choice
of his functionings,…‖
• Functioning's is what a person does with commodities of given
characteristics that they possess/control
• The concept of functioning's reflects the various things a
person may value doing
• Therefore, development cannot focus only on income, but we
• Amartya Sen. traced five sources of disparity between real
incomes and actual advantages:
• Personal heterogeneities.
• Environmental diversities.
• Social climate variations.
• Differences in relational perspectives and
• Distribution within family.
• Thus the concept of development has been greatly broadened
and includes not only more growth in economic well being but
also in terms of good quality of life, which according to Amartya
Sen consists in ‘ Enlargement of opportunities for people and
freedom of Human Choices’
• This new concept of development includes achievement of
freedom from servitude to ignorance and illiteracy. It also
includes enjoyment of Human rights.
• A.Sen asserts” Human beings are born with certain potential
capabilities, and opportunities have to be enlarged for both
present and future generations, Economic growth cannot be
sensibly treated as an end in itself. Development has to be
more concerned with enhancing the lifes we lead and the
freedoms we enjoy.”
 Concepts of Stock and Flow, Static, Dynamic and Comparative analysis.

Concepts used in macro analysis:

 STOCK VARIABLE: It refers to the quantity of a variable given at a point of time.
Example: the stock of capital in a country, the number of persons employed, the total
money supply, all at a point in time.
 FLOW VARIABLE: They are expressed at per unit of time. Example: GDP, consumption,
savings, investment, exports and imports.
 Example between Stock and flow variable
• Monthly provision of sugar in a household i.e., the quantity of sugar stocked for monthly
consumption is a stock variable and quantity of sugar consumed per day is a flow variable
• Employment is a stock variable from head count, point of you but from view point of work effort
in terms of man hours, it can be treated as flow variable.
 Static and Dynamic analysis
• In the methodology of economics, techniques of economic statics and
dynamics occupy an important place.
• Stationary and changing scenario: An economic variable is said to be
stationary, if value of the variable lies not change over time.
• On the other hand, the variable is said to be changing if its value
does not remain constant through time.
• Sometimes it is quite possible a variable may be changing from the
micro point of view, but stationary from macro point of view.(Prices of
individual goods are changing but the general price level may remain
constant over time.)
• The task of theory is to explain the functional relationships between
economic variables.
• On these lines we will proceed to Static and dynamic analysis:
• Static Economics: The word static originated from the field of physics. It is used
to denote some kind of movement in which speed is constantly maintained.
• The static economic theory is the study of static relationship between
relevant economic variables.
• Static economics mean the studies focusing only on particular period of time.
• In economics, the concept of static refers to a situation where there is a
movement. But this movement is continuous, certain, regular and constant.
• Static economics does not deal with the unexpected changes. It studies only
the expected economic activities. There are no windfall changes or fluctuations
in economic activities.
• According to Prof. Harrod, “An economy in which rates of output are constant
is called static.” It is similar to taking a photo when you press the button for a shot then the photo is just at a
particular point of time.
• This is just a static analysis since we just only see the picture at a point of time.
• Prof. Schumpeter defined static analysis as “a method of dealing with
economic phenomena that tries to establish relations between
elements of economic system, prices and quantities of commodity, all
of which refer to the same point of time.”
• According to Prof. Stigler, “The stationary state is an economy in
which the tastes, resources and technology do not change through
time.”
 Features of Static Economics
• Prof. Clark’s Features of a static economics.
(i) No change in the population and its composition.
(ii) No change in the quantity of capital.
(iii) No change in the techniques of production.
(iv) No change in the working and organisation of industrial units.
(v) No change in the habits, tastes and fashions of the people i.e. the wants of people remain
the same.
Scope and Importance of Static Economics
• 1. It is the simple and easy method of economic analysis. It is easier to understand and
economical in thought.
• 2. It is the basis of the principle of free trade. The principle of free trade which was
favoured by classical economists like Adam Smith is an integral part of static economics.
3. Robbins’ definition is also the subject matter of static economics. Robbins defined
economics as a science which studies human behaviour as a relationship between ends and
scarce means which have alternative uses. This definition is a part of static economics.
•  Static economics give knowledge of the conditions of equilibrium. It
tells that price is determined where demand for the supply of goods is
equal. Similarly, income is in equilibrium where planned investment
and planned savings are equal.
• 5. It is the basis of dynamic analysis. Prof. Hicks has pointed out that
static economics occupies an important role because it gives a lot of
information for the proper understanding of dynamic economics. We
can understand the path of equilibrium only after studying the
conditions of equilibrium.
• 6. Keynes’ theory is also static in nature. It shows only a once- over
change of variables like consumption function, multiplier, liquidity
preference, etc. The effect of once-over change of economic valuables
is studied in static economics.
 Limitations of Static Economic Analysis

 1. Constancy of Variables: Prof. Clark and Stigler have assumed many economic
variables as constant. They are population, quantity of capital, natural resources,
techniques of production, habits and fashions, etc. We know that these
economic factors change in reality. So static economic analysis is far from reality.
 2. Unrealistic Assumptions: Static analysis is based on unreal assumptions like
perfect competition, perfect mobility, perfect knowledge, full employment, etc.
These assumptions are far from the real world. That is why Prof. Hicks said,
“Stationary state in the end is nothing but an evasion.”
 3. It ignores Time Element: Another shortcoming of the static analysis is that it
studies a timeless economy. But in reality, many changes occur with the passage
of time. Therefore, it gives a narrow explanation of economic problems.
 4. It does not Explain the Path of Equilibrium:
 5. Static analysis explains only the final state of equilibrium. And comparative
statics compares only the two final equilibrium states.
 It does not show how this new equilibrium has been reached.
 Dynamic Economics
• The word ‘dynamics’ means causing to move. In economics, the term
‘dynamics’ refers to the study of economic change.
• It aims to trace and study the behavior of variables through time, and
determine whether these variables tend to move towards equilibrium.
• We have to know that there is movement in statics also but this movement is
certain, regular and expected.
• While dynamics refers to that movement which is uncertain, unexpected
and irregular.
•  Definition of Dynamic Economics, According to Prof. Harrod, “Dynamic
economics is the study of an economy in which rates of output are changing.”
• According to Prof. Hicks, “Economic dynamics refers to that part of economic
theory in which all quantities must be updated.”
• From Prof. Hicks’s definition, we come to know that time element occupies
great importance in dynamic economics.
• Example of Dynamic Economics: In dynamic analysis we focus on the
change of time and how the equilibrium change with time. It is the
same as watching the movie you can see how the image animate and
move. Dynamic analysis allows us to see the path of variable how the
variable change with time. It help us to see whether the equilibrium
will reach or not.
• Therefore, an aero plane flying in the sky is in a dynamic state only if
its direction, height and speed are uncertain. The concept of
dynamics is nearer to reality.
• In dynamic economics we study the economic variables like
consumption function, income and investment in a dynamic state.
 Features of Dynamic Economics
• Prof. Clark has pointed out the following features of a dynamic
economy:
• (i) In a dynamic economy, population grows;
• (ii) Quantity of capital grows;
• (iii) Modes of production improve;
• (iv) Industrial institutions undergo changes. Inefficient organizations
are replaced by efficient organisations.
• (v) Habits of the people, fashions and customs change, as wants of
the people increase.
• We can conclude by saying that dynamic economics relates to a
dynamic economy where uncertainty and expectations play their part.
 Scope & Importance of Dynamic analysis

• 1. Study of Time Element

• 2. Trade Cycles
• 3. Basis of many Economic Theories
• 4. More Flexible Approach
• 5. Realistic Approach
 Differences between static and dynamic economic analysis
Static Economic Analysis Dynamic Economic Analysis

In static economic analysis time element has nothing In dynamic economic analysis time element occupies
to do. All economic variables refer to the same point an important role. Economic variables refer to the
of time. different points of time.

It only tells about the conditions of equilibrium. It is a It shows the path of change. It is a movie.
‘Still Picture’

It studies only a particular point of equilibrium It also studies the process by which equilibrium is
achieved.

It is far from reality It is nearer to reality.

 Comparative Static Economics
• Comparative Static Economics studies the comparison of the old and
new equilibrium position. It does not study the path of change. In this
we take only the first equilibrium position and the final equilibrium
position and compare to find changes.
• According to Baumol, The analysis that can be used to show economic
equilibrium before and after a change in one or more variables,
without regarding of the time required is known as comparative static
economic analysis.
 Cont…Stock & Flow variable

1. Equilibrium:
2.• It refers to position in which opposite economic forces factors are
balanced.
• Example: DD and SS are in balance then there is no tendency to deviate
them from the position
• At macro level, - it is largely of general equilibrium nature - it is applicable
when a macro analysis is confined either to the product sector/ to the
monetary sector - an economy is said to be in equilibrium when
Aggregate Demand = Aggregate Supply
and

Total investment = Total savings

 Types of equilibrium:
1) Partial equilibrium
2) General equilibrium
Types of equilibrium.

1)Partial equilibrium: Only a part of the economy or economic phenomena

is analyzed in isolation to the rest of the economy, the analysis is a partial
economy.
It is used in micro economic analysis.
It assumes all other things, specially related ones to be constant
Example: Analysis of the car price is on the basis of its DD and SS,
assuming all factors of the car price to remain constant
In partial equilibrium assuming its petrol price, income of consumer, excise
duty, sales tax etc. to be constant
 2) General equilibrium:
Here, the economic system as a whole is analyzed. It deals with
interrelationship and interdependence between the various elements of the
economy. It allows all the interrelated factors to vary in reaction to one
another and analyze the equilibrium of all related sectors/markets.
It helps in identifying and explaining the cause and effects of economic
disturbance & in the formation of growth, employment & income
determination theories.