Page 5
Semester 3: MACROECONOMICS-I
National Income, Concepts: GDP, GNP, PCI, Measurement Methods, Real/Nominal GDP, National Income Accounting, Happiness Index, Circular Flow
National Income, Concepts and Measurement
GDP (Gross Domestic Product)
GDP represents the total monetary value of all finished goods and services produced within a country's borders in a specific time period. It is an indicator of a country's economic health.
GNP (Gross National Product)
GNP measures the economic performance of a country by considering the value of all finished goods and services produced by a nation's residents, regardless of location, within a specific time frame.
PCI (Per Capita Income)
PCI is the average income earned per person in a given area in a specified year. It is calculated by dividing the area's total income by its population. It helps in assessing the standard of living.
Measurement Methods
National income can be measured using three approaches: the production approach, the income approach, and the expenditure approach. Each method provides a different perspective on economic activity.
Real vs Nominal GDP
Nominal GDP measures a country's economic output without adjusting for inflation, while Real GDP adjusts for inflation, providing a more accurate reflection of an economy's size and how it's growing over time.
National Income Accounting
National income accounting is a system that a nation uses to measure its economic performance. It includes GDP, GNP, and other related metrics that help in economic analysis.
Happiness Index
The Happiness Index is a measure that evaluates the well-being and happiness of a population, taking into account various factors such as income, employment, physical and mental health, education, and the environment.
Circular Flow
The circular flow model illustrates how money moves through the economy. It shows the interactions between households and businesses, emphasizing the continuous movement of expenditures and income.
Full Employment, Classical Theory, Aggregate Demand and Supply, Classical Model, Wage and Price Flexibility, Three Ranges in AS Curve
Full Employment
Full employment refers to a situation in which all available labor resources are being used in the most efficient way possible. This does not mean zero unemployment, as some level of frictional unemployment is always present due to transitions between jobs. Full employment emphasizes the importance of utilizing labor resources effectively.
Classical Theory
Classical economics is based on the idea that free markets can regulate themselves. It asserts that individuals acting in their self-interest contribute to economic growth and stability. In classical theory, the economy is capable of reaching full employment naturally without government intervention.
Aggregate Demand and Supply
Aggregate Demand (AD) is the total demand for goods and services within a certain market, while Aggregate Supply (AS) refers to the total supply of goods and services that firms in an economy plan to sell during a specific time period. The interaction between AD and AS determines overall economic output and price levels.
Classical Model
The classical model posits that markets are always clear, and that supply creates its own demand. In this model, wage and price flexibility are key assumptions, allowing the economy to self-correct and maintain full employment.
Wage and Price Flexibility
Wage and price flexibility is the ability of wages and prices to adjust in response to changes in economic conditions. This flexibility is essential for the classical model, as it allows the economy to respond to excess supply or demand, facilitating the return to full employment.
Three Ranges in AS Curve
The Aggregate Supply curve can be divided into three ranges: the Keynesian range (where AS is flat and output is sensitive to changes in AD), the intermediate range (where AS begins to slope upwards indicating that output cannot increase indefinitely), and the classical range (where AS is vertical at full employment, indicating that no increase in AD can raise output further). Each range reflects different economic conditions and responses to AD changes.
Under Employment, Keynesian Theory, Keyness Critique, Involuntary Unemployment, Effective Demand, Consumption Function, Marginal Efficiency of Capital, Multiplier
Under Employment, Keynesian Theory, Keynes Critique, Involuntary Unemployment, Effective Demand, Consumption Function, Marginal Efficiency of Capital, Multiplier
Item
Under employment refers to a situation where individuals are working in jobs that do not utilize their skills fully or are working fewer hours than they would prefer. This can include part-time workers seeking full-time employment and individuals in jobs that do not match their qualifications.
Item
Keynesian economic theory, founded by John Maynard Keynes, posits that total spending (aggregate demand) in the economy is the primary driver of economic growth and employment.
Item
Keynes critiqued classical economics for assuming that markets are self-correcting and that full employment is the norm. He argued that insufficient aggregate demand can lead to prolonged periods of unemployment.
Item
Involuntary unemployment occurs when individuals are willing to work at prevailing wage rates but cannot find employment due to lack of demand for labor.
Item
Effective demand is the total demand for goods and services in the economy at a given time, determining the level of employment and output.
Item
The consumption function illustrates the relationship between aggregate consumption and gross national income, showing how consumption increases as income rises.
Item
The marginal efficiency of capital refers to the expected rate of return on an additional unit of capital, influencing investment decisions.
Item
The multiplier effect describes how an initial increase in spending leads to increased income and consumption, thereby resulting in a more significant overall impact on the economy.
Theories of Consumption, Absolute Income, Relative Income, Permanent Income, Life Cycle Hypothesis
Theories of Consumption
Proposes that consumer spending is determined by current income levels. Higher income leads to more spending, while lower income results in reduced expenditure.
Focuses on income as the primary determinant of consumption.
Suggests no consideration for past income or future expectations.
Associated with Keynesian economics.
Suggests that individuals base their consumption on their income relative to others, rather than absolute levels. Concerns about social status influence spending.
Emphasizes social comparisons in determining consumption behavior.
Individuals may increase consumption to match peers even if it leads to financial strain.
Proposed by economist James Duesenberry.
Argues that consumers base their consumption on their expected long-term average income rather than current income. This theory incorporates future expectations into spending decisions.
Developed by Milton Friedman.
Long-term planning shapes consumption; temporary income changes do not significantly affect spending.
Aims to explain consumption patterns across economic cycles.
Proposes that individuals plan their consumption and savings behavior over their lifetime, accounting for income changes at different life stages.
Popularized by economists Franco Modigliani and Richard Brumberg.
Individuals save during high-earning years to fund consumption during retirement.
Consumption is smoothed over time rather than fluctuating with current income.
Inflation, Types: Demand Pull, Cost Push, Mark-up, Price Indexes, Phillips Curve
Inflation
Definition of Inflation
Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. It indicates a decrease in the purchasing power of a currency.
Price Indexes
Price Indexes are statistical measures that track changes in the price level of a basket of selected goods and services over time. Common examples include the Consumer Price Index (CPI) and the Producer Price Index (PPI), which help gauge inflation rates.
Demand-Pull Inflation
Demand-Pull Inflation occurs when the overall demand for goods and services in an economy exceeds the available supply. This can be driven by factors such as increased consumer spending, government spending, and investment.
Cost-Push Inflation
Cost-Push Inflation arises when the costs of production increase, leading producers to raise prices to maintain profit margins. This can be caused by rising wages, increased prices for raw materials, and supply chain disruptions.
Mark-up Inflation
Mark-up Inflation happens when businesses increase prices to maintain profit margins in response to increased demand or costs. It is often influenced by market power and competition.
Phillips Curve
The Phillips Curve illustrates the inverse relationship between inflation and unemployment. It suggests that lower unemployment rates can lead to higher inflation, and vice versa. Policymakers often consider this relationship when addressing economic conditions.
