LITTLE STAR HR. SEC. SCHOOL Economics Class 12

LITTLE STAR HR. SEC. SCHOOL Economics Class 12

Ch 1 - INTRODUCTION TO MACROECONOMICS

Learning Material Content created by Miss Merita, Economics Subject Teacher, LSHSS

ContentCHAPTER 1

INTRODUCTION TO MACRO ECONOMICS1. Meaning2. Importance3. Scope4. Basic problems of an economy5. Basic concepts of macroeconomics 1) Business cycle. 2) consumption goods and capital goods 3) Final goods and intermediate goods 4) Stocks and variables

6. Four sectors of an economyMore resources available at www.littlestardimapur.com

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MACRO ECONOMICS:

Macro economics may be defined as that branch of economic analysis which studies the behaviour of not one particular units like a household, a firm or an industry but of all the units combined together.

Macro economics is the study of aggregates and averages of the entire economy.

Such aggregates are national income, total employment, aggregate savings and investment, aggregate demand, aggregate supply,

general price level, etc.

More resources available at www.littlestardimapur.com


MACRO ECONOMICS: It is the study of the economic system as a whole.

It thus deals not with one family but all the families taken together; not with one firm but all the firms in an economy; not with one industry but the entire industrial structure of an economy.

John Maynard Keynes, a British Economist propounded his own theory and wrote his famous book “ General Theory of Employment, Interest and Money” published in 1936 which is an outstanding example of macroeconomics.



IMPORTANCE

Macro economics helps us to understand the functioning of a complicated modern economic system. It describes how the level of national income and employment is determined on the basis of aggregate demand and aggregate supply.

It helps us to achieve the goal of economic growth, higher level of GDP and higher level of employment.



It helps to bring stability in price level and analyses fluctuations in business activities. It suggests policy measures to control inflation and deflation.

It helps to solve economic problems like poverty, unemployment, business cycles, etc., whose solution is possible at macro level only.

With detailed knowledge of functioning of an economy at macro level, it has been possible to formulate correct economic policies and also coordinate international economic policies.



SCOPE OF MACRO ECONOMICSWorking with macroeconomic concepts is a bare necessity in order to contribute to the solutions of the great problems of our times. Let us understand the scope of macroeconomics, that is, how macroeconomics helps to resolve the major issues or problems of an economy.

1: Theory of National Income- The study of macroeconomics is very important for evaluating and analysing the performance of the economy in terms of national income with the advent of the Great Depression of the 1930’s, it became necessary to analyse the courses of general overproduction and general unemployment.

This led to the constriction of the data on national income which helped in forecasting the level of economic activity and performance of an economy globally.



SCOPE OF MACRO ECONOMICS2: Theory of Employment - The general level of employment in an economy depends upon the effective demand which in turn depends on aggregate demand and aggregate supply functions. Unemployment in an economy is caused by deficiency of effective demand which can be eliminated by raising total investment, total output, total income and total consumption. Thus, macroeconomics has special significance in studying the causes and effects of general unemployment.



3: Theory of Money- Macroeconomics has a scope in solving monetary problems. Frequent changes in the value of money, inflation or deflation, affects the economic activities on analyses these changes, they can be corrected by adopting properly monetary, fiscal and other measures for the economy as a whole. 4: Theory of Economic growth- The economic growth is also a study in macroeconomics. It is on the basis of macroeconomics that the resources and capabilities of an economy were evaluated. Proper planning is done to increase the level of national income, output and employment so as to raise the level of economic growth and development of an economy as a whole.



BASIC PROBLEMS OF AN ECONOMY1. Economic Growth: It refers to the increase in the economy’s production over a period of time. It simply means increase in GDP (Gross Domestic Product) value over time.

In economics, growth is commonly modeled as a function of physical, human capital, labour force and technology. Simply put, increasing the quality of the working age population, the tools that they have to work with, and the recipes that they have available to combine labour, capital and raw materials will lead to increased economic output. Every country strives to fulfil the never-ending demands of its population effectively and hence, they aim to continually increase their GDP.

2. Inflation: Inflation refers to a situation of continually rising prices of commodities and factors of production in the economy. It is a quantitative measures of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. In other words, it is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods. Often expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s currency. Inflation beyond an extent, is harmful for the entire economy leading to downfall in productivity, GDP and hence, economic growth. Thus, it is necessary to maintain the inflation level to a minimal level.



3. UNEMPLOYMENT: Unemployment may be voluntary and involuntary.

Voluntary unemployment refers to a situation when persons who are able to work but are not willing to work although suitable work is available for them. Here, unemployment refers to the involuntary unemployment, where the labour is able as well as willing to work but is sitting idle due to unavailability of any work opportunity. As a result of non-utilisation of available resources (more unemployed workers), less total economic production will take place than might have otherwise. And unlike idle capital, unemployed workers will still need to maintain at least subsistence consumption during their period of unemployment. High, persistent unemployment can lead to serious distress in an economy.

BASIC CONCEPTS OF MACROECONOMICS1.BUSINESS CYCLE

The business cycle is also known as economic cycle or trade cycle. It is the periodic but irregular up and down movement in economic activity. In other words, it describes the rise and fall in the production of goods and services in an economy. The duration of a business cycle has not been of the same length, it varied from a minimum of two years to a maximum of twelve years.

There are four phases of business cycle- (i) Expansion or recovery, (ii) Peak or prosperity, (iii) Contraction or recession, (iv) Trough depression.



1. Expansion:

This is the first stage in the business cycle.

In this stage, there is an increase in positive economic indicators such as employment, income, output, wages, profits, demand and supply of goods and service.

The process continues as long a economic conditions are favourable expansion.

2. Peak:

The economy then reaches a saturation point or peak, which is the second stage of business cycle.

The maximum limit of growth is attained. The economic indicators do not grow further and are at their highest. Prices are at their peak.

This stage marks reversal point in the trend of economic growth.



3. Recession:

The recession is the stage that follows the peak phase.

The demand for goods and services starts declining rapidly and steadily in the phase.

Producers do not notice the decrease in demand and go on producing, which creates a situation of excess supply in the market.

Prices tend to fall.

Unemployment increases and all other positive economic indicators such as income, output, wages, etc., consequently start to fall.

4. Trough: In this stage, the economy’s growth rate becomes negative. There is further decline until the prices of factors, as well as the demand and supply of goods and services reach their lowest point. The economy eventually reaches the trough.

It is the negative saturation point for an economy.

There is extensive depletion of national income and expenditure.More resources available at www.littlestardimapur.com


2. Consumption Goods and Capital Goods

• Consumption goods are the goods which are consumed for their own sake or which satisfy current wants of consumers directly.

• Capital goods are fixed assets of producers which are repeatedly used in the process of production for several years.



3. Final Goods and Intermediate Goods

• All goods which are meant either for consumption by consumers or for investment by firms are called final goods.

• Intermediate goods, on the other hand, are the goods used as raw material for further production of other goods or for resale in the same year.



4. Flows and Stocks• Flow variables: A flow is a quantity which is measured with reference

to a period of time (a year, a week or an hour). It has time dimension. For instance, income of a person is a flow which is earned during a week or a month or any other period. Other examples are expenditure, depreciation, savings, exports, imports, etc.

• Stock variables: A stock is a quantity which is measurable at a particular point of time. Capital is a stock variable. For example, on 1st January, 2017, a country owns stock of machines, buildings, accessories, raw materials, etc. Other examples are wealth, loan, debts, population, etc. Depreciation here

means a reduction in the value of a fixed asset due to normal wear and tear in the production process.



FOUR SECTORS OF AN ECONOMY Economy is a place where exchange of goods and services takes place in its four sectors. These sectors are-

(a) Household sector: It consists of consumer goods and services and households are also owners of the factors of production.



(b) Producer sector: It consists of firms, i.e. all producing units in the economy. Firms hire factors of production, i.e. land, labour, capital and entrepreneurial skills from the households for the production of goods and services.



(c) Government sector: The government sector includes all levels of government- centre, state and local. The primary function of the government sector also termed as public sector, is to impose resource allocation decisions on the rest of the economy that might not be made otherwise. It also performs various welfare functions as maintaining law and order and defence.



(d) Rest of the world: It is also called as the external sector. It includes all such activities which are related to exports and imports of goods and capital between the domestic economy and the rest of the world.



Now look at the questions and try to answer as many as you can. (Page 24 onwards are textbook questions and the same as those in the back of the lesson)

Or you can go straight to the online quiz. Click Here.


https://docs.google.com/forms/d/e/1FAIpQLSc7WyhIMFpCzlibv5IE4l_PXsfDlHbDUwVBzt6YigwKhVC-rQ/viewform?usp=sf_link


A. Very short-answer questions

1. Name the two branches of economics.Ans. The two branches of economics are microeconomics and macroeconomics.2. Name the book authored by J.M. Keynes to explain macroeconomic theory.Ans. “General Theory of Employment, Interest and Money”3. State the meaning of microeconomics.Ans. Microeconomics is the study of individual economic units of an economy.4. State the meaning of macroeconomics.Ans. Macroeconomics is the study of aggregates and averages of the entire economy.5. “Study of inflation” is a macroeconomic concept. True or false.Ans. True



6. Define aggregate demand.Ans. Aggregate demand is the demand for final goods and services in an economy at a given time.7. What do you mean by aggregate supply?Ans. Aggregate supply is the total supply of goods and services that firms in a national economy plan on selling during a specific time period.8. “Purchase of a refrigerator by a firm”. Here refrigerator is a capital good or a consumption good?Ans. Capital good9. “Bread is a consumer goods”. True or false.Ans. True



B. Short-answer questions-I

1. Define economics.Ans. Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.2. What do you mean by microeconomics?Ans. Microeconomics is that part of economic theory which studies the behaviour of individual economic units of an economy such as household, a firm, an industry, etc. It is primarily concerned with the determination of prices of individual commodities and factors.3. What do you mean by macroeconomics?Ans. Macroeconomics is that part of economic theory which studies the economy in its totality or as a whole. Its studies not individual economic units like a household, a firm or an industry but the whole economic system. In short, macroeconomics is the study of aggregates and averages of the entire economy.

4. Divide each of the following into macroeconomics or microeconomics concept.Ans. Macroeconomics- 1) Employment level in the country. 2) Inflation rate in an economy. Microeconomics- 1) Salary of an individual. 2) Price of tomato in Delhi.5. What is meant by business cycle?Ans. The business is also known as the Economic cycle or Trade cycle, it is the downward or upward movement of gross domestic product around its long-term growth trend. In other words, it describes the rise and fall in the production of goods and services in an economy.6. How are producer goods different from capital goods?Ans. All goods which are used in the production of other goods are termed as producer goods. They are used in two ways; (i) as raw materials and (ii) as fixed assets. Capital goods on the other hand, are fixed assets of producers which are repeatedly used in the process of production for several years.



C. Short-answer questions-II

1. What is the importance of macroeconomics?Ans. The importance of macroeconomics can be explained by the following points- i) Macroeconomics helps us to understand the functioning of a complicated modern economic system. ii) Macroeconomics helps to achieve the goal of economic growth, high level of GDP and higher level of employment. iii) It helps to bring stability in price level and analyses fluctuations in business activities. iv) It helps to solve economic problems like poverty, unemployment, business cycles, etc.



2. Explain the concept of business cycle with the help of diagram.Ans. Business cycle is the downward or upward movement of gross domestic product around its long-term growth trend. It describes the rise and fall in the production of goods and services in an economy, that is, the period of high income, output and employment has been called the period of expansion or prosperity and the period of low income, output and employment has been described as period of contraction or depression. The duration of a business cycle has not been of the same length, it has varied from a minimum of two years to a maximum of twelve years. There are four phases of business cycle, that is, (i) Expansion (ii) Peak (iii) Contraction & (iv)Trough. These four phases of business cycles have been shown in the following diagram: (Pg-no.14 – Fig-1.1)



3. Explain the concept of final goods and intermediate goods by giving examples.Ans. All goods which are meant either for consumption by consumers or for investment by firms are called final goods. They are meant for final use and the final users of a product are consumers and producers. They are neither used for further transformation in production nor resold. All goods which are used as raw material for further production of other goods or for resale in the same year are known as intermediate goods. Intermediate goods are purchased by one firm from the other for use as raw material or for resale. Let us take the example of manufacturing biscuits. Biscuits are final goods but flour, milk, sugar, salt, etc., used in making biscuits are intermediate goods.



4. Explain the four sectors of an economy. Ans. Economy is a place where exchange of goods and services takes place in its four sectors. These sectors are -

(a) Household sector: It consists of consumer goods and services and households are also owners of the factors of production.

(b) Producer sector: It consists of firms, who hire factors of production, i.e. land labour, capital and entrepreneurial skills from the households for the production of goods and services.

(c) Government sector: The government performs various welfare functions as maintaining law and order and defence.

(d) Rest of the world: It is also called as the external sector. It includes all such activities which are related to export and import of goods and capital between the domestic economy and the rest of the worlds.



5. Write a short note on the basic problems of an economy.Ans. The basic problems of an economy are explained below-

1) Economic Growth: Economic growth refers to the increase in the economy’s production (i.e. GDP). Every country strives to fulfil the never-ending demands of its population effectively and hence, they aim to continually increase their GDP and GDP growth rate.

2) Inflation: Another basic problem of an economy is inflation which refers to a situation of consistently rising prices of commodities and factors of production in the economy. As a result the purchasing power of the consumers falls leading to a lot of social implications thereby leading to a downfall in GDP and hence economic growth. Thus it is necessary to maintain the inflation level to a minimal level.

3) Unemployment: Unemployment refers to a situation where the labour is able as well as willing to work but is sitting idle due to unavailability of any work opportunity. As a result of non-utilisation of an available resource, the actual output of the economy is less than the potential output. Thus it is a major problem faced by all the economies.



LITTLE STAR HR. SEC. SCHOOL Economics Class 12

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