Definition of Macroeconomics

Macro economics studies the broader aspects of the economy and studies the behaviour of an economy
as a whole.

Development of Macroeconomics

 J M Keynes pioneered a new approach to look at the macroeconomics and macroeconomic

 Classical economists focused only on the micro aspects of the economy. Business cycles were
considered to be predictable

 In the last few decades, another school of thought has gained prominence. These economists
are of the opinion that the people should be given enough incentives for their earnings, rather
than imposing taxes on their earnings. This group of economists advocates incentives for
savings, known as supply side economists.

Objectives of Macroeconomics

There are 5 main objective of macroeconomics i.e. to achieve....

High levepl of output (GDP)

 The ultimate aim of any economy is to provide the desired goods and services. The economy
should be in a position to offer these goods and services in ample number.

 GDP measures the market value of the entire output in a country during a particular year.

 There are two variants in GDP- Nominal and Real. When nominal GDP is adjusted for inflation, it
gives real GDP.

 The importance of GDP can be analyzed by the fact that any predictions regarding the future
growth or fall in the economy are made in the GDP percentage.

Full employment

 It is important for any government to ensure full employment to the citizens of its country.

 Unemployment rate shows different pattern in different phases of business cycles. During
depression unemployment is high, govt must make use of the precious resources available,
otherwise it would lead to wastage.

Price Stability

 Stable prices are the third macroeconomic objective. Inflation effects the ordinary ppl to a vry
great extent CPI is used to measure the cost of different types of goods bought by the average
customer.
  Inflation denotes the rise or fall in price level in the economy. When the inflation is high, the
purchasing power of the customers reduces.

 A negative fall in the prices is known as deflation, as witnessed during the Great Depression of
1930s.

 Hyperinflation refers to the rise in prices by thousands of percentage points, resulting in the
collapse of the price systems. Hyperinflation was witnessed in Weimer Germany in the 1920s
and again in Brazil in 1980s and Russia in 1990s.

Sustainable Balance of Payments

 Globalization has resulted in increased transactions between a country and the rest of the
world.

 Balance of Payments records all these transactions, both imports and exports. Countries keep a
close watch on their international trade.

 The barometer that shows the efficiency of international trade is the net exports. It is the
difference between the value of exports and value of imports. Net exports are also called as
the balance of trade.

 Every country desires to have a positive balance of trade.

Economic Growth & Economic Development

 Every country wishes to and strives for having a constant growth in its economy.

 There are two parameters that judge the rate of growth that an economy achieves.

1. Increase in production possibility curve or schedule

2. Growth in GDP and per capita income

Instruments of Macroeconomic Policy

Fiscal Policy

 Fiscal policy is concerned with the use of taxes and government expenditures. Government
has to meet various expenditures like salaries, defence expenses, infrastructure development,
etc.
  All these expenses leave a positive effect on the overall economy, thus influencing the size of
the GDP.

 Taxes are the main source of revenue for any government. Taxes affect the economy and the
individuals in two ways.

First, taxes imposed on the income of the people bring down the disposable income in the hands
of the consumers. This reduces the spending in the economy.

Second, the taxes levied on goods and services make them costlier. This encourages individuals to
save and invest in financial instruments.

Monetary Policy

 Monetary policy is the second most widely used macroeconomic policy instrument.

 Monetary policy helps government, managing the nation’s money, credit, and banking
system. Central bank regulates the monetary system, and other entities like banks, insurance
companies, NBFCs are also a part of the monetary system.

 In India, Reserve Bank of India is the custodian of the monetary system of the economy.
Central bank brings changes in the interest rates, reserve requirements, etc. These changes
make significant impact on the overall functioning of the economy. 

 For example, the lowering of interest rates on housing loans helped the growth of the housing
sector. As a result of low rate of interest, it became easier to avail a housing loan and to own a
house. This has resulted in the growth of many allied industries as well.

International Trade Policy

 Globalization has given a big push to the international trade. This has resulted in framing of
specific polices by many countries to cope with the new challenges. International trade policy
addresses issues like tariff and non tariff barriers.

 In India, in order to move along with the changing economic scenario, government came out
with export-import (EXIM) policy in 1997.

 Example: The EXIM policy aims at bringing down the transaction costs.

 The policy also aims at accelerating the exports and making the country a manufacturing hub
for quality goods and services.

 The government also plans to have gold card scheme for credit-worthy exporters with good
track record for easy availability of export credit on best terms to be worked out by the RBI.

 To make the country a manufacturing hub, government has announced relaxations on

 The import duty on various other capital goods have been either reduced or abolished.

Exchange Rate Policy

 Foreign exchange policy is a part of the monetary policy.

 Foreign exchange is the rate at which a country’s currency can be exchanged with a foreign
currency.

 Different countries follow different exchange mechanisms. Some countries have a fixed
exchange rate, some countries adopt a flexible exchange rate, where the exchange rates are
determined by the demand and supply functions.

 India follows a flexible exchange rate policy, which is determined by the demand and supply,
where RBI has a right to intervene in the market. In order to regulate the foreign exchange
transactions, government has come out with an act FERA, which was replaced by Foreign
exchange management act (FEMA).

Employment Policy

 Employment policies are adopted by government in order to increase the employment level in
the country. As a part of this policy, governments come out with various polices. 

 For example, in India, government has introduced various policies and schemes like, Jawahar
Rozgar Yojna etc.

Price and Incomes Policy

 This policy aims at regulating the prices in the market and also to ensure the minimum wages
to the workers.

Basic Variables in Macroeconomics

 In macroeconomics study, various variables are used.

 Variables like money supply, CPI and WPI, Foreign exchange rates, which can be measured at
any given point of time are called as stock variable.

 Variables like GDP, inflation, imports, consumption and investment, which can be measured only
over a period of time, are flow variables.

 Equilibrium states a balance in the opposing forces

 Economic models consist of stock and flow variables. These can be either in the state of
equilibrium or disequilibrium at a given point of time

Basic Concepts of Macroeconomics

 Variables like GDP, inflation, imports, consumption and investment, which can be measured only
over a period of time, are flow variables.

 Equilibrium states a balance in the opposing forces

 Disequilibrium states lack of balance or equilibrium.

 Economic models consist of stock and flow variables. These can be either in the state of
equilibrium or disequilibrium at a given point of time