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SUBJECT: MACROECONOMICS
PREPARED BY:
AAMIR HAYAT
STUDENT OF
GRADUATE SCHOOL OF
MANAGEMENT
INTERNATIOMAL ISLAMIC
UNVERSITY ISLAMABAD
Definition:
“Macroeconomics is the study of behavior of the economy as a
whole that examine the forces that effect man firms consumers and
workers etc at the same time”
Economic growth:
Economic growth is often defined as a continuous increase in the real value of the
production of goods and services.
According to Kuznets “Economic growth may be defined as a long term process
where in the substantial and sustained rise in real national income, total population and
real per capita income takes place”
In the words of Michael Todaro, “economic growth is a steady process by which
the productive capacity of the economy is increased overtime to bring about rising level
of national output and income”
Price control:
Employment level:
Monetary policy:
The second major instrument of macroeconomics is monetary policy, which the
government conducts through managing the nation’s money, credit and banking system.
Before determination of national income we must define some important terms which are
Aggregate Supply:
Aggregate supply is denoted as AS. It depends upon the price level, the productive
capacity of economy and level of costs.
P AS
200
150
100
50
Real GDP
We can see in above diagram that aggregate supply is dependent on price level.
Producer is willing more goods at higher prices while when the price becomes low they
sell less goods and services because of low profit incentives.
Aggregate Demand:
Aggregate demand refers to the total amount that the different sectors in the
economy willingly spend in a given period. Aggregate is the sum of the spending of the
consumers, businesses and government and it depend upon level of prices, as well as
monetary policy, fiscal policy and other factors.
250
200
150
100
AD
50
Economists define national income as “money value of all the goods and
services produced in a country is called national income”
These goods and services are produced by four factors of production which are land,
labor, capital and organization.
According to above definition it is clear that all the goods and services produced in a
country when multiplied by their market price give the total national income of the
economy. How much goods and services are produced or should be produced is
determined by the equilibrium point of aggregate demand and aggregate supply.
AS
P
250
200
150 E
100
AD
50
Real GDP
As we define above that value of all the goods and services produced in an
economy is its national income, so here we can get national income because total output
of the economy is Rs.3000 billion in above diagram and market value of each good is
Rs.150.
At this level of output every one is satisfied because producer can sell that he want to sell
at reasonable prices and consumer can get all he want to purchase at reasonable prices.
But if lower price prevail in than Rs.150 then there is less incentive for producer
to producer more goods and services because there is low profit margin for him. So
producer decrease production which cause unemployment in the economy. People will be
forced to pay more for some goods and services so this also causes inflation in economy.
On the other hand if high prices prevail in market then producer will produce
more goods and services because there is high profit incentive for him. This also creates
more employment opportunities in the economy and also reduces inflation.
Income basis:
All these goods and services produced by the use four factors of production which
command reward for the production made. These rewarded annually in form of rent,
interest, wages and profits
As we know that sum of all the income of the individual’s is national income, so
the aggregate of these rewards also amount to the National Income
Expenditure basis:
Alternatively the expenditure through these rewards also amount to National
Income.
To determine national income following adjustments have to be made with N.N.P
in order to arrive at national income
National Income= G.N.P –depreciation allowance = N.N.P + (govt. subsidies- indirect tax
+ transfer payments +statistical discrepancies)