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AASIGNMENT

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”

Two central themes will run through the survey of macroeconomics


 The short run fluctuations in output, employment, and prices that we call business
cycle
 The long run trend in output and living standard known as economic growth

Frame work of Macroeconomics:


Framework means skeleton or structure of any thing, so framework of economics
means structure or agenda of economics. It means what are the objectives if
Macroeconomics. It also means that what things are covered by macroeconomics or it
means what are core areas to study under macroeconomics.
Macroeconomics covers following areas of economy.

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:

Another function of macroeconomics is price controlling. Price can be controlled


by using various macroeconomics tools i.e. monitory and fiscal policies. Infect control on
prices means control on inflation which is the main concern of macroeconomics. Inflation
can be controlled by adjusting production level of the economy with in restrictions of
available economic resources.

Employment level:

Other areas of study in macroeconomics are employment level in the economy.


Employment level can also be controlled by using macroeconomic tools. Higher
employment level in any economy shows higher living standard while low employment
level is a factor of low living standard in any economy.
Tools of macroeconomics:
Fiscal policy:
Fiscal policy denotes the use of taxes and government expenditures. Govt.
expenditures come in two distinct forms. First there are govt. purchases. These include
spending on gods and services, purchase of tanks, construction of roads and salaries etc.
Other part is taxation which affects the whole nation in many ways.

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.

Determination of National Income with the help of Aggregate Demand and


Aggregate Supply:

Before determination of national income we must define some important terms which are

Aggregate Supply:

“Aggregate supply refers to the total quantity of goods and services


that the nation’s businesses willingly produce and sell in a given period”

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

200 400 600 800 1000 Qu

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

100 200 300 400 500 Qu

Aggregate demand is dependent on price level as aggregate supply. When low


prices prevail in market people demand more goods and services. On the other hand
when high price prevail in market people demand less. In above diagram we can see that
when price is Rs.150 people demand goods of Rs.300 billion. Now if this price is
decreased to Rs.100 obviously demand will increase.

Determination of National Income:

Prof. F.S Brooman defines national income as “National expenditure become


total of consumers spending, public authority spending and capital formation at home and
overseas i.e. sum of the final expenditures by the residents of the country”
Gardener Ackley defines national income as “individual’s income is the amount
of his earning from the productive services currently rendered by him or by his property.
National income is nothing more than sum of individual’s income”

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

1000 2000 3000 4000 5000 Qu

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)