BY

Qazi Subhan M. Phil (Eco), Pak LLM (IPR), Italy

1. 2. 3.

Introduction to Macroeconomics National Income Determination Derivation of Aggregate Demand, Aggregate Supply and General Equilibrium Demand Management Policies Inflation and Unemployment Measurement of Inflation with price Indices.

4. 5. 6.

What is Macroeconomics

Goals of Macro Economics Major Issues addressed by Macro Eco

The study of aggregate measures of the economy in any country.

OR

The study of all those issues which have an impact on the economy as a whole like inflation, unemployment, trade and other key social variables

The Great Depression was a period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930s.

Classical economists applied microeconomic models, or market clearing models, to economy-wide problems. However, simple classical models failed to explain the prolonged existence of high unemployment during the Great Depression. This provided the momentum for the development of macroeconomics.

In 1936, John Maynard Keynes published The

General Theory of Employment, Interest, and Money.

Keynes believed governments could intervene in the economy and affect the level of output and employment. During periods of low private demand, the government can stimulate aggregate demand to lift the economy out of recession.

Sustainable Economic Growth

Price Stability ( To Control Inflation) Employment Opportunities

Economic Indicators
GDP

Social Indicators
Health

Growth GNP Growth Employment Inflation Exports Imports BOP BOT Trade Deficits

situation Literacy Rate Transportation Communication Soft Drinking Water Poverty Sanitation Infrastructure

Chapter -1 Introduction
Main Issue Significance of the issue Objective of the research Organization of Study

Chapter 2 Literature Review

Analysis of previous studies about the subject matter

Chapter -3 Chapter- 4

Data and Methodology

Analysis and Discussions Conclusion

References

 Definition Types

of National Income

of GNP of GNP

Measurement

National Income of a country can be represented either by GDP or GNP GNP (Gross National Product) The value of all goods and services which has been produced by one nation in a specified time period (One Year) is called GNP. GDP (Gross Domestic Product) The value of all goods and services which has been produced with in the boundaries of a country in a specified time period (One Year) GNP = GDP+ Foreign Remittances (earnings)

Nominal GNP (based on Current Prices)

Real GNP (Based on Base Year price)

Potential GNP Actual GNP

Expenditure Approach
Two Sector Model Three Sector Model Four Sector Model

Income Approach

Two Sector Model Three Sector Model Four Sector Model

Circular Flow of National Income

EXPENDITURE APPROACH The national income can be measured through the aggregation of all the expenditures of the economy like the expenditures for the development of the country. This approach can be interpreted through the following models TWO SECTOR MODEL Y= C + I THREE SECTOR MODEL Y=C+I+G FOUR SECTOR MODEL Y = C + I + G + (X-M)

INCOME APPROACH
TWO SECTOR MODEL Y= C + S THREE SECTOR MODEL Y=C+S+T FOUR SECTOR MODEL Y = C + S + T + Rf

C+S+T+ Rf C+I+G+(X-M) E2

C+I+G
C+I

E1

E0

Income

Resources
Households Goods Expenditures Solid Lines - Flow of Money Dashed lines - Flow of Goods and Services Business Firms

Everyones expenditure is someone elses receipt. Every transaction must have two sides.

Multiplier means any numeric number which shows a change in dependent variable due to one unit change in Independent variable. For example how much change is required in consumption to increase 400 million in GNP. It is based on consumption Multiplier.

Multiplier means a change in autonomous expenditures (e.g. investment) leads to an even larger change in aggregate income (GNP).
An

increase in spending by one party increases the income of others. Thus, growth in spending can expand output by a multiple of the original increase. The multiplier is the number by which the initial change in spending is multiplied to obtain the total amplified increase in National income. The size of the multiplier increases with the marginal propensity to consume (MPC).

Consumption Multiplier Investment Multiplier Government Multiplier Tax Multiplier

Lump sum Tax Multiplier Income Tax Multiplier

(Expenditure Multipliers) Consumption Multiplier Investment Multiplier Government Multiplier K = 1/1- MPC

Tax Multiplier Lump sum tax Multiplier: -MPC/1-MPC Income tax Multiplier (K)= -MPC/1-MPC+MPC * Tax Rate

Y C I G where C C0 c1Y I I 0 , G G0
Then 1. find equilibrium output (Y*), consumption level and savings of a country.

2. Find Investment multiplier and consumption multiplier

Y C I G where C C0 c1 Y T T T0 , I I 0 , G G0
Then 1. find equilibrium output (Y*), consumption level and savings of a country. 2. Find Investment multiplier, consumption multiplier and Tax Multiplier

Y C I G where C C0 c1 Y T T T0 tY , I I 0 , G G0
Then 1. 2. Find equilibrium output (Y*), consumption level and savings of a country. Find Investment multiplier, consumption multiplier and Income Tax Multiplier

Suppose

Practice Question

C 200 0.67(Y T ) T 130 0.3Y I 150 G 340 ( X M ) 100

Then 1. Find equilibrium output, level of consumption and saving from the above information
2.

3.

Find Income Tax Multiplier, lump sum tax and Expenditure Multiplier. Suppose Government has imposed tax by 15% on Output then what would be the effect on equilibrium output, consumption and savings.

Y C I G where C 100 0.65Y T T 240 0.15Y , I 1000, G 500

Then 1. Find equilibrium output (Y*), consumption level and savings of a country. Find Investment multiplier, consumption multiplier and Income Tax Multiplier

2.

Introduction to General Equilibrium,

(Equilibrium of Economy),
Aggregate Demand & Aggregate Supply

To capture the concept of Aggregate demand and Aggregate Supply , following markets should be discussed Product Market

(Concerned with AD)

Money Market

Labor Market

(Concerned with AS)

From product market, IS Curve is derived and from money market LM Curve is derived With the intersection of IS and LM, Aggregate Demand would be determined From Labor Market, we can derive Aggregate Supply At That point where Aggregate Demand and Aggregate Supply are making intersection, that is the point of determination for GENERAL EQUILIBRIUM for the economy which shows the relationship between General Price Level and GNP or National Income

Product Market

Money Market

Both Curves are showing relationships between rate of interest and national income

IS Curve

LM Curve

With the intersection of IS-LM, Aggregate Demand would be determined

In IS (-tive b/w r&Y

In LM (+tive b/w r&Y

That market in which the goods are transacted at a certain price. Technically Y = C + I + G +X-M is considered as goods Market because in all the components of aggregate expenditure, goods are involved. So any change in the components would cause a change in Aggregate Demand. From Product Market, we can derive IS (Investment Saving) Curve for the derivation of Aggregate Demand.

That market which is concerned with money. Two market forces ;Money Demand and Money supply are involved for the determination of rate of interest and quantity of money From the money Market, we can derive LM (Liquidity of money) Curve for derivation of Aggregate Demand.

In labor market, we have two market forces Labor Demand Labor Supply With intersection of labor demand and labor supply, wage and employment level has been determined Aggregate supply is determined with the help of labor market and production function (Q = f (K, L)

IS (Investment Saving) curve shows negative relation between rate of interest and national income. According to this approach, as rate of interest increases, Investment would come down. As Investment decreases, total national income would come down.

Consumption Government Expenditure Exports Imports Taxes

Money market consists of two market forces

Money Demand Money supply Money Demand The people are demanding money for three purposes Money Demand for daily Transactions Money Demand for Precaution Money Demand for Speculation

Money supply is defined as M1, M2 and M3

M1= Currency + Demand Deposits

M2=M1+Money market mutual funds + Time Deposits + Postal Deposits M3= M2-Postal deposits Normally, Money Supply is in the hand of central bank so it is generally kept fixed in the analysis.

Liquidity of Money (LM) curve can be derived from money market. As national income increases, the people are demanding more money for speculation and ultimately the rate of interest will increase. LM curve shows positive relation between rate of interest with the national income

With the intersection of product and money market or (with IS and LM), Agg. Demand would be determined. Aggregate demand shows negative relation between price and national income.

An increase in P the price level causes a fall in real money balances (M/P ), causing a decrease in the demand for goods & services.

AD

Consumption Government Expenditure Exports

Imports
Taxes

Money Supply

An increase in the money supply shifts the AD curve to the right.

AD1

AD2

In labor market, wages and employment level has been determined with the help of two market forces Labor Demand

Labor Supply Labor Demand Labor demand has negative relation with wage because as wage increases, cost of production would increase. As cost of production increases, it implies that the firm would reduce the demand for labor. Briefly, there is reciprocal relation between wage and labor demand

Labor supply has positive relation with wage. As wage increases, the incentives for the labor would increase and the people are willing to offer more services at high wage rate to any organization.

Aggregate Supply can be derived from labor market and production function. As employment increases, output will amplify. An increase in output will cause to increase in GNP because GNP is the value of total product which has been produced by one nation in a specified time period. The labor market is related to aggregate supply through production function.

Labor Supply
Labor Demand

Production Techniques
Labor Intensive technology Capital Intensive Technology Neutral Technology

Demand Management Policies

Fiscal Policy Monetary Policy

Exchange Rate Policy

Definition Objectives of Fiscal policy Tools of Fiscal Policy Kinds of Fiscal Policy Application of tools of fiscal policy to Economic situation.

Fiscal Policy means that policy which is formulated by the government to achieve its objectives with the help of its tools.

Objectives
Economic Growth Price stability Employment Opportunities

Government Expenditure Taxes

Direct Tax Indirect Tax

 Contractionary Fiscal Policy (Tax and G )

Expansionary Fiscal Policy (G and Tax )

Business Cycles
To Product Market To Money Market To Labor Market

Definition Objectives of Monetary policy Tools of Monetary Policy Kinds of Monetary Policy Application of tools of Monetary policy to Economic situation.

Definition Monetary Policy is designed by State Bank to stabilize the economy with the monetary tools Objectives To improve the economic growth To stabilize the prices To increase employment opportunities

Bank Rate Required Reserve Ratio (RRR) Open Market Operation (OMO)

There are two types

Expansionary Monetary Policy
Bank Rate decrease RRR decrease Purchase of Public shares

Contractionary Monetary Policy

Bank Rate Increase RRR Increase Sale of Public shares

Money Market

Product Market
Labor Market Business Cycle