Macroeconomics – Full Notes

Macroeconomics is a branch of economics that studies the overall functioning and

performance of an economy. Unlike microeconomics, which focuses on individual markets
and decision-makers, macroeconomics looks at large-scale economic factors such as
national income, total employment, inflation, economic growth, and monetary/fiscal policy.
It helps governments, policymakers, and institutions understand the broader economy and
make informed decisions.

Scope of Macroeconomics
1. National Income and Output: Studies how the total income of a country is calculated,
including GDP (Gross Domestic Product), GNP (Gross National Product), and NNP (Net
National Product).
2. Unemployment: Examines types of unemployment, causes, and the impact on the
economy. Full employment is a key macroeconomic goal.
3. Inflation and Deflation: Tracks general price level changes, causes, effects on purchasing
power, and control measures.
4. Economic Growth: Focuses on long-term increases in national output and productivity.
5. Monetary and Fiscal Policies: Evaluates government and central bank tools to stabilize
the economy, regulate demand, and control inflation/unemployment.
6. Balance of Payments and Foreign Trade: Studies a country’s financial transactions with
the rest of the world.

Key Concepts in Macroeconomics

Aggregate Demand (AD): Aggregate demand is the total demand for goods and services in
an economy at a given overall price level and in a given time period. Components:
Consumption (C), Investment (I), Government Spending (G), Net Exports (X - M). Formula:
AD = C + I + G + (X - M)
Aggregate Supply (AS): Aggregate supply is the total output an economy is willing to
produce at different price levels. It can be short-run (SRAS) or long-run (LRAS).

National Income Accounting: National income accounting is the system used to measure the
overall economic activity of a nation.

Major Concepts:
- Gross Domestic Product (GDP): Total market value of all goods and services produced
within a country in one year.
- Gross National Product (GNP): GDP plus income earned by nationals abroad minus income
earned by foreigners in the country.
- Net National Product (NNP): GNP minus depreciation.
- National Income (NI): NNP at factor cost (i.e., after deducting indirect taxes and adding
subsidies).
- Personal Income (PI): Income received by individuals including transfer payments.
- Disposable Income (DI): PI minus personal taxes.

Methods of Measuring National Income

1. Product Method: Adds the value of all final goods and services produced.
2. Income Method: Adds incomes earned by all factors of production (wages, rent, interest,
profit).
3. Expenditure Method: Adds all expenditures on final goods and services.

Inflation and Deflation

Inflation: A persistent rise in the general price level of goods and services.
Types of Inflation:
- Demand-pull inflation
- Cost-push inflation
- Built-in inflation

Effects of Inflation:
- Reduces purchasing power
- Hurts savers and fixed-income earners
- Can erode economic stability

Control Measures:
- Monetary policy (increasing interest rates)
- Fiscal policy (reducing public spending)

Deflation: A general decline in prices, often linked with reduced demand and economic
slowdown.

Unemployment
Unemployment is the situation where people who are willing and able to work cannot find
jobs.
Types of Unemployment:
1. Frictional: Short-term, voluntary
2. Structural: Due to mismatch of skills
3. Cyclical: Due to economic downturn
4. Seasonal: Based on seasons (e.g., tourism, agriculture)

Unemployment Rate: (Number of unemployed / Labor force) × 100

Economic Growth and Development

Economic Growth: An increase in a country’s output of goods and services over time.
Indicators:
- Increase in real GDP
- Higher industrial production
- Rising national income
Economic Development: Broader than growth; includes improvements in living standards,
education, and healthcare.
Indicators:
- HDI (Human Development Index)
- Per capita income
- Literacy rates
- Life expectancy

Business Cycles: Business cycles are fluctuations in economic activity over time, consisting
of four main phases:
1. Expansion: Rising GDP, low unemployment
2. Peak: Highest point of the cycle
3. Contraction (Recession): Falling GDP, rising unemployment
4. Trough: Lowest point before recovery

Monetary Policy: Monetary policy is the process by which a central bank controls money
supply and interest rates to maintain price stability and promote economic growth.
Instruments of Monetary Policy:
- Repo rate: Rate at which central bank lends to commercial banks
- Reverse repo rate: Rate at which it borrows from them
- CRR (Cash Reserve Ratio): Percentage of reserves banks must hold with the central bank
- SLR (Statutory Liquidity Ratio): Portion of deposits banks must maintain in liquid assets

Expansionary Monetary Policy: Increases money supply to boost demand

Contractionary Monetary Policy: Reduces money supply to control inflation

Fiscal Policy: Fiscal policy involves the use of government spending and taxation to
influence the economy.
Types:
1. Expansionary: Increased spending, lower taxes to boost growth
2. Contractionary: Reduced spending, higher taxes to control inflation

Instruments:
- Public expenditure
- Taxation
- Public debt

Fiscal Deficit = Total Expenditure – Total Revenue

Balance of Payments (BoP): The BoP is a statement that summarizes a country's economic
transactions with the rest of the world over a specific time period.

Components:
1. Current Account:
- Trade in goods and services
 - Income from investments
- Transfers (e.g., remittances)
2. Capital Account:
- Foreign investment
- Loans and banking capital

BoP Surplus: Exports > Imports

BoP Deficit: Imports > Exports

Exchange Rates: An exchange rate is the price of one currency in terms of another.

Types:
- Fixed Exchange Rate: Controlled by government
- Floating Exchange Rate: Determined by market forces
- Managed Float: Partly government-controlled

Depreciation: Fall in value of a currency in a floating system

Devaluation: Deliberate lowering in a fixed system

Macroeconomic Goals:
1. Full Employment
2. Price Stability
3. Economic Growth
4. Balance of Payments Equilibrium
5. Equitable Distribution of Income

Conclusion: Macroeconomics plays a crucial role in understanding the structure and

functioning of an entire economy. From national income to inflation, employment, and
economic policy, macroeconomic analysis helps in stabilizing economies, reducing poverty,
and promoting growth. Policymakers use macroeconomic tools to achieve sustainable
development, while businesses and individuals rely on its insights for better financial
decisions.