BBS 2nd Year Economics

Chapter 1: Introduction to Macroeconomics

1. Introduction

Economics is the social science that studies how individuals and societies allocate scarce resources to satisfy unlimited wants. Because resources are limited and human wants are unlimited, choices must be made regarding what to produce, how to produce, and for whom to produce.

Economics is divided into two major branches:

• Microeconomics: Studies individual economic units such as consumers, firms and industries.
• Macroeconomics: Studies the economy as a whole, focusing on aggregate variables like national income, employment and price level.

2. Concept of Macroeconomics

Macroeconomics is the branch of economics that deals with the economy as a whole. It studies aggregate variables such as national income, total output, general price level, unemployment, money supply and economic growth.

Modern macroeconomics was developed by John Maynard Keynes after the publication of The General Theory of Employment, Interest and Money in 1936. Therefore, macroeconomics is often called Keynesian Economics.

Definitions

K.E. Boulding: Macroeconomics deals not with individual quantities but with aggregates such as national income and total output.

P.A. Samuelson: Macroeconomics is the study of behaviour of the economy as a whole.

Gardner Ackley: Macroeconomics concerns the overall dimensions of economic life.

3. Features of Macroeconomics

• Aggregative Nature: It studies totals such as total consumption, total investment and national income.
• Whole Economy Study: It analyses the entire economic system rather than individual units.
• Policy-Oriented: Provides basis for fiscal and monetary policies.
• Income and Employment Theory: Focuses on determination of national income and employment level.
• Use of Policy Tools: Uses taxation, government expenditure, money supply and interest rate as tools of analysis.

4. Scope of Macroeconomics

1. Theory of National Income

It studies the concept, components and measurement of national income. It also includes social accounting which systematically records national income data.

2. Theory of Employment

It explains the causes of unemployment and factors determining employment level such as aggregate demand, aggregate supply, saving, consumption and investment.

3. Theory of Money

It studies demand and supply of money, functions of money and role of banks and financial institutions in the economy.

4. Theory of General Price Level

It analyses inflation (general rise in prices) and deflation (general fall in prices).

5. Theory of Economic Growth

It studies long-term increase in real national income and per capita income.

6. Theory of International Trade

It examines trade between countries, tariff policies and balance of payments.

5. Importance of Macroeconomics

• Understanding the Economy: Helps understand overall economic functioning.
• Policy Formulation: Assists government in designing economic policies.
• Control of Economic Fluctuations: Helps manage inflation, deflation and trade cycles.
• International Comparison: Allows comparison of national income and growth across countries.
• Business Decision Making: Guides firms in forecasting demand and investment decisions.

6. Limitations of Macroeconomics

• Fallacy of Composition: What is true for an individual may not be true for the whole economy.
• Heterogeneous Units Problem: Different goods cannot always be meaningfully aggregated.
• Unequal Sectoral Effects: Macroeconomic changes affect different sectors differently.
• Limited Practical Application: Some macro models are theoretical in nature.

7. Stock and Flow Variables

Stock Variables

Stock variables are measured at a specific point of time. Example: Money supply, capital stock, labour force.

Flow Variables

Flow variables are measured per unit of time. Example: National income per year, consumption per month, investment per year.

8. Equilibrium and Disequilibrium

Equilibrium is a situation where aggregate demand equals aggregate supply.

Disequilibrium occurs when aggregate demand and aggregate supply are not equal.

• If AD > AS → Excess Demand
• If AS > AD → Excess Supply

9. Static, Comparative Static and Dynamic Analysis

Static Equilibrium Analysis

Studies equilibrium at a particular point of time without explaining the adjustment process.

Comparative Static Analysis

Compares two equilibrium positions before and after change in macro variables such as investment.

Dynamic Equilibrium Analysis

Explains the process through which the economy moves from one equilibrium to another over time.

📌 Formula Card – Chapter 1