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    Wa0002.

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    DOC-20240527-WA0002.

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    Wa0002.

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    of 19

    SECTION- A

    MACRO ECONOMICS
    The term Macro has its origin from the Greek term
    ‘Makros’, which means large.
    Macro Economics is defined as that branch of
    economics which studies the economic issues or
    economic problems at the level of an economy as
    a whole.
    Prof. J. M. Keynes was the pioneer in the field of
    modern Macroeconomics.
    John Maynard Keynes, (5 June 1883 – 21 April 1946), was
    a British Economist, whose ideas fundamentally changed
    the theory and practice of macro economics and the
    economic policies of the govt.
    MICRO AND MACRO ECONOMICS
    MICRO ECONOMICS MACRO ECONOMICS

    • A branch of economics which • A branch of economics which


    studies the behavior of an studies the economic behavior
    individual economic unit. of an economy as a whole.
    • It is also known as ‘Income
    • It is also known as ‘Price
    or employment theory’
    theory’
    • Determination of income and
    • Allocation of resources is the employment is the central
    central issue. issue
    • Major tools are individual • Major tools are aggregate
    demand and individual supply demand and aggregate supply.
    STOCK & FLOW VARIABLE
    STOCK FLOW

    • Stock is a variable • Flow is a variable


    measured under a measured over a period
    particular point of time.
    of time.
    • It is a static concept.
    • It does not have a time • It is dynamic concept.
    dimension. • It has a time dimension.
    • For eg:- Population of • for eg: Number of births
    India as on 31-03-2020.
    during 2019
    National wealth, Money
    supply. National Income.
    CIRCULAR FLOW
    Flow of income or factor services between
    sectors of the economy.
    There are 3 phases in circular flow of income.
    They are: Production, Distribution and
    Disposition (Expenditure)
    CIRCULAR FLOW
    REAL FLOW MONEY FLOW

    • Flow of factor of • Flow of money between


    production or goods & sectors.
    services between sectors. • It involves exchange of
    • It involves exchange of money.
    goods and services. • It is also known as ‘Nominal
    • It is also known as “physical flow”
    flow”.
    CIRULAR FLOW IN A TWO SECTOR ECONOMY
    • In a TWO sector economy there are two sectors, namely
    HOSEHOLD sector and PRODIUCING sector (FIRMS)
    • House holds are the owners of the factors of productions and
    the consumers of goods and services.
    • Producers sector (Firms) includes all the producing units in an
    economy. It hires factor inputs from the Household sector and
    produces goods and services.

    TWO sector economy is also known as a CLOSED ECONOMY.


    WORKING OF A TWO SETOR ECONOMY
    PAYMENT FOR FACTOR INPUTS (RENT, WAGE, INTEREST & PROFIT)

    FACTOR INPUTS (LAND. LABOUR, CAPITAL & ORGANISATION)

    GOODS & SERVICES

    PAYMENT FOR GOODS & SERVICES (CONSUMPTION EXPENDITURE)


    From the above flow chart we can see that there are TWO
    sectors namely Household sector and the producing sector.

    Initially Household sector supplies factor inputs to the firms


    and in return firms pays factor payments to the household
    sector.

    By using these factor inputs firms produces goods and


    services and supplies to the household sectors. In return
    house hold sectors gives payment to these goods and services
    to the firms, known as consumption expenditure.

    Here we could see there are two flows namely real flow and
    the nominal flow. Inside arrows (blue) shows the real flow and
    the outside arrows (red) shows the nominal or money flow.
    EXPNDED FORM OF TWO SECTOR ECONOMY

    By incorporating the financial market (Banking) in a two sector


    economy, we can expand the two sector model. Household
    sector and firms deposits their amount in the financial market
    and in the same way financial market lends money to the
    household and the producing sectors.

    We can see the functioning of this in the following flow chart.


    WORKING OF A TWO SECTOR ECONOMY (With Financial
    Market )
    PAYMENT FOR FACTOR INPUTS (RENT, WAGE, INTEREST & PROFIT)

    FACTOR INPUTS (LAND. LABOUR, CAPITAL & ORGANISATION)

    SAVINGS SAVINGS

    BORROWINGS BORROWINGS

    GOODS & SERVICES

    PAYMENT FOR GOODS & SERVICES (CONSUMPTION EXPENDITURE)


    THREE SECTOR MODEL ECONOMY
    • We can expand the two sector model
    economy by including the government sector.
    Govt. sector acts as both consumer and a firm.
    • Following chart shows the working of three
    sector economy.
    WORKING OF A THREE SETOR ECONOMY
    Subsidies, Payment
    for goods & services
    GOVERNMENT

    Tax
    Payments

    PAYMENT FOR FACTOR INPUTS (RENT, WAGE, INTEREST & PROFIT)


    FACTOR INPUTS (LAND. LABOUR, CAPITAL & ORGANISATION)

    SAVINGS SAVINGS
    BORROWINGS BORROWINGS
    GOODS & SERVICES

    PAYMENT FOR GOODS & SERVICES (CONSUMPTION EXPENDITURE)


    FOUR SECTOR MODEL ECONOMY
    A four sector economy consists of Households,
    firms, government and foreign sector.
    Foreign sector receives revenue from firms,
    households and government for export of goods
    and services.
    It makes payment for import of goods and services
    from firms and govt.
    It also makes payment for the factor services to
    the govt.
    Significance of circular flow of income
    • It help us to understand the mutual
    interdependence among the different sectors.
    • It helps in the estimation of national income.
    • It helps in identifying various types of leakages
    and injections.
    LEAKAGES & INJECTIONS UNDER CIRCULAR FLOW .
    •LEAKAGES:- Refer to withdrawal of money from the
    circular flow OR refers to that part of income which does
    not pass through the circular flow of income.
    •It reduces the flow of income.
    •For eg: Savings, Taxes, imports
    •INJECTIONS:- Refers to the introduction of income into the
    circular flow.
    •It increases the flow of income.
    •For eg:- Investment, Govt. expenditure, Exports.
    Classification of goods
    FINAL GOOD INTERMEDIATE GOOD

    • Goods which are used either • Goods which are used either for
    for consumption or for resale or for further production
    investment. in the same year.
    • They have crossed the • They are still in the production
    production boundary. boundary. ( As a RAW MATERIAL)
    • The are included in both • They are NOT included in
    national income and domestic national income or in domestic
    income. income.
    • Demand for such good is a • Demand for such good is a
    DIRECT DEMAND. DERIVED DEMAND
    • For eg. Machinery purchased • For eg.: Milk used in dairy shop
    by a firm, Car purchased by for resale. Wheat flour used in a
    households. bakery.
    FINAL GOODS can be classified into:
    CONSUMPTION GOODS & CAPITAL GOODS

    CONSUMPTION GOODS CAPITAL GOODS

    • Goods satisfy human wants • Goods which are in the form


    directly. fixed asst for the producers.
    • Such goods have direct demand.
    • These goods do not lead to
    • Expenditure on consumption
    goods is called as consumption direct satisfaction of
    expenditure human wants.
    • It is classified into Durable, semi- • Expenditure on
    durable, Non-durable goods & consumption goods is called
    services etc. as investment expenditure .
    • For eg. Rice, fridge, etc.
    purchased by the households • For eg. Machine, tools etc.
    FACTOR INCOME
    &
    TRANSFER INCOME

    FACTOR INCOME TRANSFER INCOME


    • Income received by the • Income received without
    factors of production for rendering any productive
    rendering factor services. services in return.
    • It is considered as bilateral • It is considered as unilateral
    payment. payment.
    • It is included both in • It is NOT included in
    National and in Domestic national or in domestic
    income. income.
    • For eg. Rent, wages, • For eg.: Scholarship, Old age
    interest & profit pension, unemployment
    allowances

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