Study of Macro Economic Variables PDF

## **Study of Macro Economic Variables** - To understand the working of the economy, the study of macro economic variables are important. - Main economic problems are related to the economic variables such as: - Behaviour of total income, output, employment and general price level in the econ...

## **Study of Macro Economic Variables** - To understand the working of the economy, the study of macro economic variables are important. - Main economic problems are related to the economic variables such as: - Behaviour of total income, output, employment and general price level in the economy. ## **Level of Employment** - Macro economics helps to analyse the general level of employment and output in an economy. ## **Micro Economics and Macro Eco­­­­nomics at a glance** | Basis for comparison | Micro Economics | Macro Economics | |---|---|---| | Meaning | Micro economics studies the behaviour of individual unit of an economy | Macro economics studies the behaviour of aggregates of the economy as a whole | ## **A free market economy** - Where the economic decisions/regarding production of goods, such as what to produce? How much to produce? How to produce etc., are taken at individual level. - There is no intervention by the government or any other agency while decision regarding the production. ## **Steps to Macro Economics** | Tools | Individual Demand and Individual Supply | Aggregate Demand and Aggregate Supply | |---|---|---| | Scope | Demand, supply, product pricing, factor pricing, production, consumption, economic welfare, etc. | National Income, general price level, employment, money etc. | | Importance | Price determination, model building, Business decisions etc. | Economic fluctuations, Study of national income, Economic development etc. | | Theory | Price Theory | Income and Employment Theory | | Examples | Individual income, individual output etc. | National income, National output etc. | ## **Try this** - Visit the vegetable market in the nearest area and try to get information about income and expenditure items of a particular seller. ## **Partial Equilibrium and General Equilibrium** | Sr. No. | Partial Equilibrium | General Equilibrium | |---|---|---| | 1. | Partial equilibrium means an equilibrium derived by considering the effects of only two variables at a time. All other variables are considered to be constant. | General Equilibrium means an equilibrium which is derived by considering the effects of many variables at a time. | | 2. | It neglects the interdependence between variables. | It takes into account the interdependence between variables. | | 3. | Micro-economic analysis is based on partial equilibrium analysis. | Macroeconomic analysis is based on general equilibrium analysis. | ## **Micro and Macro-economic analysis** * Micro-economic analysis is based on partial equilibrium analysis. * Macroeconomic analysis is based on general equilibrium analysis. * It studies the equilibrium position of a consumer, a firm, an industry, a market etc. * It studies the equilibrium position of the economy as a whole. ## **Distinguish between Micro and Macro Economics** | Sr. No. | Slicing Method | Lumping Method | |---|---|---| | 1. | When the aggregate is divided into small units for the purpose of study of each unit in depth, it is called as slicing method. | When the economy is not split up into small slices; but it is studied in big lumps as it is, it is called as lumping method. | | 2. | Micro-Economics uses slicing method. | Macro-Economics uses lumping method. | | 3. | It gives a worm's eye view of the economy. | It gives a bird's eye view of the economy. | | 4. | It studies in depth individual units like household, firm, consumer, producer, individual wages, prices, incomes, particular commodity etc. | It studies aggregates such as total employment, national income, national output, total investment, total savings, total consumption, aggregate supply, aggregate demand etc. | ## **Form Utility and Time Utility** | Form Utility | Place Utility | |---|---| | It is created by changing the form of raw materials. | It is created by transport of commodity from one place to another. | | It is created by converting raw material in the form of finished goods. | It is created by shifting place of consumption. | | E.g. Carpenter prepares chair from the piece of wood. It is created by producer. | E.g. Apple transported from Kashmir to Mumbai It is created by transporter. | ## **Direct Demand and Indirect Demand** | Sr. No. | Direct Demand | Indirect Demand | |---|---|---| | 1. | The demand for a commodity which directly satisfies wants of the consumer is called as direct demand. | The demand for goods which are needed in order to produce finished goods is called indirect demand. | | 2. | All finished goods or consumption goods have direct demand. | All factors of production have indirect or derived demand. | | 3. | E.g.: Demand for food, cloth, house etc. | E.g.: Demand for land, labour, capital etc. | ## **Joint/complementary demand** - When two or more goods are demanded jointly to satisfy one single want. it is known as joint or complementary demand. - For Example: Car and Petrol, Pen and Refill, Mobile and Charger. ## **Competitive demand** - It is demand for those goods which are substitutes for each. - For example: Tea or coffee, sugar or jaggery, etc. ## **Simple index numbers and Weighted index numbers** | Simple index numbers | Weighted index numbers | |---|---| | Simple index numbers is a method of constructing an index number in which every commodity is given equal importance. | Weighted index numbers is a method of constructing an index number in which suitable weights are assigned to various commodities. | | This method can be applied to determine the price index number, quantity index number, and value index number. | The method can be applied to determine price index numbers and the special-purpose index numbers. | | It is the easiest method for constructing index numbers. | It is relatively complex as compared to simple index numbers. | ## **Direct tax and Indirect tax** | Direct Tax | Indirect Tax | |---|---| | It is directly paid by tax payers. Or it is deducted form the income of the tax payers. | It is indirectly paid by tax payers. It is include in the price of goods and services. | | The direct taxes include personal income tax, corporate tax, capital gain tax, wealth tax, etc. | The indirect taxes include customs duty, excise duty, VAT, service Tax, etc. | ## **Principles of equity** - Direct taxes follow the principle of equity (social justice). Higher income people are taxed at a higher rate, and middle income people are taxed at lower rate. The lower income people are normally exempted form direct tax. - Indirect taxes lack the principle of equity. For instance, in the case of mass consumption goods, all consumers (whether rich or poor) have to pay the same rate of indirect taxes like excise duty. ## **Share of Taxes** - In India, the share of direct taxes is on the rise. In 2008-09, the share of direct taxes was estimated at 55% of the total tax revenue of Central Government. - In India, the share of indirect taxes is on the decline. In 2008-09, the share of indirect taxes was estimated at 45% of the total tax revenue of Central Government. ## **Internal Debt and External Debt** | Internal Debt | External Debt | |---|---| | When the government borrows from its citizens, banks, Central Bank, Financial institutions, business houses, etc. within the country. | When the government borrows from foreign governments, foreign banks or institutions, and international organizations, outside the country. | | It is voluntary or compulsory in nature. | It is voluntary in nature.| | It involves the use of domestic currency. | It involves the use of foreign currency. | | It is less complex for management. | It is more complex for management. | ## **Stock and Supply** | Stock | Supply | |---|---| | Stock is the total quantity of goods available for sale with a seller at a particular point of time. | Supply refers to the quantity of goods that a seller is able and willing to offer for sale at a particular price during a certain period of time. Supply is derived out of stock. | | Stock is the outcome of production. | Supply is derived out of stock. | | Stock can be increased if production is increased. | Supply can be increased if stock is increased. | | Stock is generally more than supply. | Supply can be less than or equal to stock. However, it cannot exceed stock. | | Stock is a static concept and is not expressed in relation to price and time. | Supply is a flow concept and is always expressed in relation to price and time. |