Transcript Macro Economic Variables/Indicators

Introduction to Macro
Economics -II
Chapter`s Outlines
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Basic Macro Economic concepts
Variables and its types
Economic models
Building economic model
Main Macro Economic Problems
Micro Economics
• Micro economics deals with a small
individual unit of the economy,
• For example, the price of a particular
commodity, consumption pattern of a
particular consumer, income of
particular individual and Producer etc.
Macro economics
Macro economics deals with total or
aggregate level of output, aggregate level
of consumption, aggregate level of
investment, aggregate level of employment
and general price level in economy.
Macro Economic Variables/Indicators
 Consumption
 Saving
 Investment
 National Income
 Export and Import
 Government Expenditures
 Taxes
 Transfer Payment
 Rate of Interest
 Demand for Labor
 Supply of Labor etc.
Stock Variable verses Flow Variable
 Stock Variables
 Those variables whose values are measured
from particular point of time such as weight of a
car, water in a tank etc..
 Similarly, In macro economics we have lots of
stock variables such like supply of money, the
deposits in the bank, the amount of wealth
possess by a person etc.
Stock Variable verses Flow Variable
(Cont..)
 Flow Variables
 Are those variables whose values are measured
from particular period of time such as speed of a
car during ten (10) minutes.
 In macro economics national income,
consumption, saving , investment and rate of
interest are all flow variables.
Endogenous and Exogenous Variables
 Endogenous Variable
 The variables whose values are determined
within the model are known as endogenous
variables.
For example
In two sector economy
Y=C+ I
Y is endogenous variable.
 The purpose of this model is to find the value of Y.
Endogenous and Exogenous Variables
(Cont..)
 Exogenous Variables
 The variables whose values are given outside the
model are exogenous variables.
 The value of I is given
 To change in the value of exogenous variable
effect the model.
Economic Model
 An economic model consists of equation and
functional relations which explain the operation of an
economy or some economic unit.
 Economic models are used to explain theoretical
principles of economics. Furthermore they can be
used for the purpose of forecasting.
 Economic model consists of mathematical
equations, diagram and graph.
Types of Economic model

Economic models are:
a) Partial Equilibrium Model
b) General Equilibrium Model
Partial Equilibrium Model
Partial Equilibrium model is a model where
we find the relationship between two
variables while keeping the other variables
constant.
Qd= f (P), [Ps, T, Y,…]
Qd= Quantity demanded & P is price while
T=taste, Ps=price of substitute good, Y is consumer`s
income.
General Equilibrium Model
General Equilibrium model is a model which
establishes relations between all the
variables of the economy.
For example if we construct a market model
we will observe;
The prices of many goods, supply of many goods,
demand for many goods etc.
such situation will represent a General
equilibrium model.
Construction of Economic Model
Economic Model has four elements:
a) A behavior or statement regarding
certain variables.
b) Assumptions which influence these
variables.
c) Hypothesis whereby the variables are
connected.
d) Prediction
A: Variables of The Model
Whenever a model is to be constructed,
the variable of the model are selected.
For example in Keynesian consumption
function we have two variables such as
C, Y
where C = f(Y)
B: Assumptions
• Assumption means where we assume
something constant.
• In Keynesian consumption function we assume
that except C and Y all other variables are
constant,
Such as
– normal condition prevail in economy,
– there is no inflation or deflation in economy,
– no change in distribution of income and no change in
taste etc.
C: Hypothesis
It expresses the behavior of the variables
of model.
For example, In law of demand our
hypothesis is. “ as a result of increase in
price, quantity demand falls”.
D: Prediction
Prediction means forecasting where we
obtain certain results on the bases of
certain facts .
For example In Keynesian consumption
function there exists a non proportional
relationship between consumption and
income.
Macroeconomic Concerns
• Three of the major concerns of
macroeconomics are:
– Unemployment
– Inflation
– Output growth
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Unemployment :
Unemployment refers to the situation where
the population of a country do not find work to
earn their livelihood.
OR
Unemployment represents that ratio of labor
force which fails to get employment.
The currently 40% of Afghanistan population is
unemployed.
Cont`d
• The unemployment rate is a key indicator
of the economy’s health.
• The existence of unemployment seems to
imply that the aggregate labor market is
not in equilibrium.
Problem of Unemployment
Problem of Unemployment
Classical economist believed in full employment i.e. all
recourses of economy are fully employed and there is no
possibility of unemployment.
BUT
Great depression of 1930 brought a lot of miseries in
form of slump and vast unemployment. So Keynes wrote
a book in 1936 “General theory” in which he rejected the
philosophy of full employment .
According to him there is always unemployment in
economy while full employment is accidental.
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Inflation
• Inflation is an increase in the overall price
level.
• Hyperinflation is a period of very rapid
increases in the overall price level.
Hyperinflations is a rare phenomenon.
• Deflation is a decrease in the overall price
level. Prolonged periods of deflation can be
just as damaging for the economy as
sustained inflation.
Problem inflation
• During 1930 the phenomena of unemployment
got a lot of attractions. Policy makers presented
their ideas to remove unemployment .
• So Government tried to provide better social and
economic service due to which Government
expenditures went on increasing.
Problem of inflation (cont)
• Thus public and private spending greatly pushed the
aggregate demand in economy which created Demand
pull inflation.
• While on other hand oil crises declined aggregate supply
of oil and caused increase in cost of production which
was given the name of cost push inflation.
• So since then to present time the phenomenon of
inflation and unemployment is observed throughout the
world.
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Output and Growth
• Growth refers to change in the
level of economic activity from
one year to another year.
• Growth means that poor and
developing countries wish to
attain a rise in their national
income and per capita income.
Output
Aggregate output is the total quantity of goods
and services produced in an economy in a
given period.
• The aggregate output is the main
measure to see how well an economy is
doing.
Problem of growth
• It is of a great concern for economists that what
should be the level of rise in investment that the
economy can achieve its desired level of income
and employment without inflation and deflation.
Such a situation will result the full utilization of
resources.
• Full employment means the maximization of
output & employment in presence of existing
recourses while growth is attach with increase
in output & employment
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