AASIGNMENT

SUBJECT: MACROECONOMICS

PREPARED BY:

AAMIR HAYAT

STUDENT OF GRADUATE SCHOOL OF MANAGEMENT

INTERNATIOMAL ISLAMIC UNVERSITY ISLAMABAD

Definition:“Macroeconomics is the study of behavior of the economy as a

whole that examine the forces that effect man firms consumers and workers etc at the same time”

Two central themes will run through the survey of macroeconomics The short run fluctuations in output, employment, and prices that we call business

cycle The long run trend in output and living standard known as economic growth

Frame work of Macroeconomics:

Framework means skeleton or structure of any thing, so framework of economics means structure or agenda of economics. It means what are the objectives if Macroeconomics. It also means that what things are covered by macroeconomics or it means what are core areas to study under macroeconomics.Macroeconomics covers following areas of economy.

Economic growth: Economic growth is often defined as a continuous increase in the real value of the

production of goods and services.According to Kuznets “Economic growth may be defined as a long term process

where in the substantial and sustained rise in real national income, total population and real per capita income takes place”

In the words of Michael Todaro, “economic growth is a steady process by which the productive capacity of the economy is increased overtime to bring about rising level of national output and income”

Price control:

Another function of macroeconomics is price controlling. Price can be controlled by using various macroeconomics tools i.e. monitory and fiscal policies. Infect control on prices means control on inflation which is the main concern of macroeconomics. Inflation can be controlled by adjusting production level of the economy with in restrictions of available economic resources.

Employment level:

Other areas of study in macroeconomics are employment level in the economy. Employment level can also be controlled by using macroeconomic tools. Higher employment level in any economy shows higher living standard while low employment level is a factor of low living standard in any economy.

Tools of macroeconomics:Fiscal policy:

Fiscal policy denotes the use of taxes and government expenditures. Govt. expenditures come in two distinct forms. First there are govt. purchases. These include spending on gods and services, purchase of tanks, construction of roads and salaries etc.Other part is taxation which affects the whole nation in many ways.

Monetary policy: The second major instrument of macroeconomics is monetary policy, which the

government conducts through managing the nation’s money, credit and banking system.

Determination of National Income with the help of Aggregate Demand and Aggregate Supply:

Before determination of national income we must define some important terms which are

Aggregate Supply:

“Aggregate supply refers to the total quantity of goods and services that the nation’s businesses willingly produce and sell in a given period”

Aggregate supply is denoted as AS. It depends upon the price level, the productive capacity of economy and level of costs.

Real GDP

200 400 600 800 1000 Qu

P

200

150

100

50

AS

We can see in above diagram that aggregate supply is dependent on price level. Producer is willing more goods at higher prices while when the price becomes low they sell less goods and services because of low profit incentives.

Aggregate Demand:

Aggregate demand refers to the total amount that the different sectors in the economy willingly spend in a given period. Aggregate is the sum of the spending of the consumers, businesses and government and it depend upon level of prices, as well as monetary policy, fiscal policy and other factors.

Aggregate demand is dependent on price level as aggregate supply. When low prices prevail in market people demand more goods and services. On the other hand when high price prevail in market people demand less. In above diagram we can see that when price is Rs.150 people demand goods of Rs.300 billion. Now if this price is decreased to Rs.100 obviously demand will increase.

Determination of National Income:

Prof. F.S Brooman defines national income as “National expenditure become total of consumers spending, public authority spending and capital formation at home and overseas i.e. sum of the final expenditures by the residents of the country”

P

250

200

150

100

50

100 200 300 400 500 Qu

AD

Gardener Ackley defines national income as “individual’s income is the amount of his earning from the productive services currently rendered by him or by his property. National income is nothing more than sum of individual’s income”

Economists define national income as “money value of all the goods and services produced in a country is called national income”These goods and services are produced by four factors of production which are land, labor, capital and organization.

According to above definition it is clear that all the goods and services produced in a country when multiplied by their market price give the total national income of the economy. How much goods and services are produced or should be produced is determined by the equilibrium point of aggregate demand and aggregate supply.

Real GDP

As we define above that value of all the goods and services produced in an economy is its national income, so here we can get national income because total output of the economy is Rs.3000 billion in above diagram and market value of each good is Rs.150. At this level of output every one is satisfied because producer can sell that he want to sell at reasonable prices and consumer can get all he want to purchase at reasonable prices.

P

250

200

150

100

50

1000 2000 3000 4000 5000 Qu

E

AS

AD

But if lower price prevail in than Rs.150 then there is less incentive for producer to producer more goods and services because there is low profit margin for him. So producer decrease production which cause unemployment in the economy. People will be forced to pay more for some goods and services so this also causes inflation in economy.

On the other hand if high prices prevail in market then producer will produce more goods and services because there is high profit incentive for him. This also creates more employment opportunities in the economy and also reduces inflation.

Income basis:All these goods and services produced by the use four factors of production which

command reward for the production made. These rewarded annually in form of rent, interest, wages and profits As we know that sum of all the income of the individual’s is national income, so the aggregate of these rewards also amount to the National Income

Expenditure basis:Alternatively the expenditure through these rewards also amount to National

Income. To determine national income following adjustments have to be made with N.N.P

in order to arrive at national income

National Income= G.N.P –depreciation allowance = N.N.P + (govt. subsidies- indirect tax + transfer payments +statistical discrepancies)