Macro Economics MMS

8/2/2019 Macro Economics MMS

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The Scope and Subject matter of Macro-economics:Macro-economics is concerned with the studyof the whole economy. It is called anaggregative economics. In short, it isconcerned with the economic activity in largeor the economy as a whole. It is a study of aggregates such as employment, total output,

total investment, total consumption. Totalsaving, national income, aggregate demand,aggregate supply, general price level etc.


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Subject Matter of Macro-economics

Determination of national income and employment:According to macroeconomic analysis, the equilibriumlevel of employment and income is determined byaggregate demand and aggregate supply. In other

words an economy attains maximum level of employment and income only when aggregate demandequals aggregate supply.Problems of Unemployment : Macroeconomics alsostudies the problem of unemployment due to lack of aggregate demand that determines the level of incomeand employment. Example: Structural unemployment,Frictional unemployment, technologicalunemployment, open unemployment etc.


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Determination of general price level: It studiesthe causes as well as the problems of inflationand deflation which are caused due to

fluctuations in price level. Stability in price level isessential for economic growth and stability.Business cycles: It studies fluctuations ineconomic activity causing recurrence of business

cycles such as prosperity, depression etc and theireffects on the economy and measures to controlthem.


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Theory of Economic Growth: Theories of economic growth and various growth modelsdesigned by various economists like Harrod-Domar, Solow, Schumpeter etc. are the subjectmatter of Macro-economics. It also studiesthe factors affecting the economic

development such as investment and the fullutilization of capacity etc.


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Theory of Distribution: Theory of Rent,Interest, Wage, Profit etc. are thesubject matter of Macro-economics.Thus Macro-economics is related withthe study of the relative shares of factors of production. How the shares of factors of production are determined?How these shares affect the income andemployment level in an economy? Etc.


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Significance of Macro-economics

Policy formulation: In all economic systems,government intervention in all economicaffairs has become indispensable. Allgovernments, especially of the developingcountries face problems such asunemployment, inflation, overpopulation etc.

Proper knowledge of these aggregates isessential in framing and formulating thepolicies to solve these problems.


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National Income: Macro-economics studiesnational income accounting and also thecauses of its fluctuations. National incomedata are useful in forecasting the level of economic activity. It is also useful inunderstanding the distribution of national

income in the economy.


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Growth models: In the post-keynesian period, General

Theory of Keynes became verypopular and its application in

the economic developmentproved very effective.


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Monetary Policies: Fluctuations in the demand for andsupply of money causes economic stability. Suitablemonetary policy helps in solving the problems of inflation and deflation. E.g. RBI announces credit policyvery often to control inflation by bringing changes inCRR, Bank rate, Repo rates etc.Fiscal policies: Good taxation policy also helps ineconomic stability of an economy. Public finance abranch of macro economic deals with this aspect.Effective budgetary policy of the govt. helps in rapideconomic growth with stability.


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Economic Growth and Economic Development

Quantitative and qualitative term: Economic growthrefers to increases over time in a countrys real output of goods and services. On the other hand economicdevelopment measures progress in terms of socio economicdevelopment of an economy. It is more comprehensive innature . According to Charles P. Kindleberger economicgrowth refers to rise in output and economic developmentimplies changes in technological and institutionalorganization of production as well as in distributive

pattern of income. Example: Rise in NI, PCI, Employmentlevel etc. indicate economic growth. Whereas Rise inliteracy level, Rise in life expectancy of population,reduction in poverty, improvement in the standard of

living and standard of life, modernisation of agricultural,industries etc. indicate economic development.


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Development without growth is unimaginable. Asubstantial rise in a countrys GNP is requiredbefore it can hope to expand its industries,financial institutions, trade, public utilities andgovernment administration. Nowhere in theworld has the occupational distribution of population changed in the absence of growth.From the welfare viewpoint of the peopleeconomic growth alone is not enough forunderdeveloped countries; it must beaccompanied by development.


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According to former World Bank presidentRobert McNamara about 40% of the

developing worlds population did notbenefit at all from the economic growthduring the 1950s and 1960s.

Thus economic growth is accompanied bygreater industrialization and greatercommercialization, whereas economicdevelopment also includes structuralchanges in the economy and includes themeasurement of benefit of economic growthaccruing to all. In India only the educatedmiddle class in benefited from rapid

economic growth in recent days.


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Features of Indian Economy

The Indian economy is characterised as anunderdeveloped economy. Though, it nolonger suffers from stagnation as it did underthe British rule and there have been structuralchanges in the economy since freedom,almost all important characteristic feature of

an underdeveloped economy have notchanged much since independence.


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Low Per Capita Income:

According to World Development Report 2008,India was one of the 45 low incomeeconomies in 2006. Per Capita GNP washigher in all the middle and higher incomeeconomies than in India. In 2006, IndiasPurchasing Power Parity estimate of GNP per

capita was as low as $3,800. It was aroundone-twelfth of the U.S.A. which was $44,260.


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Inequitable distribution of income:

Income inequalities result from theconcentration of wealth in the hands of few.In 1997, according to WDR 2000/01, while the

lowest 40% households accounted for 19.7per cent of aggregate householdsexpenditure in India, the share of top 20 percent as large as 46 per cent. In the middlecategory 40 per cent households at modestlevel of living accounted for 34.3 per cent of the aggregate household expenditure.


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Widespread Poverty:

The problem of poverty results due to incomeinequality. According to Sixth plan, the overallpercentage of the people below the poverty line haddeclined to 36.0% in 1993-94 while the incidence of

poverty was 37.3% in rural areas and 32.4% inurban areas. According to National Sample Survey61 st round, the poverty ratio was 27.5% at thenational level in 2004-05. According to TOI reportpublished on 22 nd september 10, 37% population

still lives below poverty line. 46% children areunderweight. 35% population does not have anaccess to toilets. 283 people per one lakh populationsuffers from TB.


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Predominance of agriculture:

Occupational distribution of population in Indiareflects the economic backwardness of theeconomy. In 1951 about 70% of the population of

the country was dependent on agriculture. Sincethen little change has occurred in the situation. In1951 around 69.7% of the working population wasemployed in agriculture. In 2001, 56.9% of the

main workers were employed in agriculture andallied activities. Thus agriculture still remains thebiggest employer in India.


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GDP by Industry of Origin in 2006 (percentage)Source: World Bank, World Development Report 2008.

Country Agriculture Industry Service

U.K. 1 26 73

USA 1 22 77

Germany 1 30 69

China 12 47 41

Indonesia 12 42 46

India 18 28 55


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Widespread Unemployment:

The nature of unemployment in India is different fromthat in developed countries. Most of the cases of unemployment in India is chronic in nature whichresults due to structural defects in the economy.

People in a large number in the countryside do nothave adequate work throughout the year and manyof them suffer from disguised unemployment forlong periods. According to Ragner Nurksey, if someof these people are removed from agriculture and

absorbed in other productive activities, farm outputmay not fall, while the national income will increasedue to their productive activity in the absorbedsector.


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Rapid population growth and high dependency ratio:

According to the estimates of Census 2001, thepopulation of India was 102.5 crores.During 1961 and 2001, growth rate of population was 2.14% p.a. India has passedthrough the second stage of demographictransition causing population explosion. In

1999-00 percentage of population of working age (15-64 years) was 63.8%.Growth rate of employment is poor.


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Low level of Human development:

The HDI is a composite of three basic indicatorsof human development- longevity (lifeexpectancy at birth), knowledge (educationalattainment by a combination of adult literacy)and standard of living (measured by real GDPper capita).


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HDI value and Ranking of selected Developed andDeveloping countries, 2009

Source: UNDP: Human Development Report 2007/08.

Country HDI value HDI RankDeveloped countries

Norway 0.971 1

Japan 0.960 8

U.S.A. 0.956 12

U.K. 0.947 16

Developing countries

Cuba 0.863 51

China 0.772 81

India 0.619 128

Bangladesh 0.547 169


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Above 0.9 is very high. Between 0.8 and0.9 is high. Between 0.5 and 0.8 is

medium. Below 0.5 is low. India falls inthe category of Medium Humandevelopment countries.


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Poor Capital formation :

In 1950-51, the gross saving-investment rate in this country was around8.9%. At such a poor rate of capital formation, the country could nothope to record any impressive economic growth. According to theestimates of Central Statistical Organisation, in 2001-02, the rates of gross domestic saving and gross domestic capital formation wereestimated to be 23.5 and 22.8% respectively which is just enough toachieve modest growth.

As against India, some of the East Asian countries have been able tomaintain much higher rates of saving and investment consistently for anumber of years at 35% of GDP and this has enabled them to achievemuch higher rates of economic growth.


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Technological Backwardness:

While technological progress is at the heart of development process, over a wide range of productiveactivity, techniques of production are backward inIndia. Except in the green revolution belt of the

country everywhere else farmers are persisting withcenturies old outmoded production techniques.However, in large-scale industries, energy, transportand communications sectors modern productiontechniques have been introduced. Nevertheless thereis still a wide gap between the sophisticatedproduction techniques of the developed countries andIndias technology.


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Lack of Entrepreneurs:

According to Joseph Schumpeter, the function of entrepreneurs is to reform or revolutionize the patternof production by exploiting an invention or moregenerally, an untried technological possibility forproducing a new commodity or producing an old onein a new way by opening up a new source of supply of raw materials or a new outlet for products, byreorganising an industry and so on. Obviously theseactivities require aptitudes that are present only in asmall fraction of population. JRD Tata and DhirubhaiAmbani still remain the role models and it is difficultto name any other entrepreneur in the industrialsector.


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National Income : National Income is themoney value of all final outcome of alleconomic activities by the people of acountry. Macro economic analysesdifferent concepts of national incomemainly Gross National Product (GNP) andGross Domestic Product(GDP).


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Gross National Product

The Gross National Product (GNP) is defined as the sum of all finalgoods and services produced in a country during a specific periodof time, generally one year. The market value of the finalnational product is the money value of all final goods and

services. The market value of the national output is obtained atboth constant and current prices. Accordingly, GNP is known asGNP at constant price and GNP at current prices respectively.GNP can also be defined and measured as the sum total of allfactor payments (wages, interest, rent, profit and depreciation).It is then called GNP at factor cost.

GNP = Market value of final goods and services (including bothconsumer and capital) + incomes earned by the nationalresidents in foreign countries minus incomes earned locally butaccruing to foreigners.


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Gross Domestic Product (GDP)

The Gross Domestic (GDP) is another measure of nationalincome which often figures in macro economic analysisand policy formulations. The concept of GDP is similar tothat of GNP with a significant difference. The concept of

GNP includes the income of the resident nationals whichthey receive abroad, and excludes the incomes generatedlocally but accruing to the non-nationals.

GDP = Market value of goods and services produced by the

residents in the country Plus incomes earned in thecountry by foreigners minus incomes earned by residentsof a country from abroad.


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National income during Five YearPlans

The average growth rate of national income sinceplanning has been 4.24%. National income hasbeen rising at a rate which is distinctly higherthan the population growth rate. As a resultthere has been improvement in the capitalformation and per capita consumption of ourcountry .First Plan (1951-56): Annual average growthrate was 4.4% (1999-00 prices). Growth wassteady and satisfactory.Second Plan (1956-61): The rise in nationalincome was not satisfactory as it was 3.8%.


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Third Plan (1961-66): The annual average growthrate was only 2.6%. It was just sufficient toneutralise the growth of population. It was mainlydue to severe drought and slow down of the

business in the country. This plan also witnessedIndo-China war which affected the economy.Fourth Plan(1969-74): The average annual growthrate declined to 3.1%. The rise in prices of petroleum oil, severe inflation, fall in theproduction etc. were the causes of slow growth.


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Fifth Plan (1974-78): The average annual growthrate was 4.9%. It was a satisfactory growth rate. In1979-80, there was a decline in National Income by6% and economy suffered a setback in these twoyears.Sixth Plan (1985-90): Average annual growth ratewas 5. 4%. It is not a realistic growth as the baseyear chose was 1979-80 when economy was facingproblem of price rise and slow down.Seventh Plan (1985-90): The average annual growthrate was 5.5% p.a. This growth was appreciated andit was mainly due to satisfactory performance of agriculture and manufacturing sectors.


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Tenth Plan (2002-07): The growth rate wasimpressive at 7.8% p.a. The reasons for goodperformance of the economy was mainly due toheavy inflow of foreign capital, rise ingovernment expenditure, liberalization of imports, efficient management of fiscal andcurrent account deficit through external

commercial borrowings. The good performanceof service sector is also main contributor forhigh performance during this plan.


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LIMITATIONS: Despite improvement in the economic growthrate India is lagging behind in many areas due to following

reasons: Still 28% population suffers from poverty. Unemployment still a severe problem. Imbalanced regional growth. E.g. Bihar, Assam, Orissa

and several other states remain undeveloped whereas

Punjab, Andhra, Karnataka, Maharashtra, Gujarat etc. aredeveloping at much faster rate. There is a lack of social security measures such as medical

facilities, unemployment allowance, old age pension andseveral other relief measures which other Asian

developing countries also provide. The deficiencies in primary education, primary healthcare, safe drinking water, sanitation etc. still exists in theeconomy.


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International Comparison WDR 2005

Country PCI

Norway $9590

USA

China $1740

Srilanka $1160

India $720

Pakistan $690

$43740

Documents

Macro Economics MMS