Dear All!!
This is an introduction to some of the basic concepts of Macro Economics.
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At a very fundamental level, the macroeconomy (it refers to the economy that we study in macroeconomics) can be seen as working in a circular way. The firms employ inputs supplied by households and produce goods and services to be sold to households. Households get the remuneration from the firms for the services
rendered by them and buy goods and services produced by the firms. So we can calculate the aggregate value of goods and services produced in the economy by any of the three methods (a) measuring the aggregate value of factor payments (income method) (b) measuring the aggregate value of goods and services produced by the firms (product method) (c) measuring the aggregate value of spending received
by the firms (expenditure method). In the product method, to avoid double counting, we need to deduct the value of intermediate goods and take into account only the aggregate value of final goods and services.
Key concepts :
- National Income - A term used in economics to refer to the bookkeeping system that a national government uses to measure the level of the country's economic activity in a given time period. National income accounting records the level of activity in accounts such as total revenues earned by domestic corporations, wages paid to foreign and domestic workers, and the amount spent on sales and income taxes by corporations and individuals residing in the country.
- Intermediate Goods - An intermediate good is a good or service that is used in the eventual production of a final good, or finished product. These goods are sold by industries to one another for the purpose of resale or producing other goods. An example of an intermediate good would be sugar, which is directly consumed but is also used to manufacture food products.
- Value Added - The enhancement a company gives its product or service before offering the product to customers. Value added is used to describe instances where a firm takes a product that may be considered a homogeneous product, with few differences (if any) from that of a competitor, and provides potential customers with a feature or add-on that gives it a greater sense of value.
- Gross Domestic Product (GDP) - The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.This can also be called GDP at MP (Market Price)
GDP = C + G + I + NX
where:
"C" is equal to all private consumption, or consumer spending, in a nation's economy
"G" is the sum of government spending
"I" is the sum of all the country's businesses spending on capital
"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)
Investopedia Video - What is GDP
Calculating the rest of the values - GDPmp + Factor income earned by the domestic factors of production employed in the rest of the world – Factor income earned by the factors of production of the rest of the world employed in the domestic economy
Hence, GDPmp + Net Factor Income From Abroad (NFIA) = GNP at MP
GNPmp - Depriciation = NNP at MP
NNPmp - Net Indirect Taxes = NNP at Factor Cost or National Income - Personal Income - Total compensation received by an individual. Personal income includes compensation from a number of sources - salaries, wages and bonuses received from employment or self-employment; dividends and distributions received from investments; rental receipts from real estate investments; profit-sharing from a business and so on. In most jurisdictions, personal income above a certain exemption threshold is subject to taxation. Personal income is generally computed on a pre-tax basis.
Also referred to as "gross income."Exchange of commodities without the mediation of money is called Barter Exchange. It suffers from lack of double coincidence of wants. Money facilitates exchanges by acting as a commonly acceptable medium of exchange. In a modern economy, people hold money broadly from two motives – transaction motive and speculative motive. Supply of money, on the other hand, consists of currency notes and coins, demandand time deposits held by commercial banks, etc. It is classified as narrow and broad money according to the decreasing order of liquidity. In India, the supply of money is regulated by the Reserve Bank of India (RBI) which acts as the monetary authority of the country. Various actions of the public, the commercial banks of the country and RBI are responsible for changes in the supply of money in the economy.RBI regulates money supply by controlling the stock of high powered money, the bank rate and reserve requirements of the commercial banks. It also sterilises the money supply in the economy against external shocks. - Credit Reserve Ratio - The portion (expressed as a percent) of depositors' balances banks must have on hand as cash. This is a requirement determined by the country's central bank, which in the Reserve Bank of India. The reserve ratio affects the money supply in a country. Current CRR Value as on 29/01/2013 is 4%
- Bank Rate - The interest rate at which a nation's central bank lends
money to domestic banks. Often these loans are very short in duration. Managing
the bank rate is a preferred method by which central banks can regulate the
level of economic activity. Lower bank rates can help to expand the economy,
when unemployment is high, by lowering the cost of funds for borrowers.
Conversely, higher bank rates help to reign in the economy, when inflation is
higher than desired.
The bank rate can also refer to the interest rate which banks charge customers on loans. The current Bank Rate in India is 8.75% since 29/01/2013.
- Statutory Liquidity Ratio - Statutory liquidity ratio refers amount that the commercial banks require to maintain in the form of gold or govt. approved securities before providing credit to the customers. Here by approved securities we mean, bond and shares of different companies. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. It is determined as percentage of total demand and time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon and demand liabilities are such deposits of the customers which are payable on demand.
The Current SLR in India is 23% - Repo Rate - The discount rate at which a central bank repurchases government securities from the commercial banks, depending on the level of money supply it decides to maintain in the country's monetary system. To temporarily expand the money supply, the central bank decreases repo rates (so that banks can swap their holdings of government securities for cash). To contract the money supply it increases the repo rates. Alternatively, the central bank decides on a desired level of money supply and lets the market determine the appropriate repo rate. Repo is short for repossession.
Aggregate Supply - The
aggregate supply curve shows the relationship between a nation's overall price
level, and the quantity of goods and services produces by that nation's
suppliers. The curve is upward sloping in the short run and vertical, or close
to vertical, in the long run.- Aggregate Demand - The aggregate demand curve shows, at various price levels, the quantity of goods and services produced domestically that consumers, businesses, governments and foreigners (net exports) are willing to purchase during the period of concern.
These we some of the key concepts that will be beneficial for understanding the current and static part of the syllabus. For a detailed list please the below link for the same.
Please put your queries and any further addition to the list below on the comments.!!
All the best
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