Class XII

Macro Economics





Index:

Chapter : Basic Concepts of Macroeconomics
Chapter : Introductory of Micro Economics







Basic Concepts of Macroeconomics



Domestic Territory (Economic Territory): includes political frontiers of a country.

It also includes:

  1. Ships and aircrafts owned and operated by normal residents between two or more countries.
  2. Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in the international waters where they have exclusive rights of operation.
  3. Embassies, consulates and military establishments of a country located abroad.
It does not include:
  1. Embassies, consulates and military establishments of a foreign country.
  2. International organizations like UNO, WHO, etc. located within the geographical boundaries of a country.
Normal Residents: Normal resident is a person or an institution who ordinarily resides in that country and whose center of economic interest lies in that country.

The Centre of economic interest implies:-
(1) The resident lives or is located within the economic territory.
(2) The resident carries out the basic economic activities of earnings, spending and accumulation from that location
(3) His center of interest lies in that country.

Following are not included under the category of Normal Residents:
  1. Foreign tourists or visitors for holidays, medical treatment, etc.
  2. Foreign staff of embassies, officials, diplomats and member of armed forces of a foreign country, located in a given country.
  3. International organizations like UNO,WHO, etc. are not considered as normal residents.
  4. Employees of International organizations.( but if they have been working for more than one year then they will be treated as normal resident in which institution located.)
  5. Crew members of foreign vessels or commercial travelers or seasonal workers.(if they stay for less than one year)
  6. Border workers who live near the international boundaries and cross borders on regular basis for work.
Citizenship: legal concept based on:
  1. When a person is born in a particular country, he acquires automatic citizenship of that country.
  2. A person born in a different country applies for citizenship and the law of the particular country allows him to become citizen.
Resident ship: Normal resident is a person or an institution who ordinarily resides in that country and whose center of economic interest lies in that country.
The Centre of economic interest implies:-
(1) the resident lives or is located within the economic territory.
(2) The resident carries out the basic economic activities of earnings, spending and accumulation from that location
(3) His center of interest lies in that country.

Capital goods: Capital goods are those final goods, which are used and help in the process of production of other goods and services. E.g.: plant, machinery etc.

Final goods: Are those goods, which are used either for final consumption or for investment. It includes final consumer goods and final production goods. They are not meant for resale. So, no value is added to these goods. Their value is included in the national income.

Intermediate goods: Intermediate goods are those goods, which are used either for resale or for further production. Example for intermediate good is- milk used by a tea shop for selling tea.

Production Boundary: it is the line around the productive sector. As long as the goods remains within the production boundary, they are intermediate goods and when the goods came out of boundary, it becomes final goods.


Consumption goods Capital goods
These goods satisfy human wants directly. So, such goods have direct demand. Such goods satisfy human wants indirectly. So, such goods have derived demand.
They do not help in increasing production capacity. They help in promoting production capacity.
Milk; bread; soap Machinery, plant, etc.

Factor income Transfer income
Income received by factors of production for rendering factor services. Income received without rendering any productive services in return.
Included in both domestic and national income Neither Included in domestic nor in national income
Earning concept Receipt concept
Rent, wages, profits and interest Scholarships, old age pension, etc.

Investment: Investment is the net addition made to the existing stock of capital.

Gross Investment: Total addition of capital goods to the existing stock of capital during a time period at market price.

Net Investment: is a measure of net availability of new capital or new addition to capital stock in an economy.
Net Investment = Gross investment – depreciation.

Depreciation (consumption of fixed capital): - depreciation refers to fall in the value of fixed assets due to normal wear and tear, passage of time and expected obsolescence.

Indirect Taxes: imposed by the government on production and sale of goods and services.

Net Indirect Tax: refers to the difference between Indirect Taxes and subsidies.
NIT = Indirect Taxes – subsidies.

Subsidies: Refer to the financial assistance given by the government to an enterprise on the production of a certain commodity. They are often granted to promote exports or setting up of industries in backward areas.

Factor Cost: refers to the amount paid to factors of production.
Market Price: refers to the price at which product is actually sold in the market.
Market price = Factor Cost + Net Indirect Tax.

Net Factor Income from Abroad (NFIA):
Difference between the factor incomes earned by our residents from abroad and factor income earned by non-residents within our country.

Components of Net factor income from abroad
• Net compensation of employees.
• Net income from property and entrepreneurship (other than retained earnings of resident companies of abroad).
• Net retained earnings of resident companies abroad.





INTRODUCTORY MICRO ECONOMICS



MICRO ECONOMICS:

It is a study of behaviour of individual units of an economy such as individual consumer, producer etc.
A science which studies the human behaviour as a relationship between ends and scare means which have alternative uses.

ECONOMY:An economy is a system by which people get their living.
TYPES OF ECONOMY:
(i) Capitalist economy / Market economy
(ii) Socialist economy / planned economy
(iii)Mixed economy

Market/CAPITALIST ECONOMY: -
  1. It is an economic system, in which all material means of production are owned and operated by the private with profit motive.
  2. In this type of Economy the factors of production are owned and operated by individuals or group of individuals.
  3. Main objective of production is self interest or profit maximization.
  4. Central problems are solved by price mechanism or market forces of demand & supply.
Socialist/ PLANNED ECONOMY:
  1. In this economy all material means of production are owned by the government or by a centrally planned authority.
  2. All important decisions regarding production, exchange and distributions, consumptions of goods and services are made by the government or by a centrally planned authority.
  3. Factors of production are owned and operated by Govt.
  4. Main objective of production is social welfare.
  5. Central problems are solved by central planning authority.
MIXED ECONOMY: -
  1. The Economy in which factors of production are owned and operated by both Govt. and private sector.
  2. Main objective is profit maximization(private sector) and social welfare(Gov. sector)
  3. Central problems are solved by central planning authority(in public sector) and price mechanism (in private sector)

ECONOMIC PROBLEM:“An economic problem is basically the problem of choice” which arises due to scarcity of resources having alternative uses”.
Main economic problem is how to allocate the scare resources so as to satisfy maximum of our unlimited wants. Economic problem arise mainly because human wants are unlimited and resources are limited and have alternative uses. This creates the problem of choice.


CAUSES OF ECONOMIC PROBLEM:

i) Scarcity of resources
ii) Unlimited wants
iii) Limited resources having alternative uses


BASIC (CENTRAL) ECONOMIC PROBLEMS

i) Allocation of resources
a. What to produce?
b. How to produce?
c. For whom to produce
ii) Efficient Utilization of resources
iii) Growth of resources


1. What to produce: -An economy have unlimited wants and limited means having alternative use. Economy can’t produce all type of goods like consumer goods, producer goods etc. So, Economy has to make a choice what type of goods and services are to be produced and in what quantities.

2. How to produce: -It is the problem of choice of technique of production. There are two techniques of production.

(a) Labour Intensive Technique: -It is the technique of production when labour is used more than capital.
(b) Capital Intensive Technique: -In this technique capital is used more than Labour.

3. For whom to produce: -It is the problem related to distribution of produced goods among the different group of the society.


Two Branches of Economics
Basis Micro Economics Macro Economics
Meaning It studies the economic behaviour of individual units of the economy It studies economic behaviour of aggregates of the economy as a whole.
Focus of Study Price determination, consumer/Producer Equilibrium Price determination, consumer/Producer Equilibrium
Instruments/tools Demand and supply Aggregate demand and aggregate supply
Method of study Partial equilibrium analysis General equilibrium analysis
Example Individual demand, Individual supply, Price of a commodity an equilibrium of industry, equilibrium of a firm etc. Aggregate demand aggregate supply, national Income, general price level total investment etc.

PRODUCTION POSSIBILITY CURVE (PPC) Transformation Curve/Production Frontier Curve

Meaning: - The curve which shows the various alternative production combinations of two goods that can be produced with given resources and technology when resources are fully and efficiently utilized.

Combination Cloth Wheat
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0


Features of PPC:-
1. It is concave to origin because of increasing marginal opportunity cost.
2. If the marginal opportunity cost is constant than PPC will be a straight line and
3. If MOC is decreasing than PPC will be convex to origin.



> 10. MARGINAL OPPORTUNITY COST: MOC of a particular good along PPC is the amount of other good which is sacrificed for production of additional unit of another good.


11. MARGINAL RATE OF TRANSFORMATION: MRT is the ratio of units of one good sacrificed to produce one more unit of other good.
Unit of one good sacrificed Δy
MRT = --------------------------------------------- = ----


  1. OPPORTUNITY COST: It is the cost of next best alternative foregone.
  2. POSITIVE ECONOMICS: Positive economics deals with what is, what was (or) how an economic problem facing the society is actually solved.
  3. NORMATIVE ECONOMICS: It deals with what ought to be (or) how an economic problem should be solved.
Positive Economics Normative Economics
It deals with what is what was. It deals with what ought to be.
It is based on cause and effect of facts. It is based on ethics.
It can be verified with actual data It cannot be verified with actual data.
In this value of judgments are not given. In this value of judgments are given.

How are fundamental problems solved in the capitalistic economy.
In a market-oriented or capitalist economy, the fundamental problems are solved by the market mechanism. Price is influenced by the market forces of demand and supply. These forces help to decide what, how and for whom to produce.

How are fundamental problems solved in the planned economy.
In a planned economy all the economic decisions regarding what, how and for whom to produce are solved by the state through planning. Economic planning replaces the price mechanism. The market is regulated by the state. The prices of the various products are fixed by the state called administered prices.