CLASS 12TH ROHIT BOURAI - 9761088514
INTRODUCTORY MACROECONOMICS
CH 1 NATIONAL INCOME AND RELATED AGGREGATES
Macro Economics is the study of the economy as a whole. In other words, macro economics deals with
aggregates such as national income, employment and output. Macro Economics is also known as ‘Income
Theory’.
The subject matters covered in Macro Economics are the areas such as employment, national income,
inflation, business cycle, poverty, inequality, disparity, investment and saving, capital formation, infrastructure
development, international trade, balance of trade and balance of payments, exchange rate and economic
growth.
Importance of Macro Economics
• There is a need to understand the functioning of the economy at the aggregate level to evolve suitable
strategies and to solve the basic problems prevailing in an economy.
• Understanding the future problems, needs and challenges of an economy as a whole is important to
evolve precautionary measures.
• Macro economics provides ample opportunities to use scientific investigation to understand the reality.
• Macro economics helps to make meaningful comparison and analysis of economic indicators.
• Macro economics helps for better prediction about future and to formulate suitable policies to avoid
economic crises.
Limitations
• There is a danger of excessive generalization of the economy as a whole.
• It assumes homogeneity among the individual units.
• There is a fallacy of composition. What is good of an individual need not be good for nation and vice
versa. And, what is good for a country is not good for another country and at another time.
• Many non - economic factors determine economic activities; but they do not find place in the usual
macroeconomic books.
Economy and its Types
An economy is referred to any system or area where economic activities are carried out. Each economy has its
own character. Accordingly, the functions or activities also vary.
In an economy, the fundamental economic activities are production and consumption. These two activities are
supported by several other activities. The aim of these activities is to achieve growth. The ‘exchange activity’
supports the production and consumption activities. These activities are influenced by several economic and
non- economic activities. The major economic activities include transportation, banking, advertising, planning,
government policy and others. The major non- economic activities are environment, health, education,
,entertainment, governance, regulations etc. In addition to these supporting activities, external activities from
other economies such as import, export, international relations, emigration, immigration, foreign investment,
foreign exchange earnings, etc. also influence the entire functioning of the economy.
1. Capitalistic Economy (Capitalism)
Adam Smith is the ‘Father of Capitalism’. Capitalistic economy is also termed as a free economy (Laissez faire,
in Latin) or market economy where the role of the government is minimum, and market determines the
economic activities.
The means of production in a capitalistic economy are privately owned. Manufacturers produce goods and
services with profit motive. The private individual has the freedom to undertake any occupation and develop
any skill. The USA, West Germany, Australia and Japan are the best examples for capitalistic economies.
However, they do undertake large social welfare measures to safeguard the downtrodden people from the
market forces.
Features of Capitalistic Economy
Private Ownership of Property and Law of Inheritance: The basic feature of capitalism is that all resources
namely, land, capital, machines, mines etc. are owned by private individuals. The owner has the right to own,
keep, sell or use these resources according to his will. The property can be transferred to heirs after death.
Freedom of Choice and Enterprise: Each individual is free to carry out any occupation or trade at any place and
produce any commodity. Similarly, consumers are free to buy any commodity as per their choice.
Profit Motive: Profit is the driving force behind all economic activities in a capitalistic economy. Each individual
and organization produce only those goods which ensure high profit. Advance technology, division of labour,
and specialization are followed. The golden rule for a producer under capitalism is ‘to maximize profit.’
Free Competition: There is free competition in both product and factor market. The government or any
authority cannot prevent firms from buying or selling in the market. There is competition between buyers and
sellers.
Price Mechanism: Price mechanism is the heart of any capitalistic economy. All economic activities are
regulated through price mechanism i.e, market forces of demand and supply.
Role of Government: As the price mechanism regulates economic activity, the government has a limited role in
a capitalistic economy. The government provides basic services such as, defense, public health, education, etc.
Inequalities of Income: A capitalist society is divided into two classes – ‘haves’ that is those who own property
and ‘have-nots’ who do not own property and work for their living. The outcome of this situation is that the rich
become richer and poor become poorer. Here, economic inequality goes on increasing.
,Merits of Capitalism
Automatic Working: Without any government intervention, the economy works automatically.
Efficient Use of Resources: All resources are put into optimum use.
Incentives for Hard work: Hard work is encouraged, and entrepreneurs get more profit for more efficiency.
Economic Progress: Production and productivity levels are very high in capitalistic economies.
Consumers Sovereignty: All production activities are aimed at satisfying the consumers.
Higher Rates of Capital Formation: Increase in saving and investment leads to higher rates of capital formation.
Development of New Technology: As profit is aimed at, producers invest on new technology and produce
quality goods.
Demerits of Capitalism
Concentration of Wealth and Income: Capitalism causes concentration of wealth and income in a few hands
and thereby increases inequalities of income.
Wastage of Resources: Large amount of resources are wasted on competitive advertising and duplication of
products.
Class Struggle: Capitalism leads to class struggle as it divides the society into capitalists and workers.
Business Cycle: Free market system leads to frequent violent economic fluctuations and crises.
Production of non-essential goods: Even the harmful goods are produced if there is possibility to make profit
2. Socialistic Economy (Socialism)
The Father of Socialism is Karl Marx. Socialism refers to a system of total planning, public ownership and state
control on economic activities. Socialism is defined as a way of organizing a society in which major industries
are owned and controlled by the government, A Socialistic economy is also known as ‘Planned Economy’ or
‘Command Economy’.
In a socialistic economy, all the resources are owned and operated by the government. Public welfare is the
main motive behind all economic activities. It aims at equality in the distribution of income and wealth and
equal opportunity for all. Russia, China, Vietnam, Poland and Cuba are the examples of socialist economies. But,
now there are no absolutely socialist economies.
, Features of Socialism:
Public Ownership of Means of Production: All resources are owned by the government. It means that all the
factors of production are nationalized and managed by the public authority.
Central Planning: Planning is an integral part of a socialistic economy. In this system, all decisions are
undertaken by the central planning authority.
Maximum Social Benefit: Social welfare is the guiding principle behind all economic activities. Investments are
planned in such a way that the benefits are distributed to the society at large.
Non-existence of Competition: Under the socialist economic system there is absence of competition in the
market. The state has full control over production and distribution of goods and services. The consumers will
have a limited choice.
Absence of Price Mechanism: The pricing system works under the control and regulation of the central planning
authority.
Equality of Income: Another essential feature of socialism is the removal and reduction of economic
inequalities. Under socialism private property and the law of inheritance do not exist.
Equality of Opportunity: Socialism provides equal opportunity for all through free health, education and
professional training.
Classless Society: Under socialism, there is a classless society and so no class conflicts. In a true socialist society,
everyone is equal as far as economic status is concerned.
Merits of Socialism
Reduction in Inequalities: No one is allowed to own and use private property to exploit others.
Rational Allocation of Resources: The central planning authority allocates the resources in a planned manner.
Wastages are minimised and investments are made in a pre planned manner.
Absence of Class Conflicts: As inequalities are minimum, there is no conflict between rich and poor class.
Society functions in a harmonious manner.
End of Trade Cycles: Planning authority takes control over production and distribution of goods and services.
Therefore, economic fluctuations can be avoided.
Promotes Social Welfare: Absence of exploitation, reduction in economic inequalities, avoidance of trade
cycles and increase in productive efficiency help to promote social welfare.
INTRODUCTORY MACROECONOMICS
CH 1 NATIONAL INCOME AND RELATED AGGREGATES
Macro Economics is the study of the economy as a whole. In other words, macro economics deals with
aggregates such as national income, employment and output. Macro Economics is also known as ‘Income
Theory’.
The subject matters covered in Macro Economics are the areas such as employment, national income,
inflation, business cycle, poverty, inequality, disparity, investment and saving, capital formation, infrastructure
development, international trade, balance of trade and balance of payments, exchange rate and economic
growth.
Importance of Macro Economics
• There is a need to understand the functioning of the economy at the aggregate level to evolve suitable
strategies and to solve the basic problems prevailing in an economy.
• Understanding the future problems, needs and challenges of an economy as a whole is important to
evolve precautionary measures.
• Macro economics provides ample opportunities to use scientific investigation to understand the reality.
• Macro economics helps to make meaningful comparison and analysis of economic indicators.
• Macro economics helps for better prediction about future and to formulate suitable policies to avoid
economic crises.
Limitations
• There is a danger of excessive generalization of the economy as a whole.
• It assumes homogeneity among the individual units.
• There is a fallacy of composition. What is good of an individual need not be good for nation and vice
versa. And, what is good for a country is not good for another country and at another time.
• Many non - economic factors determine economic activities; but they do not find place in the usual
macroeconomic books.
Economy and its Types
An economy is referred to any system or area where economic activities are carried out. Each economy has its
own character. Accordingly, the functions or activities also vary.
In an economy, the fundamental economic activities are production and consumption. These two activities are
supported by several other activities. The aim of these activities is to achieve growth. The ‘exchange activity’
supports the production and consumption activities. These activities are influenced by several economic and
non- economic activities. The major economic activities include transportation, banking, advertising, planning,
government policy and others. The major non- economic activities are environment, health, education,
,entertainment, governance, regulations etc. In addition to these supporting activities, external activities from
other economies such as import, export, international relations, emigration, immigration, foreign investment,
foreign exchange earnings, etc. also influence the entire functioning of the economy.
1. Capitalistic Economy (Capitalism)
Adam Smith is the ‘Father of Capitalism’. Capitalistic economy is also termed as a free economy (Laissez faire,
in Latin) or market economy where the role of the government is minimum, and market determines the
economic activities.
The means of production in a capitalistic economy are privately owned. Manufacturers produce goods and
services with profit motive. The private individual has the freedom to undertake any occupation and develop
any skill. The USA, West Germany, Australia and Japan are the best examples for capitalistic economies.
However, they do undertake large social welfare measures to safeguard the downtrodden people from the
market forces.
Features of Capitalistic Economy
Private Ownership of Property and Law of Inheritance: The basic feature of capitalism is that all resources
namely, land, capital, machines, mines etc. are owned by private individuals. The owner has the right to own,
keep, sell or use these resources according to his will. The property can be transferred to heirs after death.
Freedom of Choice and Enterprise: Each individual is free to carry out any occupation or trade at any place and
produce any commodity. Similarly, consumers are free to buy any commodity as per their choice.
Profit Motive: Profit is the driving force behind all economic activities in a capitalistic economy. Each individual
and organization produce only those goods which ensure high profit. Advance technology, division of labour,
and specialization are followed. The golden rule for a producer under capitalism is ‘to maximize profit.’
Free Competition: There is free competition in both product and factor market. The government or any
authority cannot prevent firms from buying or selling in the market. There is competition between buyers and
sellers.
Price Mechanism: Price mechanism is the heart of any capitalistic economy. All economic activities are
regulated through price mechanism i.e, market forces of demand and supply.
Role of Government: As the price mechanism regulates economic activity, the government has a limited role in
a capitalistic economy. The government provides basic services such as, defense, public health, education, etc.
Inequalities of Income: A capitalist society is divided into two classes – ‘haves’ that is those who own property
and ‘have-nots’ who do not own property and work for their living. The outcome of this situation is that the rich
become richer and poor become poorer. Here, economic inequality goes on increasing.
,Merits of Capitalism
Automatic Working: Without any government intervention, the economy works automatically.
Efficient Use of Resources: All resources are put into optimum use.
Incentives for Hard work: Hard work is encouraged, and entrepreneurs get more profit for more efficiency.
Economic Progress: Production and productivity levels are very high in capitalistic economies.
Consumers Sovereignty: All production activities are aimed at satisfying the consumers.
Higher Rates of Capital Formation: Increase in saving and investment leads to higher rates of capital formation.
Development of New Technology: As profit is aimed at, producers invest on new technology and produce
quality goods.
Demerits of Capitalism
Concentration of Wealth and Income: Capitalism causes concentration of wealth and income in a few hands
and thereby increases inequalities of income.
Wastage of Resources: Large amount of resources are wasted on competitive advertising and duplication of
products.
Class Struggle: Capitalism leads to class struggle as it divides the society into capitalists and workers.
Business Cycle: Free market system leads to frequent violent economic fluctuations and crises.
Production of non-essential goods: Even the harmful goods are produced if there is possibility to make profit
2. Socialistic Economy (Socialism)
The Father of Socialism is Karl Marx. Socialism refers to a system of total planning, public ownership and state
control on economic activities. Socialism is defined as a way of organizing a society in which major industries
are owned and controlled by the government, A Socialistic economy is also known as ‘Planned Economy’ or
‘Command Economy’.
In a socialistic economy, all the resources are owned and operated by the government. Public welfare is the
main motive behind all economic activities. It aims at equality in the distribution of income and wealth and
equal opportunity for all. Russia, China, Vietnam, Poland and Cuba are the examples of socialist economies. But,
now there are no absolutely socialist economies.
, Features of Socialism:
Public Ownership of Means of Production: All resources are owned by the government. It means that all the
factors of production are nationalized and managed by the public authority.
Central Planning: Planning is an integral part of a socialistic economy. In this system, all decisions are
undertaken by the central planning authority.
Maximum Social Benefit: Social welfare is the guiding principle behind all economic activities. Investments are
planned in such a way that the benefits are distributed to the society at large.
Non-existence of Competition: Under the socialist economic system there is absence of competition in the
market. The state has full control over production and distribution of goods and services. The consumers will
have a limited choice.
Absence of Price Mechanism: The pricing system works under the control and regulation of the central planning
authority.
Equality of Income: Another essential feature of socialism is the removal and reduction of economic
inequalities. Under socialism private property and the law of inheritance do not exist.
Equality of Opportunity: Socialism provides equal opportunity for all through free health, education and
professional training.
Classless Society: Under socialism, there is a classless society and so no class conflicts. In a true socialist society,
everyone is equal as far as economic status is concerned.
Merits of Socialism
Reduction in Inequalities: No one is allowed to own and use private property to exploit others.
Rational Allocation of Resources: The central planning authority allocates the resources in a planned manner.
Wastages are minimised and investments are made in a pre planned manner.
Absence of Class Conflicts: As inequalities are minimum, there is no conflict between rich and poor class.
Society functions in a harmonious manner.
End of Trade Cycles: Planning authority takes control over production and distribution of goods and services.
Therefore, economic fluctuations can be avoided.
Promotes Social Welfare: Absence of exploitation, reduction in economic inequalities, avoidance of trade
cycles and increase in productive efficiency help to promote social welfare.
