1
Macro Economics Notes
By
Muhammad Ishaq Jan
For
Intermediate and Higher level
, 2
Economics is basically divided into two basic branches:
I. Micro Economics
II. Macro Economics
I. Micro Economics: Micro economics is that branch of economics which deals with
the parts of economy.
(OR)
It is that branch of economics which deals with units of economy. e.g., consumer equilibrium,
firms’ equilibrium, price of a commodity, production of a firm, income of a person etc. it
indicates that in micro economics we study units or small parts of economy.
II. Macro-Economics: Macroeconomics is that branch of economics which deals with
economy as a whole. It is that branch of economics, which deals with economics
aggregates e.g., inflation rate, GNP growth rate, unemployment rate, general price level
etc. it indicates that in macroeconomics we are concerned with the economic
aggregates.
Microeconomic issues are studied in micro economics while macroeconomic issues are
studied in macroeconomics.
For the correct economic analysis of economy, we should take into consideration both the
micro aspect and macro aspect of an economic problem.
➢ History and Back ground of Macroeconomics:
In the years 1929-1933 when there occurs great depression in the world and most of the
economies are suffer from it then the theories of the classical economics were failed: who
believed that there will be no intervention of government in the economic affairs of the state
i.e., laissez-faire economy.
At that time “John Maynard Keynes” who is known as the father of macroeconomics and the
student of “Alfred Marshal” came with their ideas and wrote his well-known book “The
general theory of employment, interest and money” in the year “1936” simply known as “The
general theory” in which he states that government should intervene in the economic affairs
of the country.
According to “J.M. Keynes” aggregate demand plays a dominant role in economy. By
managing aggregate demand, we can over come different macroeconomic problems such as to
control the inflation rate, unemployment rate, recession etc.
“Keynes” theory was successful till 60s.
In the year “1973” there occurs “Inflation and Recession” at the same time in U.S.A economy
which is called “Stagflation’ and then “Keynes” theories were failed.
, 3
The work of “Keynes” is so important that it is also called “Keynesian Revolution” in economic
history.
➢ Business Cycle OR Trade Cycle: We cannot take economic activity at a smooth
path, there may be ups and downs in economic activity. The fluctuation in economy or
the ups and down in economic activity are called business cycle or trade cycle. There
are upswings and downswings in economy and such upswings and downswings are
called business cycle or trade cycle. During business cycles economic variables change
their directions.
There are four phases of business cycles.
i. Boom (or) Peak
ii. Recession
iii. Depression
iv. Recovery (or) Expansionary phase
i. Boom (or) Peak: In this phase economy is at its peak. Economic activities in this
phase are rapid, growth rate is high, unemployment in this phase declines, job
opportunities increase. Firms increases their production and their profit increases due
to high prices in this phase. Investment activities in economy increases and there is all
round business optimism in economy. Commercial banks also expand credit facilities
in economy due to bright future expectations. Income level of people increases in this
phase of business cycle.
ii. Recession: The slow down in economic activity is called recession. During this phase
economic activities declines, unemployment in economy increases, job opportunities
become short due to low economic activity. Investment activity in economy falls and
firms decrease their production. Price level declines and therefore profit of business
people falls. There is pessimism in economy. Recession in economy may exist for three
month (or) six months. In this phase people lose their jobs due to shut down of factories
(or) due to contraction of output by firms. Growth rate in economy falls and declines.
iii. Depression: When recession become severe in economy it is then transformed into
depression. Depression is the situation in which economic activity is at its lowest level,
production decreases too much, and therefore GNP gap widens, investment activity is
reduced and many people become jobless, unemployment rate in economy become
high, price level is reduced and profit of business people decreases. There is all round
pessimism in economy during this phase of business cycle.
iv. Recovery (or) Expansionary phase: In this phase of business cycle economy
restarts expanding. Economic activities are initiated due to low wages of labour and
low prices of raw materials investment increases in economy and consequently job
opportunities also increase. Growth rate in economy increases and credit facilities are
, 4
expanded by commercial banks. Business expectations are bright in this phase and a
new wave of optimism is created in economy. Price level starts rising and firms expand
their activities in order to earn higher profit.
(Business Cycle)
➢ Variable : A variable is defined as: A quantity something which changes its value
during a course of discussion, e.g. In our daily life we observe that speed of a motor car
changes, therefore speed of a car is variable.
In economics there are large number of variables, e.g., Income of a person, consumption,
saving, price of a commodity, etc.
Income (Y), Consumption (C), Exports (X), Imports (M), Saving (S), Investment (I), Interest
rate (r or i).
• Dependent Variable: A variable whose value depends upon another variable, i.e.
A variable whose value changes with the change in another variable is called dependent
variable. E.g., Consumption depends upon the level of income, when income changes
consumption also changes, therefore we can say that consumption is dependent
variable.
Saving of a person depends upon income. Therefore, saving is dependent variable.
Investment depends upon the rate of interest hence investment is dependent variable.
Macro Economics Notes
By
Muhammad Ishaq Jan
For
Intermediate and Higher level
, 2
Economics is basically divided into two basic branches:
I. Micro Economics
II. Macro Economics
I. Micro Economics: Micro economics is that branch of economics which deals with
the parts of economy.
(OR)
It is that branch of economics which deals with units of economy. e.g., consumer equilibrium,
firms’ equilibrium, price of a commodity, production of a firm, income of a person etc. it
indicates that in micro economics we study units or small parts of economy.
II. Macro-Economics: Macroeconomics is that branch of economics which deals with
economy as a whole. It is that branch of economics, which deals with economics
aggregates e.g., inflation rate, GNP growth rate, unemployment rate, general price level
etc. it indicates that in macroeconomics we are concerned with the economic
aggregates.
Microeconomic issues are studied in micro economics while macroeconomic issues are
studied in macroeconomics.
For the correct economic analysis of economy, we should take into consideration both the
micro aspect and macro aspect of an economic problem.
➢ History and Back ground of Macroeconomics:
In the years 1929-1933 when there occurs great depression in the world and most of the
economies are suffer from it then the theories of the classical economics were failed: who
believed that there will be no intervention of government in the economic affairs of the state
i.e., laissez-faire economy.
At that time “John Maynard Keynes” who is known as the father of macroeconomics and the
student of “Alfred Marshal” came with their ideas and wrote his well-known book “The
general theory of employment, interest and money” in the year “1936” simply known as “The
general theory” in which he states that government should intervene in the economic affairs
of the country.
According to “J.M. Keynes” aggregate demand plays a dominant role in economy. By
managing aggregate demand, we can over come different macroeconomic problems such as to
control the inflation rate, unemployment rate, recession etc.
“Keynes” theory was successful till 60s.
In the year “1973” there occurs “Inflation and Recession” at the same time in U.S.A economy
which is called “Stagflation’ and then “Keynes” theories were failed.
, 3
The work of “Keynes” is so important that it is also called “Keynesian Revolution” in economic
history.
➢ Business Cycle OR Trade Cycle: We cannot take economic activity at a smooth
path, there may be ups and downs in economic activity. The fluctuation in economy or
the ups and down in economic activity are called business cycle or trade cycle. There
are upswings and downswings in economy and such upswings and downswings are
called business cycle or trade cycle. During business cycles economic variables change
their directions.
There are four phases of business cycles.
i. Boom (or) Peak
ii. Recession
iii. Depression
iv. Recovery (or) Expansionary phase
i. Boom (or) Peak: In this phase economy is at its peak. Economic activities in this
phase are rapid, growth rate is high, unemployment in this phase declines, job
opportunities increase. Firms increases their production and their profit increases due
to high prices in this phase. Investment activities in economy increases and there is all
round business optimism in economy. Commercial banks also expand credit facilities
in economy due to bright future expectations. Income level of people increases in this
phase of business cycle.
ii. Recession: The slow down in economic activity is called recession. During this phase
economic activities declines, unemployment in economy increases, job opportunities
become short due to low economic activity. Investment activity in economy falls and
firms decrease their production. Price level declines and therefore profit of business
people falls. There is pessimism in economy. Recession in economy may exist for three
month (or) six months. In this phase people lose their jobs due to shut down of factories
(or) due to contraction of output by firms. Growth rate in economy falls and declines.
iii. Depression: When recession become severe in economy it is then transformed into
depression. Depression is the situation in which economic activity is at its lowest level,
production decreases too much, and therefore GNP gap widens, investment activity is
reduced and many people become jobless, unemployment rate in economy become
high, price level is reduced and profit of business people decreases. There is all round
pessimism in economy during this phase of business cycle.
iv. Recovery (or) Expansionary phase: In this phase of business cycle economy
restarts expanding. Economic activities are initiated due to low wages of labour and
low prices of raw materials investment increases in economy and consequently job
opportunities also increase. Growth rate in economy increases and credit facilities are
, 4
expanded by commercial banks. Business expectations are bright in this phase and a
new wave of optimism is created in economy. Price level starts rising and firms expand
their activities in order to earn higher profit.
(Business Cycle)
➢ Variable : A variable is defined as: A quantity something which changes its value
during a course of discussion, e.g. In our daily life we observe that speed of a motor car
changes, therefore speed of a car is variable.
In economics there are large number of variables, e.g., Income of a person, consumption,
saving, price of a commodity, etc.
Income (Y), Consumption (C), Exports (X), Imports (M), Saving (S), Investment (I), Interest
rate (r or i).
• Dependent Variable: A variable whose value depends upon another variable, i.e.
A variable whose value changes with the change in another variable is called dependent
variable. E.g., Consumption depends upon the level of income, when income changes
consumption also changes, therefore we can say that consumption is dependent
variable.
Saving of a person depends upon income. Therefore, saving is dependent variable.
Investment depends upon the rate of interest hence investment is dependent variable.
