CLASS 1

INT TO MACRO ECONOMICS

Macroeconomics (from the Greek prefix makro- meaning "large" and economics) is
a branch of economics dealing with the performance, structure, behavior, and
decision-making of an economy as a whole rather than individual markets. This
includes national, regional, and global economies.[1][2] Along with microeconomics,
macroeconomics is one of the two most general fields ineconomics.

Macroeconomists study aggregated indicators such as GDP, unemployment

rates, national income, price indices, and the interrelations among the different
sectors of the economy to better understand how the whole economy functions.
Macroeconomists develop models that explain the relationship between such
factors as national
income, output, consumption, unemployment, inflation,savings, investment, intern
ational trade and international finance. In contrast, microeconomics is primarily
focused on the actions of individual agents, such as firms and consumers, and how
their behavior determines prices and quantities in specific markets.

While macroeconomics is a broad field of study, there are two areas of research
that are emblematic of the discipline: the attempt to understand the causes and
consequences of short-run fluctuations in national income (the business cycle),
and the attempt tounderstand the determinants of long-run economic
growth (increases in national income). Macroeconomic models and their forecasts
are used by governments to assist in the development and evaluation of economic
policy.

Economic system
An economic system is a system of production, resource allocation, and
distribution of goods and services in a society or a given geographic area. It
includes the combination of the various institutions, agencies, entities, decision-
making processes, and patterns of consumption that comprise the economic
structure of a given community.

Types

Capitalism

Capitalism generally features the private ownership of the means of production

(capital), and a market economy for coordination. Corporate capitalism refers to a
capitalist marketplace characterized by the dominance of hierarchical bureaucratic
corporations.

Socialism[edit]

Socialist economic systems (all of which feature social ownership of the means of
production) can be subdivided by their coordinating mechanism (planning and
markets) into planned socialist and market socialist systems. Additionally,

IBPS BASIC FOUNDATION STATIC 1 BY RAKESH M 1

socialism can be divided based on their property structures between those that are
based on public ownership, worker or consumer cooperatives and common
ownership (i.e., non-ownership).

Mixed economy[edit]

There is no precise definition of a "mixed economy". Theoretically, it may refer to an

economic system that combines one of three characteristics: public and private
ownership of industry, market-based allocation with economic planning, or free-
markets with state interventionism.

In practice, "mixed economy" generally refers to market economies with substantial

state interventionism and/or sizable public sector alongside a dominant private
sector.

The green economy is defined as an economy that aims at reducing environmental

risks and ecological scarcities, and that aims forsustainable development without
degrading the environment. It is closely related with ecological economics, but has
a more politically applied focus.[1][2] The 2011 UNEP Green Economy Report argues
"that to be green, an economy must not only be efficient, but also fair. Fairness
implies recognising global and country level equity dimensions, particularly in
assuring a just transition to an economy that is low-carbon, resource efficient, and
socially inclusive."

Information economy is an economy with an increased emphasis

on informational activities and information industry.

Manuel Castells states that information economy is not mutually exclusive with
manufacturing economy. He finds that some countries such
as Germany and Japan exhibit the informatization of manufacturing processes. In
a typical conceptualization, however, information economy is considered a "stage"
or "phase" of an economy, coming after stages of hunting, agriculture, and
manufacturing. This conceptualization can be widely observed regarding
information society, a closely related but wider concept.

VAROIUS SECTORS OF ECONOMY

1. Agriculture, Forestry & Fishing

2. Industries(a+b+c+d)

(a) Mining & Quarrying

(b) Manufacturing

IBPS BASIC FOUNDATION STATIC 1 BY RAKESH M 2

 (c) Electricity, Gas & Water Supply.

(d) Construction

3. Services(e+f+g)

(e) Trade, Hotels, Transport and Communication

(f) Financial, Insurance, Real Estate & Professional Services.

(g) Public Administration, defence & other services.

INCOME ACCOUNTING
Gross domestic product (GDP) is the market value of all officially
recognized final goods and services produced within a country in a given
period of time.
GDP = private consumption + gross investment + government spending +
(exports imports),

Components of GDP by expenditure

GDP (Y) is a sum of Consumption (C), Investment (I), Government
Spending (G) and Net Exports (X M).
Y = C + I + G + (X M)
Here is a description of each GDP component:
C (consumption) is normally the largest GDP component in the
economy, consisting of private (household final consumption
expenditure) in the economy. These personal expenditures fall under
one of the following categories: durable goods, non-durable goods, and
services. Examples include food, rent, jewelry, gasoline, and medical
expenses but does not include the purchase of new housing.

I (investment) includes, for instance, business investment in

equipment, but does not include exchanges of existing assets.
Examples include construction of a new mine, purchase of software,
or purchase of machinery and equipment for a factory. Spending by
households (not government) on new houses is also included in
Investment. In contrast to its colloquial meaning, 'Investment' in GDP
does not mean purchases of financial products. Buying financial
products is classed as 'saving', as opposed to investment. This avoids
double-counting: if one buys shares in a company, and the company
uses the money received to buy plant, equipment, etc., the amount
will be counted toward GDP when the company spends the money on
those things; to also count it when one gives it to the company would
be to count two times an amount that only corresponds to one group
of products. Buying bonds or stocks is a swapping of deeds, a transfer
of claims on future production, not directly an expenditure on
products.

IBPS BASIC FOUNDATION STATIC 1 BY RAKESH M 3

 G (government spending) is the sum of government expenditures on
final goods and services. It includes salaries of public servants,
purchase of weapons for the military, and any investment expenditure
by a government. It does not include any transfer payments, such as
social security or unemployment benefits.
X (exports) represents gross exports. GDP captures the amount a
country produces, including goods and services produced for other
nations' consumption, therefore exports are added.
M (imports) represents gross imports. Imports are subtracted since
imported goods will be included in the terms G, I, or C, and must be
deducted to avoid counting foreign supply as domestic.

A fully equivalent definition is that GDP (Y) is the sum of final

consumption expenditure (FCE), gross capital formation (GCF), and net
exports (X M).

Y = FCE + GCF+ (X M)

GNP
Gross national product (GNP) is the market value of all the products and
services produced in one year by labor and property supplied by the
residents of a country. Unlike Gross Domestic Product (GDP), which
defines production based on the geographical location of production, GNP
allocates production based on ownership.

Basically, GNP is the total value of all final goods and services produced
within a nation in a particular year, plus income earned by its citizens
(including income of those located abroad), minus income of non-residents
located in that country. GNP measures the value of goods and services that
the country's citizens produced regardless of their location. GNP is one
measure of the economic condition of a country, under the assumption that
a higher GNP leads to a higher quality of living, all other things being equal.

GNI
The Gross national income (GNI) consists of: the personal consumption
expenditure, the gross private investment, the government consumption
expenditures, the net income from assets abroad (net income receipts), and
the gross exports of goods and services, after deducting two components: the
gross imports of goods and services, and the indirect business taxes.

Inflation
In economics, inflation is a rise in the general level of prices of goods and
services in an economy over a period of time.[1] When the general price level
rises, each unit of currency buys fewer goods and services. Consequently,
inflation reflects a reduction in the purchasing power per unit of money a
loss of real value in the medium of exchange and unit of account within the
economy.[2][3] A chief measure of price inflation is the inflation rate, the

IBPS BASIC FOUNDATION STATIC 1 BY RAKESH M 4

annualized percentage change in a general price index (normally the
consumer price index) over time.

Types of Inflation
There are three major types of inflation,
Demand-pull inflation is caused by increases in aggregate demand
due to increased private and government spending, etc. Demand
inflation encourages economic growth since the excess demand and
favourable market conditions will stimulate investment and
expansion.

Cost-push inflation, also called "supply shock inflation," is caused by

a drop in aggregate supply (potential output). This may be due to
natural disasters, or increased prices of inputs. For example, a
sudden decrease in the supply of oil, leading to increased oil prices,
can cause cost-push inflation. Producers for whom oil is a part of their
costs could then pass this on to consumers in the form of increased
prices. Another example stems from unexpectedly high Insured
Losses, either legitimate (catastrophes) or fraudulent (which might be
particularly prevalent in times of recession).

Built-in inflation is induced by adaptive expectations, and is often

linked to the "price/wage spiral". It involves workers trying to keep
their wages up with prices (above the rate of inflation), and firms
passing these higher labor costs on to their customers as higher
prices, leading to a 'vicious circle'.

Controlling inflation
A variety of methods and policies have been used to control inflation.
1. Stimulating economic growth
If economic growth matches the growth of the money supply, inflation
should not occur when all else is equal.[59] A large variety of factors
can affect the rate of both. For example, investment in market
production, infrastructure, education, and preventative health care
can all grow an economy in greater amounts than the investment
spending.

2. Monetary policy
Today the primary tool for controlling inflation is monetary policy.
Most central banks are tasked with keeping their inter-bank lending
rates at low levels, normally to a target rate around 2% to 3% per
annum, and within a targeted low inflation range, somewhere from
about 2% to 6% per annum. A low positive inflation is usually
targeted, as deflationary conditions are seen as dangerous for the
health of the economy.

3. Cost-of-living allowance
A cost-of-living allowance (COLA) adjusts salaries based on changes in
a cost-of-living index. Salaries are typically adjusted annually in low
inflation economies. During hyperinflation they are adjusted more

IBPS BASIC FOUNDATION STATIC 1 BY RAKESH M 5

 often.[68] They may also be tied to a cost-of-living index that varies by
geographic location if the employee moves.

List of newer approaches to the measurement of (economic) progress

Human development index (HDI) up until 2009 report HDI used GDP as
a part of its calculation and then factors in indicators of life expectancy and
education levels. In 2010 the GDP component has been replaced with GNI.

Genuine progress indicator (GPI) or Index of Sustainable Economic

Welfare (ISEW) The GPI and the ISEW attempt to address many of the
above criticisms by taking the same raw information supplied for GDP and
then adjust for income distribution, add for the value of household and
volunteer work, and subtract for crime and pollution.

Gross national happiness (GNH) GNH measures quality of life or social

progress in more holistic and psychological terms than GDP.

European Quality of Life Survey The survey, first published in 2005,

assessed quality of life across European countries through a series of
questions on overall subjective life satisfaction, satisfaction with different
aspects of life, and sets of questions used to calculate deficits of time, loving,
being and having.[30]

Gross national happiness The Centre for Bhutanese Studies in Bhutan is

working on a complex set of subjective and objective indicators to measure
'national happiness' in various domains (living standards, health, education,
eco-system diversity and resilience, cultural vitality and diversity, time use
and balance, good governance, community vitality and psychological well-
being). This set of indicators would be used to assess progress towards gross
national happiness, which they have already identified as being the nation's
priority, above GDP.
Happy Planet Index The happy planet index (HPI) is an index of human
well-being and environmental impact, introduced by the New Economics
Foundation (NEF) in 2006. It measures the environmental efficiency with
which human well-being is achieved within a given country or group.
Human well-being is defined in terms of subjective life satisfaction and life
expectancy while environmental impact is defined by the Ecological
Footprint.

OECD Better Life Index - The better lives compendium of indicators

produced in 2011 reflects some 10 years by the organisation to develop a
wider of set of indicators more closely attuned to the measurement of
wellbeing or welfare outcomes. There is felt to be considerable convergence
(in 2011) in high income countries about the kinds of dimensions that
should be included in such multi-dimensional approaches to welfare
measurement - see for instance the capabilities measurement research
project capabilities approach.

IBPS BASIC FOUNDATION STATIC 1 BY RAKESH M 6

Meaning of Some terms

Recession
In economics, a recession is a business cycle contraction, a general slowdown in
economic activity.[1][2] Macroeconomic indicators such as GDP, employment,
investment spending, capacity utilization, household income, business profits, and
inflation fall, while bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending (an

adverse demand shock). This may be triggered by various events, such as a
financial crisis, an external trade shock, an adverse supply shock or the bursting of
an economic bubble. Governments usually respond to recessions by adopting
expansionary macroeconomic policies, such as increasing money supply,
increasing government spending and decreasing taxation.

Financial crisis
The term financial crisis is applied broadly to a variety of situations in which some
financial assets suddenly lose a large part of their nominal value. In the 19th and
early 20th centuries, many financial crises were associated with banking panics,
and many recessions coincided with these panics. Other situations that are often
called financial crises include stock market crashes and the bursting of other
financial bubbles, currency crises, and sovereign defaults.[1][2] Financial crises
directly result in a loss of paper wealth but do not necessarily result in changes in
the real economy.

IBPS BASIC FOUNDATION STATIC 1 BY RAKESH M 7