Introduction

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The term' Micro’ is derived from the a Greek word ‘MIKROS’ which means ‘small’. so microeconomic is the study of economic actions of individuals. Economic units which are small come under Microeconomic study. Micro means a “Millionth ” part. It deals with a small part or small component of national economy of a country . It is the study of particular unit rather than all units combined.

Definitions:According to BOULDINGMicroeconomics is the study of particular firm, particular

household, individual price, wage , income , industry and particular commodity.

In the words of Prof . McConnell“Microeconomics is concerned with specific economic units

and a detailed consideration of the behavior of those individual units”.

The term ‘Macro’ as used in English language is derived from the Greek word ’MAKROS’ which means large. Macroeconomics is the study of economics system as a whole . It is the study of overall conditions of an economy e.g. its total production, total consumption, total saving ,total investment etc. It deals with aggregates such as national income , output , employment and general price level .It is therefore also called ‘aggregate economics'. It thus deals not with one family but with all the families, not with one firm but with all the firms in an economy: not with one industry but with the entire industrial structure of an economy.

Definitions: In the words of Boulding .”Macroeconomics deals not with

individual quantities as such, but with aggregates of these quantities, not with individual income but with national income , not with individual output but with national output.”

According to Shapiro. “Macroeconomics deals with the functioning of the economy as a whole.”

The objective of studying macroeconomics is to: Help you learn how the national economy works. Enable you to understand such issues as: Why key economic variables are at their present levels? What may be the likely future paths of these variables? Causes and consequences f recessions, inflation, etc. What the government can do about these problems? Side effects of government actions. Pros and cons of free trade versus trade restrictions.

Why does the cost of living keep rising? Why are millions of people unemployed, even

when the economy is booming? Why are there recessions?Can the government do anything to combat

recessions? Should it?? What is the government budget deficit? How does

it affect the economy? Why do the economies have such a huge trade

deficit? Why are so many countries poor? What policies might help them grow out of

poverty?

Macroeconomics is the study of aggregate mode model of the economy, with specific focus on problems associated with those models : the problems of growth , business cycles , unemployment , and inflation . The macroeconomic study is designed to explain low supply and demand in the aggregate .Thus the key macroeconomic concepts are growth , business cycles, unemployment, and inflation.

National Income and its Measurement

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Meaning and definition of NI Significance of National Income Factors effecting the volume of

National Income Various concept of NI. Three approaches used to measure

NI.1. Product approach2. Income approach3. Expenditure approach

Difficulties in measuring NI.

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Goods. All those tangible things which are used to satisfy human needs are called goods.

There are two types of goods

1. Consumer goods. Those goods which the consumer are consuming in routine life are called consumer goods.

2. Capital goods. Those goods which are used to produce more goods are called capital goods. Such as plants & machines, buildings etc.

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Explanation of some terms

Services. All those economic actions which satisfy human wants and needs are done for money rewards are known as services.

There are two types of services :

1. Physical service. The service which is done physically by a person is known as physical service such as labor, barber, cobbler, tailors etc.

2. Mental service. That actions which are done mentally for satisfying human needs are called mental services. For example the service of doctor, engineer, professors, etc.

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National Income is the monetary value

of all goods and services produced in a

country during the course of one year,

including income derived from abroad.

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• Agriculture• Industry• Natural Resources• Trade• Transport & communication• Health & education• Banking

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It seeks to measure the level of production in the country in one year.

We can know whether the economy is growing or declining by comparing it with the previous years .

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National income shows contributions by various sectors in the economic development of economy.

Living standard and economic welfare of the people can be compared with other countries.

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From National Income Data we From National Income Data we can see the employment can see the employment situation sector wise.situation sector wise.

By Looking the National Income Data we can see which sector of the economy is week so we can focus on it to improve its performance.

Natural Resources:-A Country having large deposits of natural resources will have large production and hence large volume of national income.

Human Resources:-If the human resources of a country are healthy ,well-educated and trained, the production of the country will be large and hence large volume of national income.

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Man-made Resources:-If man-made sources are greater in number,itwill increase the volume of business in the country and hence volume of national income.

Credit Facilites:-Credit facilities in a country will increase the volume of business activities in a country and hence volume of national income.

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Technology:- A country having advanced technology will

have maximum production and hence will have large volume of national income.

Political Stability:- if a country is politically stable, Local and

foreign investment will be high so production and national income will be high.

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GDP shows the money value of all final goods and services produced only within the geographical boundaries of a country using the natural resources of the country.

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GDP or ( Gross Domestic Product)

Various Concepts of National Income

GNP or Gross national product is the money value of all final goods and services produced by the people within and outside the country for one year.

GNP = GDP + (exports – imports)

Exports of both physical goods and services Import of both physical goods and services

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NNP is the monetary value of all output after deducting depreciation allowances from GNP.

In producing GNP we consume or use up some capital like equipments and machinery, these capital goods falls in its value due to wear and tear in the production process.This wear and tear of machines is called depreciation.

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Thus :

NNP = GNP – Depreciation allowances

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NDP is the monetary value of all output after deducting depreciation allowances from GDP.

In producing GDP we consume or use up some capital like equipments and machinery, these capital goods falls in its value due to wear and tear in the production process.This wear and tear of machines is called depreciation.

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Thus :

NDP = GDP – Depreciation allowances

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Personal income = National income – Corporate income tax – undistributed profit + transfer payments ( pension, old age benefits, unemployment fund etc)

In personal income of an individual direct taxes are also included such as income tax.

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DPI is the amount which is left with individuals after paying direct taxes.This is the money income which individuals can either spend or save as possible as they can according to their needs and wants.

DPI = Personal income – Direct tax. DPI = Consumption + Saving

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Per Capita Income is the average income per head of the country. Per Capita Income is obtained by dividing the National Income of a country by its population.

Per Capita Income = National

Income

Population

There are three methods which are used to measure National Income:

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PRODUCTION OR Value Added METHOD

Income Method

Expenditure Method

The national income is calculated by adding up the net values of all production that has taken place in different sectors of economy during a year.in this method the economy is divided into various sectors such as…. Agriculture industry Infrastructure Banking Health Education Transport and communication etc.

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The net market or money value of all these sectors is added and the result is coming as national income.

Example….. production sectors Net value (billions) Agriculture 340

industry 210 Trade 290 Transport & communication 200 Health & education 250 Banking 160 NATIONAL INCOME 1450

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Following are the precautions regarding product method or value added method:

1. Value of the sale and purchase of second hand goods is not included in value added. Because , value of second hand goods is already accounted for during the year they were produced.

2. Goods produced for personal use will also be included in estimating value added . Because, these goods are like those produced for market . They are simply not sold owing to their own need by the producer.

3. Value of intermediate goods is not included in the estimation of value added . Because , value of intermediate goods is already included in the value of final goods .

4. Commission earned on account of the sale and purchase of second hand goods is included in the estimation of value added . Because commission is reward for the services rendered.

5. Imputed rent on the owner occupied house is also taken into account . Because , all houses have rental value, no matter these are self occupied or rented out.

6. Services for self consumption is not considered while estimating value added . Simply because , it is difficult to estimate their market value , like , for example , services of housewives.

7. Income from illegal activities is not included in national income.

This approach explains that money value of all the final goods and services produced in a year goes into the hands of the enterpreneure who in turn distribute it among the four factor of production. This constitutes the annual aggregate income/ rewards of the four factors of production, whose sum or total makes the National Income through income method.

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We will make it clear from the following hypothetical table:

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S.No. Rewards(per annum) Total amount (Billion Dollars)

1 Wages and Salaries 150

2 Interest 50

3 Rent 100

4 Profits 200

National Income 500

Following are the main difficulties in the use of product method:

1. It is difficult to differentiate between intermediate and final goods. For example a farmer is selling wheat on a flour mill . So for the flour mill the value of wheat is an intermediate good and for the farmer it is final good. Now this flour mill will sell this flour on a baker , so flour is final good for flour mill and intermediate good for the baker. Now the baker will sell it to a shopkeeper.

So value of output = $ 40 +$60+ $80+$100 = $2802. Difficulties in calculating depreciation cost.3. Difficulty regarding valuation of the product method.4. Difficulty regarding measuring self consumption goods.5. Statistical difficulties as in underdeveloped economies

farmers and small business firms do not keep proper accounts.

The amount of expenditure by the people on consumer goods produced by either the private or public sector and capital goods produced by either the private or public sector and either inside or outside the country, summing up together, would be the National Expenditure/National income.

In order to arrive at National Expenditure we would have to calculate various expenditures which are as follow:

o Personal consumption expenditureo Gross domestic private investmento Govt. expenditure on goods and serviceso Gross domestic public investmento Export surpluso Net foreign investment 45

We will make it clear with the help of a hypothetical table:

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CONT’D

S.NO. Items Amount (Billion Dollars)

1 Personal consumption expenditure

400

2 Gross domestic private investment

100

3 Govt. expenditure on goods & services

50

4 + Gross domestic public investment

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5 Export surplus 10

6 Net foreign investment 15

7 G.N.P 600

8 - Depreciation allowances 25

9 N.N.P 575

10 + Govt. subsidies 50

11 - Indirect taxes 95

12 - Transfer payment 25

13 - Statistical discrepancy 5

National Income 500

So far we have discussed the methods of measuring the National Income. Now we will take up the obstacles which prevent us from arriving at the most appropriate calculation of national income. These difficulties are generally prevailing in the third world countries.

shortage of statistical data: one of the main problems in measuring national income is that there is shortage of statistical data. Furthermore, there is also absence of statistical and technical procedures which are not generally adopted and people generally do not keep up to date on their earnings, expenditure etc.

Lack of trained manpower: the problem arises as there is a shortage of manpower to be employed to data collect the data regarding national income, for example , in Afghanistan statistical division is unable to provide reliable data on all aspects of the economy.

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