What is Macroeconomics

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What is Macroeconomics?

Macroeconomics is the branch of economics that studies the behavior and performance of the whole economy. It covers the economy as a whole rather than just focusing on individual markets or businesses. It examines the large-scale economic factors and aggregates, such as

  • Gross domestic product (GDP)
  • Gross national products (GNP)
  • National income
  • Unemployment rates
  • Inflation and deflation
  • Fiscal policy
  • Monetary policy

For example, when the government reduces interest rates to encourage borrowing and spending.

Objectives of Macroeconomics

  • Stable prices (control of inflation)
  • High employment (low unemployment)
  • Sustained economic growth
  • Balance in international trade

National Income Accounting (NIA)

National Income Accounting (NIA) is the systematic record of the aggregate economic activities in monetary value of an economy during a specific time period, normally in a year. Every economy maintains  NIA using different concepts in order to know the status of the economy, assess the performance of the economy over the period or across different sectors, make evidence-based policy, and work as a data bank that can be used for pure academic and policy-making purposes.

Major Concepts/indicator of NIA

Gross Domestic Product (GDP)It is the aggregate monetary value of goods and services produced within the geographical boundary of the country or economy during the given period of time. In Nepal fiscal year starts from Shrawan 1 to Asar.

GDP excludes: non-market activities like household work, volunteer work, pensions, social security funds, second-hand sales of goods, buying and selling of stocks, bonds, and intermediate goods (flour to make bread, steel used in cars), etc.

So, GDP in market price is given as

GDPMP = P1Q1+ P2Q2……………………..+PnQn

Where Pi = price of the final product produced domestically

Qi = quantity of final product produced domestically at a given time

GDP can also be expressed as GDPMP = C + I + G + (X -M)

Gross National Product (GNP)

GNP is the aggregate monetary value of the final products produced by the domestic factors of production only within the economy or abroad during the given period of time. It means GNP includes the earnings made by the domestic factors from abroad and excludes the payments made to the foreign factors during the given period of time.

GNPMP = GDPMP + Net factor income from abroad (NFIA)

Net national product (NNP)

During the production, some parts of capital goods are consumed or depreciated, and by deducting aggregate depreciation from GNP, we get NNP. It means NNP is the net contribution made by the domestic factors of production during the given period of time.

NNPMP = GNPMP  Depreciation or capital consumption allowances

National income (NI)

It is the aggregate income of domestic factors of production during the given period. The factors of production are classified into labour,  capital, and organization, then NI is the total earnings of these domestic factors during the given period.

NI = W + R + I + P

Where,

  • W = Labor income (wage, salary, bonuses, etc)
  • R = Land income (rent, royalty)
  • I = Capital income (interest)
  • P = Organizational income (profit)

Since NI includes only the earnings of the factors of production, it is also called NPP at factor cost.

NI = NNPFC

FC = MP – Tax + Subsidy

Personal Income (PI)

It is the aggregate income of the individual or household, which is obtained by deducting institutional retained earnings and social security contributions, and including transfer income of the individual and household in the national income.

Personal income =  NI – Retained earnings of corporate institution – social security contribution (SSC) + Transfer income (TI)

SSC – PF, CIT, RF (retirement fund), old age allowances, matured insurance, foreign remittance

Disposable personal income (DPI)

It is the aggregate income of the individual or household that they can dispose of or utilize for their need. It is calculated by deducting direct tax from the personal income.

DPI = PI – Direct Tax

Q) Which of the National Income Accounting is mostly used and why?

– GDP is the most frequently used concept of NIA, which is often used to assess the progress of the overall economy as well as compare the performance of the different sectors. The following are the major reasons for such frequent use of GDP:

  1. GDP measures the domestic production capacity of the economy, which helps to assess the internal strength or capacity. So, it is better to compare the other indicators of the economy, such as external trade, public debt, government expenditure and revenue, money supply, etc., in terms of GDP.
  2. GDP is said to be more reliable than other indicators of NIA because it measures domestic economic activity, and the government has the right and the information, whereas for other indicators, such as GNP and NI, we have to rely solely on the information provided.
  3. GDP is the fundamental concept of NIA, and the rest of the others are derived from GDP. So, better to use the basic concept rather than the derived one.
  4. GDP has been in practice to measure and compare the performance of the economy for a long time, and as a matter of convention, GDP is still more in practice.  

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