Macroeconomics Concepts

There are primarily two major branches of economics – microeconomics and macroeconomics. The former deals with the performance and behaviour of individuals or organisations. The latter one, on the other hand, accesses the economy as a whole and includes a country’s vital economics factors such as inflation, growth rate, GDP, etc. 

Basic Concepts of Macroeconomics

Macroeconomics in itself studies decision-making, structure, performance, etc. of a nation. Further, it accesses other quintessential aspects of microeconomics and aggregate indicators that influence a country’s economy. It works through macroeconomic models which Government and corporations use to formulate economic strategies and policies. 

  1. Inflation and Deflation – A significant factor of macroeconomics is the assessment of inflation and deflation. Inflation denotes the rise in prices of goods and services, and deflation means a decrease in the price of those.

Economists evaluate inflation and deflation with the help of price indexes. Studying these two aspects, the Government can take measures to curb them; as high inflation rate leads to several consequences while deflation causes low economic output.

  1. Unemployment – Another crucial economic indicator is the unemployment rate. It refers to the percentage of people without a job. Higher rate of unemployment of a country means a lesser economic output. Economists have divided it into four classic segments- classical, structural, frictional and cyclical employment.

Classical unemployment occurs when real wages are kept too high to hire workforce by employers. Frictional unemployment means when people change jobs voluntarily, it takes time to find another job after an individual leaves, that period is termed as unemployed. Structural unemployment comes from the mismatch between an employee’s working skills and skill necessary for a particular job.

Finally, cyclical unemployment is variable numbers of unemployed workers over a specific period; like it rises during recession and declines during economic growth. The overall performance of a country depends on how it uses its resources, and skilful employees have to be one of them.

  1. Income and Outputs – One of the most important macroeconomics concepts includes income and output. The national output is calculated by a total number of goods and services produced in a country over a specific period.

When organisations or production units sale off all products, they gain an equal income from those. Economists usually measure these two factors with the help of Gross Domestic Product or GDP.

With capital increase, technological advances and other aspects, Government or organisations can increase income and national output. However, these two components often get affected by several market factors such as recession. 

Macroeconomics Policies

Now and then the Government introduces several new policies to bring equilibrium in an economy. Two of these policies are monetary policies and fiscal policies.

  • Monetary Policies - It is an essential factor which is implemented by a central monetary authority like the Reserve Bank of India. The main objective of this change is to stabilise GDP and narrow down the rate of unemployment.

Along with that, it regulates money supply in an economy. For instance, RBI can infuse money in the market by issuing funds to purchase bonds and several other assets. Similarly, RBI can sell those assets to stop the circulation of money.

A few instruments of monetary policies are CRR, SLR, Open Market Operations, Repo and Reverse Repo Rate, Bank rate policy and various others. However, the primary goal of this is to stabilise the economic condition of the country.

  • Fiscal Policies - It is a tool which makes use of Government’s expenditure and revenue generation to control economic stability during a financial year. For example, if production in an economy cannot match up to required output, Government may spend on a few resources to reach up to estimated output. However, monetary policies are preferred over fiscal policies by economists as the former ones are controlled by RBI, which is an independent body. In contrast, fiscal policies are regulated by the Government which can be altered by political intentions.

These are some basic concepts of macroeconomics which commerce students need to master to comprehend how a country’s economy works at a large scale. 

Circulation in Macroeconomics

The flowchart mentioned below elucidates the process in which the economy of a country runs under macroeconomics. (image to be uploaded soon)

You can also make a table to find the difference between inflation and deflation for further reference. 

MCQs on Macroeconomics

  1. Macroeconomics is a discipline of economics which deals with 4 major components.

  1. Household, government, firm, demand-supply.

  2. Household, firms, Government, and external sector.

  3. Firms, free-market, Government, regulations.

  4. None of the above.

Ans. b)

  1. Intermediate goods are not included in calculating the final output because

  1. They do not have value

  2. They have an unknown value

  3. Their value is included in final value to avoid double counting

  4. None of the above.

Ans. c)

  1. In a nation’s economy, what does gross investment mean?

  1. Net investment + Depreciation

  2. Net investment- Depreciation

  3. Depreciation- Net investment

  4. None of the above

Ans. a)

Macroeconomics is essential to understand the economic situation of a country. Hence, students should read more on this topic and economics basic concepts notes, in general, to get a firm grasp on economics as a subject. For more such useful lessons on other commerce subjects’ stay tuned to Vedantu’s website. You can also install Vedantu’s app in your smartphone to access the study materials anytime.

FAQ (Frequently Asked Questions)

1. What are Final Goods?

Ans. Final goods are products which are produced for direct use by the end-users. For example, food, television, clothing, gasoline are final goods.

2. What are Consumer Goods?

Ans. Consumer goods are items bought by average consumers for consumption. These are the end result of manufacturing and production and ready to be used by consumers. Furniture, jewellery, airline services are a few examples of consumer goods.

3. What are Intermediate Goods?

Ans. Intermediate goods are products which are utilised to produce final good. These goods are sold among industries to produce other products or resale. For example, salt is used for direct consumption as well as food manufacturing industry.

4. Is a Bus Purchased by any School a Final Good?

Ans. Yes, it is a final good because the bus purchased by a school is an investment expenditure as well as capital good.