This document provides an overview of macroeconomics and its key concepts. It begins by defining macroeconomics as the study of the overall behavior of an economy, including output, employment, prices, and trade. It then lists common questions that macroeconomics seeks to answer, such as what determines economic activity and employment levels. The document continues by explaining why macroeconomic theory is important to study and provides a brief history of developments in the field from classical to Keynesian to modern macroeconomics. It also defines common macroeconomic terms like stock and flow variables.

1. Ms. Dilpreet Kaur
Unit I
Concepts of Macro Economics

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Introduction
Put subtitle here
01 02 03 04
Compare the
US in the
years 1933
and 2000?
What do you
notice?
Why is it that jobs are
plentiful in one time
period in one country
and there is
completely a different
situation in another
country?
Did you know that the
inflation rate in Zimbabwe
in 2007 was 50% per
month??? In 2008 it
surged to 231000000%
per annum!!!
What drives
up prices
over time?

3. OVERVIEW

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“Macroeconomics is the study of the behavior of the economy as a whole.
It examines the overall level of a nation’s output, employment, prices and foreign trade.”
What is Macroeconomics?
According to Paul Samuelson,
To understand macroeconomics better, look at the questions macroeconomics seeks to answer,
• What determines the level of the economic activity, total output and employment in a country?
• How is the equilibrium level of national income determined?
• What determines the general level of prices in a country?
• What determines the level of foreign trade and trade balance?
• How do the monetary and fiscal policies of the government affect the economy?

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1. Importance of Macroeconomic Issues:
2. Growing Complexity of Economic System:
Macroeconomic issues of a country need to be resolved effectively as they pertain to the
economic fate of a country and its people. The internal security, law and order situation,
social harmony also depend to a great extent on the economic condition of the common man
of a country.
• The modern economic system has grown extremely complex due to
Why to study Macroeconomic Theory?
• Expanding horizons of human wants to consume more and better goods and services,
• Increasing economic interaction between nations (globalization)
• Increasing international flows of capital, manpower, and technology,
• Growing interdependence of economies

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3- Need for Government Intervention with the Market System:
While the government intervention with the market system has proved helpful in preventing
business cycles and controlling inflation, it has created new kinds of problems like inefficiency,
corruption, reducing growth rate, etc.
The need for management of the economy by the government has arisen out of the failures
of the market mechanism to ensure efficient allocation of resources, to achieve socially
optimum production and distribution patterns of goods and services, and to bring stability in
growth, employment, price levels and exchange rates.
Why to study Macroeconomic Theory?

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Transaction motive
GROWTH OF MACROECONOMICS
The Classical
Macroeconomics
Post Classical: The
Keynesian
Revolution
Post Keynesian
Developments

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The classical economists had not developed any macroeconomic theory or model.
According to the classical economists, if market forces of demand and supply are allowed to
work freely, then
1- There will always be full employment in the long run and unemployment, if any, will be a
short run phenomenon;
l- The Classical Macroeconomics
3- The economy will always be in equilibrium in the long run
2- There will be neither over-production nor under production; and

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• There was large scale unemployment in most industrialized economies
• In the US, unemployment rates increased from 3% in 1929 to 25% in 1933,
• GNP declined disastrously,
BUT, what happened in the 1930s?
The Great Depression
• Production of goods and services declined by 30%,
• Price level fell by 23%,
• Business investments dropped to almost nil.

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The classical economists could offer neither an explanation nor a solution to the economic
problems created by the great depression.
This marked the collapse of the classical macroeconomics.

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Keynesian macroeconomics was born out of John Maynard Keynes’ attempt to find solution to
economic problems associated with the Great Depression
The Keynesian macroeconomic theories are associated mainly with
a) Employment,
b) Growth, and
c) Stability.
II. Post Classical: The Keynesian Revolution

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• The level of output and employment in an economy is determined by the aggregate
demand given the resources
• The unemployment in any country is caused by lack of aggregate demand and economic
fluctuations are caused by demand deficiency
The central theme of the Keynesian macroeconomics may be
summarized as follows:
• The demand deficiency can be removed through compensatory government spending
• Keynesian economics stresses on the role of demand management by the government for
the stable growth of the economy
• Keynesian economics stresses the favorable macroeconomic effects of the government
spending on national income and employment through its multiplier effect

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The post Keynesian developments in macroeconomics include the following schools of
thoughts
• Monetarist school,
• Neo-classical macroeconomics,
• Supply side economics, and
• Neo-Keynesianism.
III. The Post Keynesian Developments

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A group of economists called “monetarists” led by Milton Friedman claimed that Keynesian
theory had failed to predict national output, price level, rate of employment and
unemployment, and interest rates.
Monetarism
The monetarists came out with a new revolutionary thought, that is, the role of money is
central to the growth and stability of national output. In their opinion, money supply is the
main determinant of output and employment in the short run and price level in the short run

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The neo classical school emphasizes the role of individual’s rational expectations about future
economic events, especially those on the supply side of the economy and future government
policies
Neo Classical Macroeconomics: Robert E. Lucas
The anticipated changes in monetary and fiscal policies cause a shift in aggregate demand
curve, which causes an immediate and equal shift in the aggregate supply curve

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• The supply side economists, emphasized on the role of the factors operating on the supply
side of the market
Supply-Side Economics: Arthur Laffer
• The supply side economists, emphasized on the role of the factors operating on the supply
side of the market

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• Contrary to the neo classical group, the new Keynesians argue that market does not clear
always, in spite of individuals working for their own interest
Neo Keynesianism
• They give reason that ‘information problem and cost of changing prices lead to some price
rigidities’ which cause fluctuations in output and employment

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• It ignores the structural changes in the constituent elements of the aggregate. Therefore,
the conclusions drawn from the analysis of the behavior of the aggregate variables may be
misleading
Limitations of Macroeconomics
• Macroeconomics deals with national aggregates and “aggregates are not a reality but a
picture or approximation of reality.”
• Some economists consider macroeconomics only as an “intellectual attraction” without
much practical use.

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Stock and Flow Variables
Stock Variables Flow Variables
•Refer to the quantity of a variable given at a
point in time
•For example, water stored in a tank at a point
in time is a stock variable, number of books in a
library on a particular date
•In economics, the stock of capital in country,
number of people employed, total money
supply etc are measured at a point in time and
are thus stock variables
•Are the variables that are expressed per unit of
time, e.g., per hour, per week, per month
•For example, in economics, GDP, consumption,
savings, investments, exports, imports etc, are
all flow variables, since they all are measured
over a period of time

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• A fixed deposit with a bank is a stock variable and interest earned on the deposit (say,
monthly) is a flow variable
• Investment in plant, building, machinery, stock, etc, is a stock variable and the annual
return from such investments is a flow variable
Some other examples:

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