NCERT Class 12 Economics Part 2 Chapter 1: Introduction YouTube Lecture Handouts

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NCERT Class 12 Economics Part 2 Chapter 1: Introduction

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What is Macroeconomics?

Image of a Macroeconomics

Image of a Macroeconomics

Image of a Macroeconomics

  • Study of economy wise phenomena – unemployment, inflation, national income, national output, global economies and complexity

  • Will the prices as a whole rise or come down? Is the employment condition of the country as a whole, or of some sectors of the economy, getting better or is it worsening? What would be reasonable indicators to show that the economy is better or worse? What steps, if any, can the State take, or the people ask for, in order to improve the state of the economy?

  • If output of food grain is experiencing a growth, it is generally accompanied by a rise in the output level of industrial goods

  • If aggregate output level, price level, or employment level, in the different production units of an economy bear close relationship to each other then the task of analysing entire economy becomes relatively easy.

  • Instead of dealing with the above mentioned variables at individual (disaggregated) levels, we can think of a single good as the representative of all the goods and services produced within the economy. This representative good will have a level of production which will correspond to the average production level of all the goods and services

How Macro-Economy Works?

  • Particularly, when these attributes start changing fast, like when prices are going up (in what is called an inflation), or employment and production levels are going down (heading for a depression), the general directions of the movements of these variables for all the individual commodities are usually of the same kind as are seen for the aggregates for the economy as a whole

  • Interdependence of (or even rivalry between) two sectors of the economy (agriculture and industry, for example) or the relationships between sectors (like the household sector, the business sector and government in a democratic set-up) help us understand some things happening to the country’s economy much better

  • general kinds of commodities may be taken as a representative of all commodities being produced within the economy: agricultural goods, industrial goods and services. These goods may have different production technology and different prices

Microeconomics vs. Macroeconomics

  • In microeconomics, you came across individual ‘economic agents’ (which can take economic decisions) and the nature of the motivations that drive them. They were ‘micro’ (meaning ‘small’) agents – consumers choosing their respective optimum combinations of goods to buy, given their tastes and incomes; and producers trying to make maximum profit keeping their costs as low as possible and selling at a price as

  • high as they could get in the markets; study of individual markets of demand and supply and the ‘players’, or the decision-makers, were also individuals

  • Macroeconomics - phenomena affecting the economy as a whole, like inflation or unemployment, were either not mentioned or were taken as given

Adam Smith

  • Adam Smith, the founding father of modern economics (or political economy), had suggested that if the buyers and sellers in each market take their decisions following only their own self-interest, economists will not need to think of the wealth and welfare of the country as a whole separately.

  • Adam Smith was Scotsman and a professor at the University of Glasgow - his well known work An Enquiry into the Nature and Cause of the Wealth of Nations (1776) is regarded as the first

  • major comprehensive book on the subject.

  • Markets did not or could not exist.

  • Markets existed but failed to produce equilibrium of demand and supply

  • Society (or the State, or the people as a whole) had decided to pursue certain important social goals unselfishly (in areas like employment, administration, defence, education and health) for which some of the aggregate effects of the microeconomic decisions made by the individual economic agents needed to be modified.

  • For these purposes macroeconomists had to study the effects in the markets of taxation and other budgetary policies, and policies for bringing about changes in money supply, the

  • rate of interest, wages, employment, and output

  • Macroeconomics has deep roots in microeconomics because it has to study the aggregate effects of the forces of demand and supply in the markets – policies aimed at modifying these forces

Who Are Decision Makers & What They Try to Do?

  • Macroeconomic policies are pursued by the State itself or statutory bodies like the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and similar institutions. Typically, each such body will have one or more public goals to pursue as defined by law or the Constitution of India itself. These goals are not those of individual economic agents maximising their private profit or welfare. Thus the macroeconomic agents are basically different from the individual decision-makers.

  • Macroeconomics goes beyond economic objectives and try to direct the deployment of economic resources for such public needs, not serve individual interest but welfare of country as a whole

Emergence of Macroeconomics

  • Macroeconomics emerged as a separate subject in the 1930s due to Keynes. The Great Depression, which dealt a blow to the economies of developed countries, had provided Keynes with the inspiration for his book - The General Theory of Employment, Interest and Money in 1936- to examine the working of the economy in its entirety and examine the interdependence of the different sectors

  • Classical Tradition: Thinking in economics before Keynes was that all the labourers who are ready to work will find employment and all the factories will be working at their full capacity.

  • Great depression: output and employment levels in the countries of Europe and North America fall by huge amounts. It affected other countries of the world as well. Demand for goods in the market was low, many factories were lying idle, workers were thrown out of jobs. In USA, from 1929 to 1933, unemployment rate rose from 3% to 25%; aggregate output in USA fell by about 33%

  • Keynes prophesied the break down of the peace agreement of the War in the book The Economic Consequences of the Peace (1919). His book General Theory of Employment, Interest and Money (1936) is regarded as one of the most influential economics books of the twentieth century. He was also a shrewd foreign currency speculator.

Economy in a Capitalist Nation

  • In a capitalist country production activities are mainly carried out by capitalist enterprises (one or more entrepreneurs with own capital or borrow capital)

  • To carry production they need

  • Natural resources (partly consumable and partly fixed)

  • Labor

  • Capital – as discussed

  • With these 3 factors, entrepreneur sells product and earns revenue (part is paid as rent of land, interest of capital and wages of labour) & the rest is profit

  • Profits are often used by the producers in the next period to buy new machinery or to build new factories, so that production can be expanded. These expenses which raise productive capacity are examples of investment expenditure

Capitalist Economy

  • -There is private ownership of means of production

  • -Production takes place for selling the output in the market

  • -There is sale and purchase of labor services at a price which is called the wage rate

  • Labour which is sold and purchased against wages is referred to as wage labour

  • Few Countries of N. America, Europe and Asia – Capitalist

  • Underdeveloped countries production (in agriculture especially) is carried out by peasant families. Wage labour is seldom used and most of the labour is performed by the family members themselves.

  • Tribal societies – no ownership and land belongs to community

  • Sectors in Economy

  • Production unit or firm – entrepreneur hires wage labour from the market, she employs the services of capital and land as well. After hiring these inputs she undertakes the task of production. Output production aim is to sell in market and earn profit

  • State: framing laws, enforcing them and delivering justice. State undertakes production – apart from imposing taxes and spending money on building public infrastructure, running schools, colleges, providing health services etc. For ease we say Government

  • Household Sector: single individual who takes decisions relating to her own consumption, or a group of individuals for whom decisions relating to consumption are jointly determined, save and pay taxes. These people work in firms as workers and earn wages. They are the ones who work in the government departments and earn salaries. They can also earn rent by leasing land or earn interest by lending capital.

  • External Trade: Exports (sell to world) and Imports (buy from world)

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