Concepts in Macro-Economic Analysis

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Concepts in Macroeconomic Analysis
Stock and Flow Variables

Stock: quantity of a variable at a point in time. Eg: Capital stock, money supply, unemployment level, foreign exchange reserve, etc.

Flow: quantity expressed for a period of time. Eg: GDP, inflation, exports, consumption, etc.

Aggregate Demand and Aggregate Supply

Aggregate Demand: sum of demands for all consumer goods and services and for capital goods – Sum of consumption, investment, government expenditure and net export.

Aggregate Supply: sum of the supplies of all consumer goods and services and of capital goods – The amount of output the economy can produce given the resources and technology available

National Income – Concepts and Measurement
Different concepts of NI - (i) Items included in or excluded from the NI concept; (ii) Method of estimating NI
Gross Domestic Product (GDP) – The sum of market value of all final goods and services produced in a country during a specified period of time, generally one year. Also called GDP at market prices (GDPMP)

GDP at factor cost (GDPFC) is the sum of all factor payments (wages, interest, rent, profits and depreciation)

GDPFC= GDPMP – Net indirect taxes, where Net indirect taxes = Indirect taxes – Subsidies.


GNP measures the total value of all final goods and services that a country’s citizens produce regardless of where they produce them. Example: Profits of Indian MNCs earn in overseas market is included in India’s GNP.

GDP measures the total value of goods and services that are produced within a country’s geographical borders. Example: An Indian MNC in China will actually contribute to Chinese GDP. 

GDP = GNP – NFIA (Net Factor Income from Abroad), where NFIA=income earned by residents abroad – income earned by non-residents from our country.


Net National Product (NNP)

GNP included final consumer goods + capital goods
Depreciation: part of capital goods that is used up or consumed in the process of production Usually covered under Gross Investment, (Gross Investment = Net Investment + Replacement Investment/Depreciation)

NNP = GNP – Depreciation

NNPFC = NI (the actual measure of National Income)
Per Capita Income = (NNPFC = NI ) / Total Population

Personal Income (PI): The sum of all kinds of income received by the individuals from all sources of income – The share of NI actually received by the HH sector. 

Personal Income (PI) = National Income (NI) – Income earned but not received (undistributed corporate profits, social security contributions by the HHs, etc.) + Income received but not earned (transfer payments by business and govt. to HHs).

Disposable Personal Income (DPI): the income at the disposal of a person, DPI = PI – Direct Taxes. Nominal and Real GNP

GNP is estimated at current and constant prices
Nominal GNP: market value of all final goods and services measured in current year prices. Real GNP: market value of all final goods and services measured in the price of a base year (constant prices).

Why do we estimate GNP at constant prices?
How to convert the nominal (current) values into real (constant) values?

GNP Deflator

An index of price changes for goods and services included in GNP Used to deflate the nominal GNP to eliminate the price effect to find real GNP for any year GNP Deflator = (Price Index for the current year) / (Price Index for the base year, i.e. =100) Real GNP = Nominal GNP / GNP Deflator;

GNP Deflator = (Nominal GNP / Real GNP) x 100.

Paradox of Thrift

Paradox of thrift is important to the Keynesian theory
When consumers save more, spending decreases and equilibrium output is lower Unemployment would rise and incomes would fall as people lost their jobs causing both consumption and saving to fall as well


Thus, attempts by people to save more lead both to a decline in output and to unchanged...
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