Definition of Basic Terms
Micro economics: Micro economics is a branch of economics that examines the functioning of individual business firms and households. The goal of micro economics is to explain the determination of prices and quantitative individual goods and' services. Micro economics is, therefore, often called price theory. In brief, Micro economics is the study of choices made by consumers, firms and government and how these decisions affect the market for a particular good and services.
Macro Economics: The term 'Macro' is derived from the Greek word 'Uakpo' which means large. Macroeconomics looks at the 'economy as a whole. It examines the factors that determine national output and its growth overtime. It studies the economic aggregates such as the overall level of prices, output and employment in the economy.
Gross domestic product (GDP): Is the total value of the goods and services produced within the territories boundaries of a country by both nationals and no nationals in a given year.
Factor income: Are rewards or payments to the factors of production for their services or contributions in the production process for example profit for entrepreneur, wages for labour, land for rent, interest for capital.
Gross national income (GNY): It is the total income earned within the country including net income earned aboard by our nationals in a period of one year.
Personal income ( PY). Is all incomes received by an individuals in a given year PY = undistributed profits - taxes - social security Contributors of transfer payments.
Disposable incomes (DY): Is the income that remains with an individual after removing taxes and computing payments. It is income that can be used either for consumption or savings (S), it is referred to as take home pay D (= C+S depreciation allowance (consumption capital allowance)
It is money set aside for the wear and tear of capital or machinery.
Net property Income from abroad
Is the inflow (+) of income by national with resources abroad less the output flow of income by foreigners with resources in our country
Nominal income: Is the monetary income arising from the production of goods and services by a given country is a period of one year.
Real income: In the national income is expressed in terms of real goods and services of a country in a given year or it is the purchasing power of an individuals money income
Income per factor: It is the total national income divided by total number income divided by total number of effective labour. It shows the contribution per sector.
Consumption per capital: It is the average consumption per person or head . it represents the proportion of income consumed .
Transfer payment: refers to transfer of income within the community which is not made in respect of any productive activity difference between market price (MP) and factor cost (FC) national income may be estimated using either market prices or factor cost (MP) occurs when a country final goods are established using the current market prices that are normally inflated as the include indirect taxes on the other hand, when estimated income using factor cost you only consider the production in terms of wages, rent and interest. it also includes subsidy
Note: if you are given income at market price to get income at indirect taxes and add subsidy. Likewise, if are you given income at factor cost to get income at market price you must add taxes and subtract subsidizes +direct
GNP= GNP + Indirect taxes
GNPFC GNP-Indirect taxes
Importance of macro - Economics
- It helps in understanding the determination of income and employment. J.M. Keynes, in his revolutionary book, "General Theory, Employment interest and Money", brought drastic changes in economic thinking. He explained the factors which determine the level of aggregate employment and output in the economy.
- Determination of general level of prices. Macro-economic analysis answers questions as to how the general price level is determined and factors which influence general price level.
- Economic growth. The macro-economic models help us to formulate economic policies for achieving long run economic growth with stability. The new developed growth theories explain the causes of poverty in under developed countries and suggest remedies to overcome them.
- Macro economics and business cycles. It is in terms of macro-economics that causes of fluctuations in the national income are analyzed. It has also been possible now to formulate policies for controlling business cycles i.e. inflation and deflation.
- International trade. Another important subject of macroeconomics is to analyze the various aspects of international trade.
- Unemployment. Another macro-economic issue is to explain the causes of unemployment in the economy. Stagflation is another important issue of modern economics. The Keynesian and post Keynesian economists are putting lot of efforts in explaining the causes of cyclical unemployment. and high unemployment coupled with inflation and suggesting remedies to counteract them.
- Macroeconomic policies. Fiscal and monetary policies affect the performance of the economy. These two major types of macroeconomic policies are central in macro-economic analysis of the economy.
- Global economic system; In the macro-economic analysis, it is emphasized that a nation's economy is a part of a global economic system. A good or weak performance of a nation's economy can affect the performance of the world economy as a whole.