The Scope and Subject matter of Macroeconomics: Macro-economics is concerned with the study of the whole economy.

It is called an aggregative economics. In short, it is concerned with the economic activity in large or the economy as a whole. It is a study of aggregates such as employment, total output, total investment, total consumption. Total saving, national income, aggregate demand, aggregate supply, general price level etc.

Subject Matter of Macro-economics

Determination of national income and employment:
According to macroeconomic analysis, the equilibrium level of employment and income is determined by aggregate demand and aggregate supply. In other words an economy attains maximum level of employment and income only when aggregate demand equals aggregate supply. Problems of Unemployment : Macroeconomics also studies the problem of unemployment due to lack of aggregate demand that determines the level of income and employment. Example: Structural unemployment, Frictional unemployment, technological unemployment, open unemployment etc.

Determination of general price level: It studies

the causes as well as the problems of inflation and deflation which are caused due to fluctuations in price level. Stability in price level is essential for economic growth and stability. Business cycles: It studies fluctuations in economic activity causing recurrence of business cycles such as prosperity, depression etc and their effects on the economy and measures to control them.

Theory of Economic Growth: Theories of economic growth and various growth models designed by various economists like HarrodDomar, Solow, Schumpeter etc. are the subject matter of Macro-economics. It also studies the factors affecting the economic development such as investment and the full utilization of capacity etc.

Theory of Distribution: Theory of Rent, Interest, Wage, Profit etc. are the subject matter of Macro-economics. Thus Macro-economics is related with the study of the relative shares of factors of production. How the shares of factors of production are determined? How these shares affect the income and employment level in an economy? Etc.

Significance of Macro-economics
Policy formulation: In all economic systems, government intervention in all economic affairs has become indispensable. All governments, especially of the developing countries face problems such as unemployment, inflation, overpopulation etc. Proper knowledge of these aggregates is essential in framing and formulating the policies to solve these problems.

Micro analysis: Macro approach provides basis for the micro-economic analysis that helps to verify the behavior of individual units. Multi-dimensional study: Macro economics deals with the problems relating to total output, employment, national income etc.. Study of these variables is helpful to the state in initiating necessary measures to control fluctuations in them.

National Income: Macro-economics studies

national income accounting and also the causes of its fluctuations. National income data are useful in forecasting the level of economic activity. It is also useful in understanding the distribution of national income in the economy.

Growth models: In the postkeynesian period, General Theory of Keynes became very popular and its application in the economic development proved very effective.

 Monetary Policies: Fluctuations in the demand for and supply of money causes economic stability. Suitable monetary policy helps in solving the problems of inflation and deflation. E.g. RBI announces credit policy very often to control inflation by bringing changes in CRR, Bank rate, Repo rates etc. Fiscal policies: Good taxation policy also helps in economic stability of an economy. Public finance a branch of macro economic deals with this aspect. Effective budgetary policy of the govt. helps in rapid economic growth with stability.

Economic Growth and Economic Development

Quantitative

and qualitative term: Economic growth

refers to increases over time in a countrys real output of goods and services. On the other hand economic development measures progress in terms of socio economic development of an economy. It is more comprehensive in nature. According to Charles P. Kindleberger economic growth refers to rise in output and economic development implies changes in technological and institutional organization of production as well as in distributive pattern of income. Example: Rise in NI, PCI, Employment level etc. indicate economic growth. Whereas Rise in literacy level, Rise in life expectancy of population, reduction in poverty, improvement in the standard of living and standard of life, modernisation of agricultural, industries etc. indicate economic development.

Development

without growth is unimaginable. A substantial rise in a countrys GNP is required before it can hope to expand its industries, financial institutions, trade, public utilities and government administration. Nowhere in the world has the occupational distribution of population changed in the absence of growth. From the welfare viewpoint of the people economic growth alone is not enough for underdeveloped countries; it must be accompanied by development.

According to former World Bank president Robert McNamara about 40% of the developing worlds population did not benefit at all from the economic growth during the 1950s and 1960s. Thus economic growth is accompanied by greater industrialization and greater commercialization, whereas economic development also includes structural changes in the economy and includes the measurement of benefit of economic growth accruing to all. In India only the educated middle class in benefited from rapid economic growth in recent days.

Features of Indian Economy

The Indian economy is characterised as an underdeveloped economy. Though, it no longer suffers from stagnation as it did under the British rule and there have been structural changes in the economy since freedom, almost all important characteristic feature of an underdeveloped economy have not changed much since independence.

Low Per Capita Income:

According to World Development Report 2008, India was one of the 45 low income economies in 2006. Per Capita GNP was higher in all the middle and higher income economies than in India. In 2006, Indias Purchasing Power Parity estimate of GNP per capita was as low as $3,800. It was around one-twelfth of the U.S.A. which was $44,260.

Inequitable distribution of income:

Income inequalities result from the concentration of wealth in the hands of few. In 1997, according to WDR 2000/01, while the lowest 40% households accounted for 19.7 per cent of aggregate households expenditure in India, the share of top 20 per cent as large as 46 per cent. In the middle category 40 per cent households at modest level of living accounted for 34.3 per cent of the aggregate household expenditure.

Widespread Poverty:
The problem of poverty results due to income inequality. According to Sixth plan, the overall percentage of the people below the poverty line had declined to 36.0% in 1993-94 while the incidence of poverty was 37.3% in rural areas and 32.4% in urban areas. According to National Sample Survey 61st round, the poverty ratio was 27.5% at the national level in 2004-05. According to TOI report published on 22nd september10, 37% population still lives below poverty line. 46% children are underweight. 35% population does not have an access to toilets. 283 people per one lakh population suffers from TB.

Predominance of agriculture:
Occupational distribution of population in India reflects the economic backwardness of the economy. In 1951 about 70% of the population of the country was dependent on agriculture. Since then little change has occurred in the situation. In 1951 around 69.7% of the working population was employed in agriculture. In 2001, 56.9% of the main workers were employed in agriculture and allied activities. Thus agriculture still remains the biggest employer in India.

GDP by Industry of Origin in 2006 (percentage) Source: World Bank, World Development Report 2008.

Country

Agriculture

Industry

Service

U.K.
USA Germany China Indonesia India

1
1 1 12 12 18

26
22 30 47 42 28

73
77 69 41 46 55

Widespread Unemployment:
The nature of unemployment in India is different from that in developed countries. Most of the cases of unemployment in India is chronic in nature which results due to structural defects in the economy. People in a large number in the countryside do not have adequate work throughout the year and many of them suffer from disguised unemployment for long periods. According to Ragner Nurksey, if some of these people are removed from agriculture and absorbed in other productive activities, farm output may not fall, while the national income will increase due to their productive activity in the absorbed sector.

Rapid population growth and high dependency ratio:

According to the estimates of Census 2001, the population of India was 102.5 crores. During 1961 and 2001, growth rate of population was 2.14% p.a. India has passed through the second stage of demographic transition causing population explosion. In 1999-00 percentage of population of working age (15-64 years) was 63.8%. Growth rate of employment is poor.

Low level of Human development:

The HDI is a composite of three basic indicators of human development- longevity (life expectancy at birth), knowledge (educational attainment by a combination of adult literacy) and standard of living (measured by real GDP per capita).

HDI value and Ranking of selected Developed and Developing countries, 2009
Country Developed countries Norway Japan U.S.A. U.K. Developing countries Cuba China India Bangladesh 0.863 0.772 0.619 0.547 51 81 128 169 0.971 0.960 0.956 0.947 1 8 12 16 HDI value HDI Rank

Source: UNDP: Human Development Report 2007/08.

Above 0.9 is very high. Between 0.8 and 0.9 is high. Between 0.5 and 0.8 is medium. Below 0.5 is low. India falls in the category of Medium Human development countries.

Poor Capital formation :

In 1950-51, the gross saving-investment rate in this country was around 8.9%. At such a poor rate of capital formation, the country could not hope to record any impressive economic growth. According to the estimates of Central Statistical Organisation, in 2001-02, the rates of gross domestic saving and gross domestic capital formation were estimated to be 23.5 and 22.8% respectively which is just enough to achieve modest growth. As against India, some of the East Asian countries have been able to maintain much higher rates of saving and investment consistently for a number of years at 35% of GDP and this has enabled them to achieve much higher rates of economic growth.

Technological Backwardness:
While technological progress is at the heart of development process, over a wide range of productive activity, techniques of production are backward in India. Except in the green revolution belt of the country everywhere else farmers are persisting with centuries old outmoded production techniques. However, in large-scale industries, energy, transport and communications sectors modern production techniques have been introduced. Nevertheless there is still a wide gap between the sophisticated production techniques of the developed countries and Indias technology.

Lack of Entrepreneurs:
According to Joseph Schumpeter, the function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way by opening up a new source of supply of raw materials or a new outlet for products, by reorganising an industry and so on. Obviously these activities require aptitudes that are present only in a small fraction of population. JRD Tata and Dhirubhai Ambani still remain the role models and it is difficult to name any other entrepreneur in the industrial sector.

National Income : National Income is the money value of all final outcome of all economic activities by the people of a country. Macro economic analyses different concepts of national income mainly Gross National Product (GNP) and Gross Domestic Product(GDP).

Gross National Product

The Gross National Product (GNP) is defined as the sum of all final goods and services produced in a country during a specific period of time, generally one year. The market value of the final national product is the money value of all final goods and services. The market value of the national output is obtained at both constant and current prices. Accordingly, GNP is known as GNP at constant price and GNP at current prices respectively. GNP can also be defined and measured as the sum total of all factor payments (wages, interest, rent, profit and depreciation). It is then called GNP at factor cost. GNP = Market value of final goods and services (including both consumer and capital) + incomes earned by the national residents in foreign countries minus incomes earned locally but accruing to foreigners.

Gross Domestic Product (GDP)

The Gross Domestic (GDP) is another measure of national income which often figures in macro economic analysis and policy formulations. The concept of GDP is similar to that of GNP with a significant difference. The concept of GNP includes the income of the resident nationals which they receive abroad, and excludes the incomes generated locally but accruing to the non-nationals. GDP = Market value of goods and services produced by the residents in the country Plus incomes earned in the country by foreigners minus incomes earned by residents of a country from abroad.

National income during Five Year Plans

The average growth rate of national income since planning has been 4.24%. National income has been rising at a rate which is distinctly higher than the population growth rate. As a result there has been improvement in the capital formation and per capita consumption of our country.

First Plan (1951-56): Annual average growth rate was 4.4% (1999-00 prices). Growth was steady and satisfactory. Second Plan (1956-61): The rise in national income was not satisfactory as it was 3.8%.

 Third Plan (1961-66): The annual average growth rate was only 2.6%. It was just sufficient to neutralise the growth of population. It was mainly due to severe drought and slow down of the business in the country. This plan also witnessed Indo-China war which affected the economy. Fourth Plan(1969-74): The average annual growth rate declined to 3.1%. The rise in prices of petroleum oil, severe inflation, fall in the production etc. were the causes of slow growth.

 Fifth Plan (1974-78): The average annual growth rate was 4.9%. It was a satisfactory growth rate. In 1979-80, there was a decline in National Income by 6% and economy suffered a setback in these two years. Sixth Plan (1985-90): Average annual growth rate was 5. 4%. It is not a realistic growth as the base year chose was 1979-80 when economy was facing problem of price rise and slow down. Seventh Plan (1985-90): The average annual growth rate was 5.5% p.a. This growth was appreciated and it was mainly due to satisfactory performance of agriculture and manufacturing sectors.

Seventh Plan (1985-90): The average annual growth rate was 5.5% p.a. This growth was appreciated and it was mainly due to satisfactory performance of agriculture and manufacturing sectors. Eighth plan (1992-97): Since 1992 there was an improvement as growth rate was 6.7%p.a. It was mainly due to high growth rate in agriculture, manufacturing, construction, electricity, trade and transport. Ninth Plan (1997-2002): The average annual growth rate was lesser than eighth plan at 5.3%.p.a. The main cause for decline was poor performance industrial sector.

Tenth Plan (2002-07): The growth rate was impressive at 7.8% p.a. The reasons for good performance of the economy was mainly due to heavy inflow of foreign capital, rise in government expenditure, liberalization of imports, efficient management of fiscal and current account deficit through external commercial borrowings. The good performance of service sector is also main contributor for high performance during this plan.

LIMITATIONS: Despite improvement in the economic growth rate India is lagging behind in many areas due to following reasons: Still 28% population suffers from poverty. Unemployment still a severe problem. Imbalanced regional growth. E.g. Bihar, Assam, Orissa and several other states remain undeveloped whereas Punjab, Andhra, Karnataka, Maharashtra, Gujarat etc. are developing at much faster rate. There is a lack of social security measures such as medical facilities, unemployment allowance, old age pension and several other relief measures which other Asian developing countries also provide. The deficiencies in primary education, primary health care, safe drinking water, sanitation etc. still exists in the economy.

International Comparison WDR 2005

Country Norway USA PCI $9590 $43740

China
Srilanka India Pakistan

$1740
$1160 $720 $690