Macroeconomics

Roots of Macroeconomics:

Adam Smith is considered the father of Economics. He published a book in 1776, stating that the market can function independently without external forces or government interference. He argued that in the market, there is an “invisible hand,” suggesting that individuals can make optimal decisions to fulfill their needs and wants with limited resources.

People accepted Adam Smith’s theory as valid until the economy was functioning well. However, in the 20th century, the Great Depression occurred in 1929, leading to a decrease in GDP, increased unemployment, and the closure of industries. Adam Smith’s theory seemed to fail. Economist John Maynard Keynes argued that government intervention is crucial in the economy. Before the Great Depression, governments mainly focused on welfare, leaving aspects like inflation, GDP, and employment to individuals.

However, John Maynard Keynes introduced Macroeconomics, earning him the title of the father of Modern Macroeconomics.

What is Macroeconomics:

So, firstly, economics means how individuals, societies, and countries can fulfill unlimited needs and wants with limited resources. Similarly, “macro” refers to large. Therefore, when economics is applied on a large scale, looking at the economy as a whole, it is termed as macroeconomics.For instance, we study an individual’s income in microeconomics, while the sum of incomes for all individuals in a country is analyzed in macroeconomics. Similarly, the production of a specific industry in a country is a topic of microeconomics, whereas the total production of all industries across the entire country is examined in macroeconomics.

Scope of Macroeconomics:

Gross Domestic Product:

In a country, the total value of goods and services produced in a year is known as Gross Domestic Product (GDP). It reflects a country’s economic situation, indicating that if a country’s GDP is high, it means the country is producing more. However, it’s important to note that GDP includes the prices of final products and does not incorporate the prices of raw materials for any specific product.

For example, when a bakery purchases eggs, the price of the eggs is not directly added to GDP; instead, it is included in the final product, like a cake or bakery item.

There are two types of GDP: nominal GDP and real GDP. Nominal GDP increases due to higher production of goods and services, whereas real GDP refers to a situation where the production of goods and services remains the same, but their prices increase.

Inflation:

In simple terms, inflation can be defined as the increase in prices over time. For example, if a product that used to cost 20rs in 2010 now costs 60rs in 2024, the 40rs difference represents inflation. Inflation reflects a decrease in the value of currency. For instance, if you save 1000rs today, thinking of using it after 5 years, what could be bought with that amount today may not be possible due to inflation, as the currency’s value is gradually decreasing. In some countries, coins are disappearing, with many now only found in museums, illustrating the impact of inflation on the value of currency.

Inflation can be further explained as the persistent increase in the prices of everyday goods and products. However, it’s important to note that the price increase of a single product or service alone doesn’t constitute inflation. Inflation is characterized by a general and sustained rise in the prices of multiple products and services. It is only termed as inflation when there is an overall increase in the prices across a range of goods and services.

Indicators of Inflation:

Inflation is measured through two methods: WPI (Wholesale Price Index) and CPI (Consumer Price Index). WPI is used when inflation is primarily due to an increase in the prices of goods. On the other hand, CPI is employed when inflation results from increases in both goods and services prices.

Types of Inflation:

Demand pull inflation:

When people have more money, leading to an increase in aggregate demand, and the overall supply in the country is limited, it results in demand-pull inflation. For instance, if a new phone is launched in the market with limited stock, but many people have substantial money, a surge in demand for the phone will occur, causing its price to increase. This situation exemplifies demand-pull inflation.

Cost push inflation:

This type of inflation, where the increase in the price of a product is due to a rise in the cost of its raw materials, is known as cost-push inflation. For example, if a pizza originally priced at 100rs sees an increase to 120rs due to the rising cost of the cheese used in it, this price hike is attributed to cost-push inflation..

Unemployment:

In a country, those individuals who are actively seeking employment but have not yet found a job or work are referred to as the percentage of people experiencing unemployment. Unemployment shows the reputation and standard of living of a country.

Types of Unemployment:

Disguised Unmployment:

Those individuals who are working but their contribution to production is minimal are said to be experiencing disguised unemployment. For example, consider a factory with 5 workers producing 100 units. If an additional 3 workers are hired, but the production remains at 100 units, this situation is termed as disguised unemployment.

Frictional Unemployment:

This type of employment is inherent in every country. The transitional period between leaving one job and searching for another is termed as frictional unemployment. Additionally, the period when a fresh graduate is searching for their first job is also referred to as frictional unemployment.

Structural Unemployment:

This is a type of unemployment that is quite normal; it occurs when someone’s job is replaced due to the introduction of new technology. For example, if graphic designers become unemployed due to the advent of artificial intelligence, this situation is referred to as structural unemployment

Cyclical Unemployment:

Often, we have observed that if a business is facing losses, many people are laid off from their jobs. When unemployment occurs due to an economic recession, it is termed as cyclical unemployment.

Seasonal Unemployment:

The occurrence of unemployment due to the changing seasons is termed as seasonal unemployment. For example, if someone opens an ice cream shop in the summer but has to close it during the winter, the unemployment caused by the change in seasons is referred to as seasonal unemployment.

Macroeconomics, as a branch of economics, is crucial for effectively managing a country. Even leaders such as Prime Ministers, Presidents, Chief Ministers, etc., should have a strong understanding of macroeconomics. By utilizing macroeconomic principles and analyzing key factors, a country’s conditions can be improved. When the main components in macroeconomics are studied effectively, a country can be governed more intelligently and efficiently, leading to better outcomes.

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