Sharq Institute of Higher Education

Faculty of Economics
Department of BBA

Macroeconomics
For 3rd Semester

Course Instructor: Mr. Mohammad Mobin Ahmad Yar

Year: 2025

Macroeconomics course
outline
Chap-1:- National Income and its Measurement.
Chap-2:- Aggregate Consumption and Saving.
Chap-3:- Investment Multiplier.
Chap-4:- International Trade.
Chap-5:- Theory Public Finance.
Chap-6:- Money and Banking.
Chap-7:- Inflation and Unemployment.
Difference between:

Micro
and
Macro
Economics.
 Microeconomics
• Micro is a Greek word which means small.
Microeconomics is a branch of economics which deals
in small or individual parts of economy such as
individual income, consumption, demand, supply of
individual firm or seller and consumer behavior [Link]
other words .The study of an individual unit, firm and
industry is called micro economics. Its also called as
price theory.
 Macroeconomics
• Macro is also a Greek word which means large.
Macroeconomics is the aggregate study of economy
as whole. In other words macroeconomics deals in
economic activities of a country on large scale such as,
national income, aggregate consumption, national
saving and investment, international trade, inflation
and unemployment of a country etc. macro is like a
tree of economics while micro is the branch of that
tree.
 Chapter 1
National Income and its
Measurement

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 Chapter outline
• Meaning and definition.
• Various concept of NI.
• Three approaches used to measure NI.
1. Product approach
2. Income approach
3. Expenditure approach
• Difficulties and precautions in measuring NI.
• Circular flow of NI.

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 Definition to NI
• National income is the total sum of incomes
of all individuals plus income of the
government in a country.
or
National income is the money or market value
of all goods and services produced by the
people with the economic resources of a
country in addition to foreign remittances
during one year.

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 Some important steps to be
remembered.
• National income is measured for
one year.
• Only the money or market value of
output is to be calculated not the
physical quantity.
• National income does not include
the income earned from illegal
activities such as smuggling,
kidnapping, theft etc.

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 Various concepts of NI
• Following are the various concepts of
national income which are given as under
1. GDP or ( Gross Domestic Product)
2. GNP or ( Gross National Product)
3. NNP or ( Net National Product)
4. National income at factor cost.
5. PI or ( Personal Income)
6. DPI or ( Disposable Personal Income)

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 GDP or ( Gross Domestic Product)

• GDP shows the money value of all f inal goods

and serv ic es p rod uc ed only within the
geographical boundaries of a country either by
nationals of that country or foreigners during one
year.

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• GDP (Y ) is the sum of the following:
– Consumption (C)
– Investment (I)
– Government Purchases or spending (G)
GDP = Y = C + I + G

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 Nominal GDP vs Real GDP
• Nominal GDP: the marker value at current price of nationals out of goods and services.
• Afghanistan nominal GDP in 2014

Afghanistan’s Quantity produced Price in 2014 Total value of output

Output in 2014 in 2014 in2014(Q×P)

Cheese 10 2 Afs 10×2=20 Afs

Chocolate 15 2 Afs 15×2=30 Afs

Watches 5 10 Afs 5×10=50 Afs

Nominal GDP in 2014 100 Afs

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Afghanistan Nominal GDP in 2015
Afghanistan’s Quantity produced Price in Total value of
Output in 2015 in 2015 2015 output in2015(Q
×P)

Cheese 13 3 39

Chocolate 19 5 95

Watches 5 11 55

Nominal GDP in 189

2015

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Real GDP
• Real GDP: the value of a nation’s output of
goods and services in a particular adjusted for
changes in the prices of goods and services
from a base year.
• The quantity of output in the current year
multiply price of the output in base year.

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 Conti….
• Real GDP:
• (Current quantity ×previous price or base year
price)
Afghanistan’s Quantity Price in Total value of
Output in produced 2015 output in2015(Q×
2015 in 2015 P)

Cheese 13 3 39(13×2)=26

Chocolate 19 5 95(19×2)=38

Watches 5 11 55(5×10)=55

Nominal GDP Nominal GDP in

in 2015 2015 is 189 and
real GDP is 119

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Conti…
• The GDP deflator: simple measure the nominal
GDP divided by real GDP in a particular year.
• Or
• GDP deflator =nominal GDP/real GDP
• Nominal GDP in 2015 (189)
• Real GDP in 2015 (119)
GDP deflator =189/119 =1.58823×100 =158.82
what tell us this number
• Inflation: 158.82-100/100=0.5882×100=58.82%
inflation

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GNP or ( Gross National Product)
• GNP or Gross national product is the money value of
all f inal goods and services produced by the people
within and outside the country for one year.
GNP = GDP - incomes earned by the foreigners working
in that country + incomes earned by nationals of that
country working abroad.

GNP = GDP + Foreign remittances – foreigners earning

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• GNP (Y ) is the sum of the following:
– Consumption (C)
– Investment (I)
– Government Purchases or spending (G)
– Exports

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• Consumption (C):
• The spending by households on goods and
services.
• Investment (I):
• The spending on capital equipment, inventories,
and structures, including new housing.

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• Government Purchases (G):
• The spending on goods and services by local, state,
and federal governments.
• Net Exports (NX):
• Exports minus imports.

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 NNP or ( Net National Product)

• NNP is the net market or money value of all

output after deducting depreciation allowances
from GNP. In producing GNP we consume or use up
some capital like equipment's and machinery, these capital
goods falls in its value due to wear and tear in the
production process.
This wear and tear of machines is called depreciation.
For keeping these machines in working order we keep
an amount which is called depreciation allowance.

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 CONT`D

• Thus :

NNP = GNP – Depreciation allowances

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 PI or ( Personal Income)

Personal income =Net National Product–

Corporate income tax – undistributed profit +
transfer payments ( pension, old age benefits,
unemployment fund etc.)
In personal income of an individual direct taxes
are also included such as income tax.

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DPI or ( Disposable Personal Income)
• DPI is the amount which is left with
individuals after paying direct [Link] is the
money income which individuals can either
spend or save as possible as they can
according to their needs and wants.
DPI = Personal income – Direct tax.

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PRODUCTION OR OUTPUT
Expenditure
Income Method METHOD
Method

MEASUREMENT OF NATIONAL
INCOME
There are three methods which are used to
measure National Income:

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 PRODUCTION METHOD
The national income is calculated by adding up the net values of all
production that has taken place in different sectors of economy during a
year.
in this method the economy is divided into various sectors such as….
 Agriculture
 industry
 Infrastructure
 Banking
 Health
 Education
 Transport and communication etc.

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 CONT`D
The net market or money value of all these sectors is added
and the result is coming as national income.
Example…..
production sectors Net value (billions)
Agriculture 340
industry 210
Trade 290
Transport & communication 200
Health & education 250
Banking 160
NATIONAL INCOME 1450

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INCOME METHOD OR NI AT FACTOR
COST
• In this method the income of all individuals in a
country is calculated which they earn in return of
services they provide for four factors of production
such as,
Land, Labor , Capital and Entrepreneurship
Thus national income is the sum total of Rent,
Wages, Interest and profit which are received by
people from four factors of production.

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 CONT`D

FOPs = land + Labor + capital + Entrepreneur

and

N.I = Rent + Wage + Interest+ Profit

Pgs. 169-171 30
 CONT`D

Example:
Source of income Amount (billions)
Wages and salaries 400
Rent 300
Interest 320
Profit 450
National income 1470

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 EXPENDITURE METHOD

National income can also be measured by adding

the total expenditure made by the people and
government on consumption of goods and
services and investment in a country during a year.

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 CONT`D
Example:
Expenditure Amount (billions)
Private consumption exp 400
Private domestic investment 200
Government consumption 350
Government investment 300
Export minus import 150
National Income 1400

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 Circular Flow of National Income in
two Sector Economy
The modern economy is monetary economy. In the modern
economy money is used as medium of exchange. While
analyzing the circular flow of income in two sector model of the
economy, we assume:
• There are only two sectors in economy
Household sector and
Business sector
The business sector hires the service of factors of production
owned by household sector and pays for those services in terms
of wage, rent and interest to household sector.
The household sector buys goods and services from business
sector and spends its entire income on consumption
in this way the income of household sector become the revenue
of business sector and national income circulates.
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 MARKETS
Revenue FOR Spending
GOODS AND SERVICES
•Firms sell Goods and
Goods
•Households buy services
and services
sold bought

FIRMS HOUSEHOLDS
•Produce and sell •Buy and consume
goods and services goods and services
•Hire and use factors •Own and sell factors
of production of production

Factors of MARKETS Labor, land,

production FOR and capital
FACTORS OF PRODUCTION
Wages, rent, •Households sell Income
and profit •Firms buy
= Flow of inputs
and outputs
= Flow of dollars

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Copyright © 2004 South-Western
 Difficulties in measuring NI

• Inadequate statistical data:

In under-developed countries since scientif ic methods
of collecting data are not used, so accurate information
is not obtained and NI is under estimated.
• Lack of trained staff:
Most under-developed countries do not have trained staff
for data collection which leads to the problem of
estimating exact NI.

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 CONT`D

• Illiteracy :
Due to illiteracy, most of the producers do not maintain
proper records of production, cost and income which
leads to under estimated NI.
• Many sources of income:
Some people get their incomes from many other sources
It is very dif fic ult to compute their income from different
sources and in this way the exact figure of NI is mislead.
• No-cooperation of the people:
In most of under-developed countries, people do not
cooperate with data collecting staff.

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 CONT`D

• Non-marketed goods and services:

In estimating the national income, only those goods
and services are included for which the payment is
made the unpaid or non-marketed goods and services
are excluded such as production for self consumption,
help or volunteer etc
• Under-ground economy:
In under-developed countries, about 30% of the
economy is under-ground the of fic ially declared
incomes are less than the actual incomes.

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 Significance of NI
• It seeks to measure the level of production in
the country in one year.

• We can know whether the economy is growing,

declining or stagnant by comparing it with the
previous years .

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 CONT`D
 National income shows contributions by
various sectors of economy.
 Living standard and economic welfare of the
people can be compared with other countries.

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Quiz # 1 Marks (5)

• Q1:
• Q2:
• Q3:

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