Macroeconomics examines aggregate economic measures for entire economies, such as total output, income, spending, employment and prices. It analyzes topics like economic growth, inflation, recession and the effects of fiscal and monetary policy. Microeconomics looks at individual agents and markets. Macroeconomics deals with economy-wide phenomena and seeks to understand how the whole economic system functions.

1. Macroeconomics
GDP, Income and Growth

2. Microeconomics vs. Macroeconomics
Microeconomics examines the behavior of individual
decision-making units—business firms and households.
Macroeconomics deals with the economy as a whole; it
examines the behavior of economic aggregates such as
aggregate income, consumption, investment, and the overall
level of prices.
• Aggregate behavior refers to the behavior of all
households and firms together

3. Macroeconomics Deals with….
Total output of goods & Services
Growth of output
Rate of Inflation
Rate of unemployment
Balance of Payment
Exchange rate

4. The Goals of Macroeconomic Policy
Ex:
Full employment
High living standards
Price stability
Reduction of economic inequality
Rapid economic growth
Steady foreign exchange position

5. Analyzing Strength of the Economy
National Product and Domestic Product
Aggregate Consumption
Gross Domestic Savings
Gross Domestic Capital Formation
Wholesale Prices, Consumer Prices, and Inflation
Employment Level
Balance of Payments
Economic Growth Rate

6. Limitations of Macro Economics
It doesn’t give the correct pictures of functioning of the economy
 It doesn't provide solution to certain economic problems.
Macro economic predictions are not fully reliable when they are based
on incomplete information or inaccurate measures.
Macroeconomics ignores the structural changes in the basic elements
of the aggregate.

7. Issues Addressed by Macroeconomists
• What determines a nation’s long-run economic growth?
• What causes a nation’s economic activity to fluctuate?
• What causes unemployment?
• What causes prices to rise?
• How does being a part of a global economic system affect nations’
economies?
• Can government policies be used to improve economic
performance?

8. Business Cycle
Business cycle is the more or less regular pattern of
expansion (recovery) and contraction (recession) in
economic activity around the path of trend growth.
Trend line provides an estimate of the path of potential
output, which is the productive capacity of the economy.

11. Cycles of key macroeconomic variables

12. The Business Cycle and the Output Gap
Business cycle is the pattern of expansion and contraction in
economic activity around the path of trend growth
•Trend path of GDP is the path GDP would take if factors
of production were fully utilized
Deviation of output from the trend is referred to as the
output gap
•Output gap ≡ actual output – potential output
•Output gap measures the magnitude of cyclical deviations
of output from the potential level
1-12

14. Gross Domestic Product(GDP)
To measure the output of any economy, Gross Domestic Product
(GDP) is the most comprehensive estimate.
It is the market value for all final goods and services produced within
a given period of time by factors of production located within the
country.
GDP is concerned only with new and current production .
GDP also excludes output produced abroad by domestically owned
factors of production.
Intermediate goods (those goods that are produced by one firm for
use in further processing by another firm) are not counted in the GDP.

15. Gross Domestic Product
Is the total market value of all final goods and services produced
within a given period by factors of production owned by a country’s
citizens regardless of where the output is produced.
Market value of goods and services produced by the residents in the country xxx
Plus: incomes earned locally by foreigners xxx
minus incomes received by the nationals from abroad xxx
Gross domestic product xxx

16. Gross National Product (GNP)
The gross national product (GNP) is defined as the sum of market value of
all final goods and services produced in a country during a specific period
of time, generally one year.
 Market value of domestically produced goods and services xxx
Plus: incomes earned by the national residents in foreign countries xxx
Minus: incomes earned locally but accruing to foreigners xxx
Gross National product xxx

17. • Y=C+S – Two sector economy- H/S and P/s
• 3= Government - Example
• 4= F/ Sector - Key- G/S- Money market
• S=I
• Y=E=p
• = C+I

18. Nominal versus real gross National product (GNP)
GNP is estimated at both current and constant prices
NOMINAL GNP
The GNP estimated at current prices is called nominal GNP- all
components of GNP valued at their current prices.
 REAL GNP
GNP estimated at constant prices in a chosen year ( base year ) is called
Real income. GNP adjusted for price changes is called Real GNP

20. Gross domestic product in constant prices
growth rate

22. PER CAPITA GDP/GNP
A country’s GDP or GNP divided by its population.
It is a better measure of well-being for the average person than total
GDP or GNP.
In 2017, GDP per capita for Sri Lanka was 4,085 us dollars. GDP per
capita of Sri Lanka increased from 1,028 US dollars in 1998 to 4,085
US dollars in 2017 growing at an average annual rate of 7.77 %.
GDP per capita was estimated at Rs. 688,719 in 2019, compared to
Rs. 662,949 in 2018, which is an increase of 3.9 per cent in 2019 in
comparison to the increase of 6.7 per cent in 2018

25. According to the World Bank data, Sri Lanka’s
GNI per capita has increased from USD 3,840 in
2017 to USD 4,060 in 2018. As per the new
classifications, upper-middle income economies
are defined as those with a GNI per capita
between USD 3,996 and USD 12,375.

26. What is national income?
National income is the sum of wages, rent , interest and profit or the
sum of the earnings of the factors of production”(Shapiro).
 National product is the net output of commodities and services
flowing during the year from the country’s productive system into the
hands of ultimate consumers or into net addition to the country’s
capital goods” (Simon Kuznets).
http://www.yourarticlelibrary.com/notes/national-income-definition-
concepts-and-methods-of-measuring-national-income/30801

28. It is defined as the value of all final goods and services
produced by the normal residents of a country, whether
operating within the domestic territory of the country
or outside, in a year.
What is national income? Cont’n

29. Measuring National Income
• There are three basic approaches to measurement of National Income.
1. Output Method
2. Income Method
3. Expenditure Method
• Output Method
• The entire economy is considered as an aggregate of producing units,
combining of different sectors such as agriculture, mining,
manufacturing, trade and commerce etc.

30. • Income Method
• National Income is calculated by adding up all the incomes accruing to the
basic factors of production used in producing the national product. Factors
of production are conventionally classified as land, labour, capital and
entrepreneurship. Accordingly, the national income equals the sum of the
corresponding factor earnings.
• Factor income = Rent+ Wages+ Interests+ Profits
• Expenditure Method
• In finding the national income total expenditure total expenditure on final
product and services are calculated. Therefore this is also known as final
production method. Expenditure on intermediately goods is omitted.

31. • NI is a flow concept. It is the flow of goods and services. A
flow is a quantity which is measured over a period of time.
• It tells us how many rupees worth of goods and services are
flowing in the economy per unit of time.
• Conventionally, NI is expressed over one year.
Flow

32. Circular Flow of Income
The Economy is divided into four sectors
Household sector
Business sector or firms
Government sector
Foreign sector
These four sectors are combined to make the three models.
Two-sector model
Three-sector model
Four-sector model

33. Interaction and inter-dependence between various
economic activities like production, exchange and
consumption is called the circular flow of income.
National income is a flow concept.
Production give rise to Income which gives rise to
Consumption/Expenditure and expenditure gives rise to
income again.
It goes on continuously and indefinitely in a circular
way; it has neither any beginning nor any end.
Circular Flow of Income

34. •Thus, CFI is defined as the flow of payments and
receipts for goods and services and factor services
between different sectors of the economy.
Flows:
Real Flows
Flow of factor services
Flow of goods and services
Money Flows
Circular Flow of Income

35. Producers Households
The Circular Flow Model in 3 Sector Economy
Money / Finance
Saving
Borrowing
Transfer Payments
Consumption Expenditure
Government
Taxes
Expenditure on Goods & Services
Taxes
Borrowing
Saving
Saving
Borrowing
Subsidies
Factor Payments

36. The Government Sector
Government taxation (T) reduces households’ disposable
income and business funds

Government spending (G) includes expenditure on collective
goods and services and goods and services provided by the
business sector, plus transfer payments

37. Savings and Investment
If planned (I+G) = planned (S+T)
so that injections = leakages
and total spending = total income
and demand = supply
thenwe have a stable economy

38. Withdrawals and Injections of circular flows
Leakages (withdrawals) from the circular flow
Not all income will flow from households to businesses directly.
The circular flow shows that some part of household income will
be:
I. Put aside for future spending, i.e. savings (S) in banks
accounts and other types of deposit
II. Paid to the government in taxation (T) e.g. income tax
III. Spent on foreign-made goods and services, i.e. imports (M)
which flow into the economy

39. Withdrawals and Injections of circular flows
Injections into the circular flow are additions to investment,
government spending or exports so boosting the circular flow of
income leading to a multiplied expansion of output.
I. Capital spending by firms, i.e. investment expenditure (I) e.g. on
new technology
II. The government, i.e. government expenditure (G) e.g. on the
education, defence
III. Overseas consumers buying UK goods and service, i.e. SL export
expenditure (X)

40. Contracting Economy
If leakages are Higher than injections (Planned S+T >
Planned I+G), economy contracts resulting in
inventory accumulation
too little spending
drop in prices

41. Expanding Economy
If injections are Higher than leakages (Planned
I+G > Planned S+T), economy expands
resulting in
more goods and services produced
higher prices

42. Producers Households
The Circular Flow Model in 4 Sector Economy (Open Economy)
Money / Finance
Saving
Borrowing
Government
Borrowing
Saving
Govt. Consumption Expenditure
Transfer Payments
Taxes
Transfer
Payments
Taxes
Borrowing
Saving
Rest of the World
Export
Receipt
Import
Payment

43. S + T + M = I + G + X equilibrium
S + T + M > I + G + X contraction
S + T + M < I + G + X expansion
The Open Economy

44. Sri Lanka Annual Inflation Rate

45. Government Debt as a Share of GDP

47. Sectorial Composition of Approved Foreign Direct
Investment in Sri Lanka, 2005–2015 ($ million)
0
200
400
600
800
,000
1
,200
1
1 ,400
,600
1
1 ,800
2008 2009
2005 2007
2006 2010 2013
2012
2011 2014 2015
Manufacturing Agriculture Infrastructure Services

48. Industry Composition of Foreign Direct
Investment in Manufacturing, 2005–2015 ($
million)

49. • Y=E
• Y =C+I
• C=

50. Consumption function
The consumption function is a functional statement of relationship
between the consumption expenditure and its determinants..
• Ct = C0 + cYt
Ct = Consumption at time t
CO = Autonomous consumption
cYt = Induced Consumption
Behavior of consumption functions
7/31/2022 50

51. Review questions
I. Define and Explain Circular Flow Income and Expenditures
diagram in a simple two sector economy.
II. Answer the following macroeconomic model wherein;
Y = C + I + G + NX equilibrium condition in
macroeconomic model
C = 300 + 0.70Y consumption function (C = C0+cYd),
where c is MPC
I = 1,500 planned investment function
G =1,250 government purchases function
NX = -200 net export function
Find the value of Real GDP (Y) by solving above macroeconomic
model?

52. • Y = C + I + G + NX
• Y= 300+0.7Y+1500+1250-200
• Y= 2850+0.70Y
• Y=2850+0.70Y
• Y-0.70Y=2850
• 0.30Y=2850
• Y= 2850/0.30= 9500/
• C= 300+0.7x9500= 6950 Y=E 9500=(6950+1500+1250-200)
• 9500= 9500

53. Review questions
iii. The fundamental equations in an economy are given as:
Consumption Function C = 300 + 0.8Yd
Investment Function I = 200
Tax T = 150
Government Expenditure G = 250
Exports X = 150
Imports M = 0.05Y
Find the following.
a) The equilibrium level of income
b) The net exports

54. Important links
ADB
https://www.adb.org/countries/sri-lanka/economy
Central Bank of Sri Lanka
httpwww.cbsl.gov.lk/en/publications/economic-and-financial-
reports/annual-reportss://
https://www.cbsl.gov.lk/en/publications/economic-and-financial-
reports/annual-reports/annual-report-2019
file:///D:/Business%20Economics%20MBA%202020/2019%20importna
t%20data.pdf
Department of Census and Statistics
http://www.statistics.gov.lk/