MEANING OF CIRCULAR FLOW OF INCOME

     Production is a continuous process in an economy.Various factors of production like land,labour,capital and entrepreneurship are combined together for the production of goods and services.The supply of these factors of production comes from household sector.The factors offer their services to the producers(also known as firm)who in return produce goods and sevices.They make payments as reward in the form of rent,wages,interest and profit.They household sector spends this money on goods and services produced by the films.Thus,income or money first folws from  the firms to the  households in the form of factors payments and then from households to the firm to the form of consumption expenditure.The income continous to flow.In short,this type of economic activity remain in action with the help of circular flow of money and goods in four sectors:
1. Household sector
2. Producing sector
3. Government sector
4. Foreign sector
    Thus,circular flow of income and product is defined as the flow of payments and receipts for goods and services and factors services between sectors of the economy.

MEANING AND CLASSIFICATION OF VARIABLES

    Meaning:-
                     In simple words,a variable is a quantity or magnitude which varies during a specified time period given. It can be defined as per oxford dictionary of economics
                     'A quantity which is liable to change is known as variable.' For example, these variables are like price, interest rates, income levels, quantity of goods etc. Generally these variables take different possible values which go on increasing or decreasing.
  classification of variables:-
       Variables may be classified into two parts as under:
        1. Independent and dependent variables.
        2. Exogeneous and endogeneous variables.
      Let us explain these two types of variables
      (i) Independent and dependent variables:- The independent variables refers to those variables manipulated or changed while dependent variables provide observed results of independent variables being manipulated.For example, in demand theory price is independent variables and quantity demanded is dependent variable.In this case, we see that when an experiment is conducted, some variables are manipulated by the experimenter and consequently measured from the subject. Therefore, former variable is called independent variable while the latter is known as dependent variables.
      (ii) Exongeneous and endogeneous variables:-Exogeneous variables refers those which are determined or set outside the model.These are contrasted by exogeneous variables which are determined by inside the model.So,the value of the endogenous variables will change the exogeneous variables changes.

DIFFERENCE BETWEEN MICRO AND MACRO ECONOMICS

            The main differences between micro and macro economics are given below:-

MICRO ECONOMICS:-
1.Evolution of micro economics took place earlier than macro economics.
2.It is branch of economics,which studies individual economic variables like demand,supply,price etc.
3.It has a very narrow scope i.e. an individual,a market etc.
4.Demand,supply,market forms etc.relate to micro economics.
5.It is helpful in analysis of an individual economics unit like firm.
6.Theory of demand,theory of production,price determination theory etc.develop from micro economics.

MACRO ECONOMICS:-
1.It evolved only after the publication of keynes'book.Genral.theory of employment,interest and money.
2.It is a branch of economics which studies aggregate economic variables,like aggregate demand,aggregate supply,price level etc.
3.It has a very wide scope i.e. a country.
4.Aggregate demand aggregate supply,national income etc.relate to macro economics.
5.It is helpful for analysing the level of employment,income,economic growth etc.
6.Theory of national income,theory of employment,theory of money,theory of genral price level etc.develop from macro economics.

BASIC CHARACTERISTICS OF MACRO ECONOMICS

            The basic features of macro economics are discussed as below:-
1.Short-run period:-Macro economics deals with short run period.We have to solve all problems in a short period.In long run period,we all are dead.
2.Study of aggregate or as a whole economy:-Macro economics is a study of aggregate or as a whole economy which consists national income or national output,aggregate consumption,aggregate investment,effective demand,price levels,full employment or less than full employment.It does not study any individuals.
3.Role of state intervention:-Macro economics has laid stree on the role of sate intervention in all walk of life.In order to cope up private sector,role of state is positive.State plays an active role to solve economic problem.State is like balancing factor.Its intervention is not meant to abolish private enterpreneurs.It rather help it to a great extent.
4.Systematic and comprehensive:-Macro economics is a systematic and comprehensive study in all type of environments .Wheather it is inflation or deflation,boom or depression,full employment or under employment.It makes systematic study of all these conditions.
5.Monetary factors:-Classical economists has laid stress on real forces in their analysis.They consider that main function of money was MEDIUM OF EXCHANGE.But macro economics has given importance to monetary factors which makes considerable effect on the determination of income and employment.This happens due to change in demand and supply of money.
6.Role of investment:-Keynes has given important role to investment.Investment refers addition to the stock of goods and creation of new capital assets.According to prof.Dillard,"Macro economics reduced to its simplest states that employment depends upon the amount of investment."

INTERDEPENDENCE BETWEEN MICRO AND MACRO ECONOMICS

       Micro and macro economics are the two sides of the same coin.There is close interdependence between the two.We cannot analyse the individual behaviour without the assuming to aggregate and likewise aggregate cannot be effective unless individual variables are kept under considration.
       Micro economics contributes towards macro economics in a  number of ways as:-
1.Study of economic fluctuations:-Business cycles which are universal in every sector,are influnced by both individuals and aggregate factors.Unless we reveiw both micro and aggergate variables,we can not provide an appropriate solution to business cycles.Therfore to study trade cycles micro and macro economics contribute significantly.
2.Basis of economic laws:-Micro economics acts as a basis macro economics because macro is an aggregate of individual units.The success and accuracy of aggregates depends on the individual units.Similarly,macro theories are used by micro economists.
3.Role in international trade:-In international trade both the approches are used.Economists have developed their theories on the basis of micro economics presuming full emplyoment of resources and mobility of factors mof production.However,modern economists looked on the economy as a whole and recognised the role of aggregates.So genral equlibrium is nothing but an extension of equlibrium of micro economics.
4.Balance of payments and interdependence:-Balance of payments problem is also a burning problem for economy.An individual sector may have favourable balance of payments whereas other sectors,unfavourable balance of payments.On the other hand.the overall position of an economy is to be assessed from aggregate position of all sectors.
5.Theory of tariffs:-Many economists have propounded that modern macro approaches of imposing tariffs with the intenstion of correcting balance of payments position is virtually based on the theory of monopoly.So micro economics has influenced the modern macro economics theory.

ASSUMPTIONS OF MACRO ECONOMICS

      Macro economics is based on following assumptions:-
1.Short period:-Macro economics theories are applicable in short period.In short period,investment can be increased by installing new plants,hiring number of labourers,tastes of the consumer,their habits and fashion remain constant.Lord keynes assumed that the problem of unemployment in developed countries was a short-term problem and not the long run because"in the long run-run we are all dead".
2.Perfect competition:-Macro economics assumes that perfect competitions prevails in the economy.Under the conditions of perfect competitions,there is no external interference in the determination of prices.Prices may increase or decrease according to changes in demand and supply position.
3.Closed economy:-Macro economics assumes that a developed capitalist economy is a closed economy.A closed economy refers to an economy which is free from the influence of foreign trade on income and employment level.
4.Money also acts as store of value:-Macro economics assumes that money is not only a medium of exchange but also a store of value.Therfore,it is not necessary that people must spend all their monetary income soon as they get it.
5.No time lag:-Macro economics assumes that adjustments among different economic variables take place without any time lag.For instance,consumption expenditure of a month depends upon the income of that particular month.It means present consumption is a function of present income.
6.Savings and investment:-Macro economics assumes that savings depends on income.On the other hand,investment depends on the rate of interest.
7.Optimum utilization of resources:-Macro economics also assumes that there is optimum utilization of resources.

TYPES OF MACRO ECONOMICS

       The main types of macro economics are as under:-
1.Static macro:-It analyses certain aggregate relations in stationary state but throws no light on the process by which find equlibrium is reached.It simply deals with the final equalibrium is reached.It simply deals with the final eqalibrium of the economy at a particular point of time.This method gives a 'still' picture of the economy as a whole.
2.Comparative macro statics:-We know that various macro variables like total consumption ,total investment and total income go on changing with the passage of time in an economy.As a result,the economy keeps on reaching different levels of equilibria.Thus,this method of comparative macro economic statics involves a comparitive study of different equilibria attained by the economy by the economy.But this method does not detail the process of adjustment by the economy moves from one equlibrium to another.In short,it present only'still'picture of the various equlibria reached by the economy.
3.Macro dynamics:-This method has recently been developed by frisch,D.H.Robertson,M.Kalechi,Tinbergen and P.A.Samnelson.This is the complete and comprehensive method of economic analysis.
       It studies how the equlibrium in the economy is reached consequent upon changes in the macro variables and aggregates.It enables us to separate 'the process of trial and error into a series of continuously changes of aggregates,the sequence of cause and effect on events arising from some initial disturbance and the time paths of macro-variables and aggregative relationship.It also furnished guidance relating to the practical problems of short and long period economic stability.

IMPORTANCE OF MACRO ECONOMICS

Since the publication of J.M.Keynes,"General Theory of Employment,Interest and Money,in 1936,macro economics has gained greater popularity.

   Mankiw has started,"The study of macro economics can illuminated much about the world and that the lessons learned,if properly applied,can make the world  a better place."

    Therefore,the importance of macro economics is explained under:-

1.Functioning of an economy:-Macro economics helps us to understand the functioning of an economy.It gives bird's eye view of the phenomena of economic universe.

2.Behaviour of individual units:-It also helps in understanding the behaviour of individual units.for eg,demand for individual products depends upon aggregate demand in the economy.

3.Indispensable for accurate knowlege:-Macro economics is indispensable for a proper and accurate knowlege of the behaviour patteren of the aggregative variables.

4.Economic planning:-Macro economics is extremly helpfulto the government in formulating of appropriate economic polices for tackling the problems of inflation,balance of payment,over-population,under-production.

5.Study of national income:-In modern era,almost in all countries,it is only through the study of national income that the economic situation of different countries is known.

6.Change in general price level:-Value of money has been undergoing wide of fluctuations during20th century.Fall in the value of money is called inflation whereas rise in the value of money is called deflation.

7.The role of expectations in economics:-expectations refers to hope of profit in future.Investment is goverend by marginal efficecy of capital.Marginal efficency of capital is governed by expected [rofitability.An entrepreneur will make investment only if he is optimistic.At the same time the concept of liquidity preference is also dependent on future expectations.

LIMITATIONS OF MACRO ECONOMICS

Following are the main limitations of macro economics:-

1.Excessive Thinking:-Macro economics suffers from the limitations that it always excessively thinks in the terms of aggregates and presumes circumstances to be normal and homogeneous but aggregates may result into heterogeneous character.As Prof.Boulding points:
(a) Six apples+Seven apples=Thirteen apples which constitutes a meaningful aggregate.
(b) Six apples+Seven oranges=Thirteen fruits,which constitues a fairly meaningful aggregates.
(c) Six apples+Seven shoes constitutes a meaningless aggregates.
2.Difference in individual items:-Sometimes while aggregating the variables,the basic characteristics of the data or the variables is left untouched because there are important diffrences in the items.Sometimes,the features of individual components may not be true to the aggregate so macro suffers from the danger of excessive generalisation.
3.Unable to influnce society equally:-An aggregative tendency may not influence the entire sectors of the economy in the same way.For example,a genral rise in price as inflation may not similar effects on different sectors of the economy.
4.Contradictory:-In aggregates,sometime the contradictory individual aspects are neutralised as in case of the estimation,prices in agriculture fall,of industrial products rise which have different affects on individual factors but as an aggregate,there may not be any effect at all.Thus,macro aggregate reslts may be misleading.
5.Role of less aggregative analysis:-Aggregates itself suffer from certain serious problems due to statical techniques.The recently introduced computational procedures and programming techniques hane reduced the role of aggregative analysis.

NATURE AND SCOPE OF MACRO ECONOMICS

        The scope of macro economics has been explained as under:-

1.Theory of National Income:-Macro economics studies the concept of national income,its different elements,methods of its measurement and social accounting.

2.Theory of Employment:-It studies the problems of employment and unemployment.There are different factors which determine employment.They are like effective demand,aggregate demand,aggregate supply,total consumption ,total savings and total investment etc.

3.Marco Theory of distribution:-There are macro economic theories of distrubution.These theories try to explain how the national output is distributed among the factors of production.

4.Economic development:-UDC's  are blessed with mass poverty and low per capita income curve for economic development.Economic development is a long run process.In it,we analyse the problems and theories of development.

5.Theory of International Trade:-It also studies principles determing trade among different countries.Tariff's protection and free-trade polices fall under foreign trade.

6.Theroy of Money:- Changes in demand and supply of money effect level of employment.Therfore ,under macro economics functions of money and theories relating to money are studied.

7.Theory of Business Fluctuations:-It also deals with the fluctuations in the level of employment,total expenditure,genral price level.

8.Theory of Genral Price Level:-A continuous rise in the price level is called inflation.It distorts production.It increases inequalities in the distribution of income and wealth.The common man is injured by inflation.Deflation is the opposite of inflation.The genral price level falls continuously.Output and employment levels fall.Macro economics provides explation provides explation for the occurence of inflation and deflation.

DEFINITIONS OF MACRO ECONOMICS

        The term macro economics has been derived from Greek word"MAKROS",meaning large.In it,we study the economic system as a whole.

         In other words,Macro economics is the study of aggregates or averages covering entire economy such as total employment,national income ,national output,total investment,total consumption,total saving,aggegate demand,aggregate supply etc.Thus,Macro economics deals with the aggregates and averages of the system rather than with particular units in it.

     DEFINITIONS:-

1- "Macro economics deals not with individuals quantities as such but with aggregate of these quantities ; not with individual income but with natianal income;not with individual price but with price level;not with individual output but with national output."      

                                                                                                          - K.E.Boulding

2."Macro economics concerns itself with such variables as the aggregates volume of the output of any economy,within the extent to which its resources are employed,with the size of the national income,with the general price level."

                                                                                                         -Gardner Ackley

3."Macro economics deals with the functioning of the economy as a whole."

                                                                                                          -Shapiro

4."Macro economics is concerned with the economy as a whole or large segments of it.In Macro economics,attention is focussed on such problems as the level of unemployment,the rate of inflation,the nation's total output and other matters of economy -wide significance."

                                                                                                           -M.H.Spencer

INTRODUTION OF MACRO ECONOMICS

      Till the great depression of 1930,all economists were engaged in formulating principles relating to the allocation of scarce resources.Earlier,they were assuming full employment as a normal situation of an economy.They devoted their time to micro economics with aggregate output to be constant.Thier major emphasis was on the determination of individual price and output levels.At the same time classical economists namely RICARDO,MARSHALL and PIGOU talked about aggregate behaviour of the economy or the study of individuals behaviour.Thus,they mainly concerntrated on micro economic policy.

       In 1930,two events stimulated the study of macro economics.First,great depression demonstrated that full employment was unstable.In U.S.A. unemployment rate which was 2.9% in 1929 jumped to24.9% in 1933.Moreover,in the same period,GNP declined by about 30%.It indicated that unemployment rate and aggragate output were variables.therefore,economists felt the need to study the factors that determine the level of output and employment.

        Secondly.in 1936,Lord Keynes published the genral theory of employment,intrest and money.In this book,Keynes analysed that unemployment could exist for long period.He analysed that unemployment and depression.He concluded that unemployment occurs due to deficiency of aggregate demand.It can be removed by raising the level of aggregate demand.Many economists accepted Keynesian economics.Therfore ,the publication of his book and subsequent adoption of his veiws are often reffered to as Keynesian revolution.