Tuesday, August 25, 2009

Some Basic Concepts used in Macro Economics

The following are some of basic instrument and concepts which are used in macro economic analysis. These concepts help to understand macro economic problems clearly and easily.

1. Stock and Flow: A stock is a quantity measurable at a particular point of time. It has no time dimension. For example national capital is a stock because it refers to the nation’s capital at a particular point of time. Similarly wealth of nation is stock.

Flow is a quantity that can be measured over a specified period of time, say a year, capital formation in the economy is a flow.

2. Ratio Variables: Such variables express functional relationship between income and saving or income and consumption are known ratio variables. The ratio between saving and income is known as average propensity to save (APS). Symbolically it is expressed as S/Y where S is saving and Y is income and the ratio between consumption and income is known as average propensity to consume (APC). Symbolically it is expressed as C/Y where C is consumption and Y is income.

3. Independent and Dependent variables: Some economic variables are independent and some are dependent. For example income is an independent variable while consumption is a dependent variable and as such one can say that consumption is a function of income. Symbolically we can express this functional relationship as C = F (Y) where C is consumptions F is function and Y is income. This functional relationship shows that consumption is a function income as income increases, consumption also increases though less than the increase in income.

4. Equilibrium: Equilibrium refers to a state of balance between two variables. We can define a state of equilibrium as situation in which the effective demand for every good and every factor of production is exactly equal to the supply of it. When equilibrium is achieved there is no tendency to change from it. So it can be said that equilibrium is the best situation.

5. Ex-ante and Ex-post: This basic concept is used in saving and investment. Ex-ante means, what we plan or anticipate to do and Ex-post means what we have actually achieved or done. For example, economists classifying saving and investment into two parts.

(i) Ex-ante saving and investment i-e what they plan to save and invest.

(ii) Ex-post saving and in investment i-e what they actually save and invest.

Our plans to save and invest depend upon many independent variables like income, prices, future out look etc. so saving may or may not be equal to investment.


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