Some Basic Concepts of Macroeconomics: Monetary Policy, Inflation etc

The compilation of these National Income Accounting Notes makes students exam preparation simpler and organised.

Some Basic Concepts of Macroeconomics

The two main fields of study in economics are microeconomics and macroeconomics. Now, as you already know, macroeconomics deals with the economy as a whole. Microeconomics, on the other hand, studies the behavior of organizations and individuals. Let us understand a few concepts of Macroeconomics such as Monetary Policy, Input, and Output, etc.

Basic Concepts of Macroeconomics

Consider a basic scenario of your school’s annual day celebrations. You and your friends may either volunteer for backstage help or participate in one or more events. Some of your friends may also be involved in stage décor. In most cases, everyone is involved in one activity or the other. And amidst all these preparations, there will be someone or some committee overseeing or managing the entire event at a large scale or macro level. Or in other words, the big picture.

Now, studying this big picture in terms of a country’s economy is what is called macroeconomics. Wikipedia defines macroeconomics as a branch of economics that studies the structure, behavior, performance, and decision-making of an economy as a whole.

Now that you are familiar with the basic idea of macroeconomics, let’s understand a few concepts. Macroeconomics is a vast subject and a field of study in itself. However, some quintessential concepts of macroeconomics include the study of national income, gross domestic product (GDP), inflation, unemployment, savings, and investments to name a few. Let’s discuss a few concepts.

Concepts of Macroeconomics

Income and Output
One of the most important concepts of macroeconomics is income and output. The national output is the total amount of all goods and services produced in a country during a specific period. And when production units or organizations sell everything they produce, they generate an equal amount of income. Hence, you can measure output by calculating the total income from the sale of all goods and services.

In relation to macroeconomics, economists usually measure national income or output by gross domestic product or GDP. By measuring GDP, economists can understand the market swings and changes. They can identify what measures to take to improve the GDP of the country. With technological advances, capital increase, and acquisition of state-of-art equipment, production units and organizations can increase national output and income. However, income and output can be affected by the recession and other market factors.

Another important component of macroeconomics is unemployment. Economists measure the unemployment rate in an economy by calculating the percentage of individuals without jobs. Unemployment categories include classic unemployment, frictional unemployment, and structural unemployment.

Classical unemployment is when wages are too high for employers to consider hiring more workers. Frictional unemployment occurs when the time taken to search for an appropriate employee is too long. Structural unemployment occurs when there is a mismatch between a worker’s skills and the actual skill required for a job. Another important category of unemployment is cyclical unemployment that occurs when an economy’s growth is stagnant.

Inflation and Deflation
The study of inflation and deflation is another important aspect of macroeconomics. The term inflation refers to an increase in the prices of goods and services across the country. And the term deflation refers to a decrease in the prices of goods and services. Economists measure inflation and deflation by studying price indexes. A price index is the weighted average of price for a class of products and services.

Inflation occurs when an economy grows too quickly. Deflation, on the other hand, occurs when an economy declines over a period of time. By studying the inflation and deflation trends, economists can help curb inflation rates by taking appropriate measures. Too much inflation can lead to negative consequences and continuous deflation can cause low economic output.

Macroeconomic Policies

Now that you are familiar with some of the basic concepts of macroeconomics, let’s try and understand some macroeconomic policies. The two main macroeconomic policies that a government may apply to bring about stability are the monetary policy and the fiscal policy.

Monetary Policy
The monetary policy is an important process, which is under the control of the monetary authority of a country. This monetary authority is usually the central bank or the currency board. The monetary policy is usually implemented by the central bank to stabilize prices and to increase the strength of a country’s currency.

The monetary policy also aims to reduce unemployment rates and stabilize GDP. It also controls the supply of money in an economy. For example, the central bank of a country can pump money into an economy by issuing money to buy bonds and other assets. On the other hand, the central bank of a country can also sell bonds and take money out of circulation.

Fiscal Policy
The fiscal policy is a process that makes use of a government’s revenue generation and expenditure as tools to control economic windfalls. The government uses fiscal policy to stabilize the economy during a business cycle. For instance, if production in an economy does not match the required output, the government can spend on idle resources and help in increasing output.

Usually, economists prefer the monetary policy over the fiscal policy. This is because the monetary policy is under the control of the central bank of a country, which is an independent organization. The fiscal policy is under the control of the government, which can be affected by political intentions.


National Income of country is also known as _______________
a. GDP
b. GNP
c. NNP
d. All of the above
The correct option is “c”.
The National income of a country is the Net National Product or the NNP. We calculate it at either market price or factor cost. When we calculate it at factor cost it is the National Income.