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Introduction to Macroeconomics

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  • Last Updated : 22 Aug, 2022
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Macroeconomics is a part of economics that focuses on how general economies, markets, or different systems that operate on a large scale behave. Macroeconomics concentrates on phenomena like inflation, price levels, rate of economic growth, national income, gross domestic product (GDP) and changes in unemployment.

“Macroeconomics is that part of economics which studies the overall averages and aggregates of the system”. – KE Boulding

Important terms used in Macroeconomics

Consumer Goods

Consumer goods are goods bought for consumption by the consumers for their own use and not for any further economic activity. Consumer goods are also known as final goods, and are the outcome of production and manufacturing and what a buyer will see stocked on the store shelf. Clothing, food and jewellery are some examples of consumer goods. Basics or raw materials, such as copper, are not considered consumer goods, as they must be transformed into usable products.
From an economic point of view, consumer goods can be divided into durable (useful for more than three years), non-durable (useful for less than three years), or pure services (consumed immediately as they are produced). For the purpose of marketing, consumer goods can be divided into different categories based on buyer’s behaviour, how buyers shop for them, and how frequently they shop for consumer goods.

Capital Goods

Capital goods are physical assets that an organization uses in the process of production to manufacture products and services that consumers will use later. Capital goods are also known as tangible goods as they are physical in nature. It involves buildings, machinery, equipment, vehicles, tools, etc. Capital goods are not finished goods; rather, they are used to make finished goods.
They are also produced for the service sector, e.g., hair clips used by hairstylists and coffee machines for restaurants and coffee shops. In other words, capital goods do not create utility or satisfaction for the buyer, instead they are used to produce the final product, which does create satisfaction or utility.

Depreciation

A reduction in the monetary value of fixed assets due to wear and tear caused by continuous use or any other reason is known as Depreciation. Capital goods that a business does not use within a year of production cannot be completely deducted as business expenses in the year of their purchase; rather, they must be depreciated over the period of their valuable lives, with the business taking partial tax deductions divided among the years that the capital goods are in use. This is done through techniques of accounting such as depreciation or devaluation. Depreciation represents the annual loss of the tangible asset’s monetary value during the period of its valuable life. 

Final Goods

Final goods are those goods that do not require further processing and are ready to use. These goods are also called consumer goods and are manufactured for the purpose of direct use by the end consumer. In a nutshell, final goods are products that are manufactured by a company for consumption by the consumer in the coming time. These goods aim to satisfy the needs or wants of a consumer.
Final goods consist of the following:
Goods that are purchased by local households are meant for final consumption. For example, television, milk, ready-to-eat foods, medicines, etc. It also consists of the goods that are bought by the organizations for investment purposes or the formation of capital.
Final goods can be diversified into the following two broad categories:

  • Buying habits
  • Durability

On the basis of buying habits of a consumer, there are four types of goods:

1. Convenience Goods

Convenience goods are those goods that are available and regularly consumed by buyers. For example, milk, bread, pulses, etc.

2. Specialty Goods

Specialty goods are mostly consumed by the upper class of society, as they provide luxury and are expensive. These goods are not a necessity; instead, the purchase is made on the basis of the user’s desires. Examples of such goods are antique cars, jewelry, etc.

3. Shopping Goods

These types of goods are purchased after thinking a lot about them on the consumer’s part.  They are durable and more expensive in comparison to convenience goods. For example refrigerators, televisions, laptops, etc.

4. Unsought Goods

These types of goods are easily available in the market but are rarely purchased by consumers. For example, fire extinguishers, snow jackets, etc.

There are three types of goods on the basis of the durability of goods:

1. Service

Services are intangible as they cannot be physically touched, but they provide satisfaction to the buyers. They are variable and indivisible. For example, salon services, automobile repair services, etc.

2. Non-Durable

Non-durable goods are goods with small shelf life and are to be consumed as soon as possible. For example, milk, beverages, etc.

3. Durable Goods

Durable goods are goods with a longer shelf life than non-durable goods. For example, cars, equipment, etc.

Intermediate Goods

An intermediate good is a good used to produce a final good or finished good for the purpose of selling it to the consumers. Intermediate goods like salt can be a finished product, as it is consumed directly by consumers and can be used by producers to produce other food products.
These are sold between industries for the resale or production of other goods. These goods are also called semi-finished products as they are used as inputs to manufacture the finished product.
While calculating GDP, economists use the value-added method for intermediate goods to make sure that they are not counted twice—once when they are purchased, and once when the final product is sold.
There are normally three choices for the use of intermediate goods. A producer may produce and use their own intermediate goods. The producer may also sell them, which is most commonly practised between industries. Companies purchase intermediate goods for particular use in producing either a secondary intermediate product or in producing the finished product. Usually, all intermediate goods are either a part of the final product or are totally reconfigured during the production process.

Example, Consider a farmer who produces wheat. The farmer sells his wheat to a miller for ₹100 giving the farmer ₹100 in value. The miller further operates the wheat to make flour—a secondary intermediate good. The miller sells the flour to a baker for ₹200 and gets ₹100 in value (₹200 sale – ₹100 purchase = ₹100). The final good, which is sold directly to the buyer, is the bread. The baker sells all of it for ₹300, creating another $100 of value (₹300 – ₹200 = ₹100). The final cost at which the bread is sold is equal to the value that is added at each stage in the production process, i.e., ₹300 (₹100 + ₹100 + ₹100).

Stock and Flow

Stock is referred to any quantity that is calculated at a particular point of time, whereas flow refers to the quantity that can be calculated over a period of time. Both the stock and flow are interconnected to each other. For example, the number of cars in the warehouse of TATA as of 31st May 2022 is stock; however, the number of cars in the warehouse of TATA during 2021 is flow. 

Gross Investment

Gross Investment is referred to the total expenditure or investment that is made by an organization to acquire capital goods.
Gross investment is the gross value for such expenditure and it does not take the factor of depreciation into consideration. However, any actual change in the stock of productive assets for a given year of an economy is not represented by Gross Investment. 
Net Investment is estimated by subtracting the depreciation value from the gross investment (Gross Investment – Depreciation).
If the value of the gross investment is higher than the value of depreciation at any given time period, it shows that the net investment is positive, and the capital stock has increased. Similarly, if the gross investment value is less than the depreciation value, it shows that the net investment becomes negative, which leads to falling in capital stock.

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