Macroeconomics
Macroeconomics deals with the aggregate behavior of all individuals in an economy. It is the study of the behavior an economy at the aggregate level. It is not the study of the level of a specific subgroups or individuals (which is referred to microeconomics). The main subjects studied under macroeconomics include inflation, unemployment, and industrial production, often with the aim of studying the effect of government policy on these factors.
Economic growth
Economic growth has been defined as the quantitative increase in the volume of goods and services in the economy overtime. It is a positive change in the level of production of goods and services by a country over a certain period of time. It is often measured as a rate of change in the Growth Domestic Product (GDP) overtime. It can be viewed as either nominal or real economic growth.
Nominal growth can be defined as economic growth (GDP) including inflation. It just looks at the given period’s GDP figures without removing inflation.
Real growth is nominal growth minus inflation. It presents the real picture of the economy during a stated period of time. It presents the actual performance of the economy; without inflation. It is real GDP that presents a good picture of economic performance.
- It refers the qualitative and quantitative increase in the level of goods and services in a country during a given period of time. It is a process whereby an economy’s real national income as well as per capita income increases over a long period of time.
- It includes changes in resource supplies, in the rate of capital formation, in demographic composition, in technology, skills and efficiency, in institutional and organizational set-up. It also implies respective changes in the structure of demand for goods, in the level and pattern of income distribution, in size and composition of population, in consumption habits and living standards, and in the pattern of social relationships and religious dogmas, ideas and institutions.
Human Development Index (HDI); Prosperity index
Human Development Index (HDI)
To overcome the deficiencies of GDP as a measure of welfare, the United Nations has developed the Human Development Index (HDI) – that combines data on life expectancy, years of schooling, and income per capita in order to give a broader measure of a country’s development.
Prosperity index
The prosperity index looks at such variables as entrepreneurship, health, security, freedom, and governance. See Helliwell, J., Layard, R., and Sachs, J., (2013). World Happiness Index 2013; and Legatum Institute (2014). The Legatum 2014 Prosperity Index; others
Consumption and Investment
Saving is the part of income not spent on consumption and can therefore be put into investment. The more one saves, and later invests, the better for the future meeting of one’s obligations. Most people save for retirement, and emergencies. The more people in a nation are willing and able to save – and invest of the future, the better it will be for their economies as a whole.
Investment
- Investment can be defined as the accumulation of stock (physical or financial) of capital.
- Investment is about goods purchased by individuals, companies or governments that increase their stock of physical or financial capital. Involves using money and other resources to undertake an activity or enterprise intended to make profit in future.
- Investment broadly includes spending on new plant and machines, buildings (including residential home building), and inventory (including materials in the stores and work-in-progress).
Consumption
- Consumption is the largest of the demand in the economy and plays an important role in the business cycle fluctuations.
- It represents the largest part of the economy overall spending and therefore a key determinant of GDP. Let us remember that sometimes GDP is viewed as total expenditure in an economy in a fiscal year.
- The size of consumption varies across developed and developing economies.
- Most economies consumption is on average 50 – 70 per cent.
Marginal propensity to consume (MPC)
Marginal propensity to consume (MPC): This is an important concept in Keynes’ work. The marginal propensity to consume is the extra amount and individual will if spend given an extra $1. If MPC is 60 % (or 0.6), then from every extra dollar of income, the individual spends 60 cents. This is to say that the more income an individual earns, the more they increase consumption expenditure but as Keynes said, ‘not as much as the increase in their income’.
See Keynes, J.M., (1939:96). The General Theory of Employment, Interest and money. New
York: MacMillan.
Poverty
Poverty: According to the World Bank, poverty means the inability to attain a minimal standard of living. According the United Nations, it means the denial of choices and opportunities that are basic to human development, reflected in a short life, lack of basic education, lack of material means, exclusion, and a lack of freedom and dignity.
Human poverty takes into account other factors, such as life expectancy, infant malnutrition, illiteracy and lack of food or clean water. Human poverty implies deprivations of a long and healthy life, knowledge, a decent standard of living.
Income poverty means that you are poor if you have less money than the defined poverty line for your country. There are two types of income poverty: absolute poverty and relative poverty.
Absolute poverty is defined according to an absolute minimum standard, which is often called the ‘poverty line’. Absolute is used here to indicate a fixed and minimum set of basic resources which all individuals are said to require in order to physically sustaining life. Absolute poverty refers to income level below that necessary to meet basic needs. The UN has been using a measure for absolute poverty is USD 1 per day.
Relative Poverty: This is basically a comparison of different levels of income. It varies with per capita income. A relative poverty line is different in all countries. High-income countries
have a higher poverty line than low-income countries.
