Important Macro Economics Concepts For Your Interviews

For an MBA interview, it is important for one to be abreast with various terms and concepts related to Economics. In the previous article, we have looked at important concepts related to Microeconomics. In this article, we will be looking at the concepts related to Macroeconomics. Macroeconomics is the branch of economics that studies how an overall economy functions on a large scale. Let us start by looking at how the health of a country's economy is measured. If you haven't read my previous article on the important concepts of Micro Economics, please read it here.

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Gross Domestic Product

The total market value of the basket of all final goods and services manufactured within a country in a given financial year.  

2 Approaches to calculating GDP

Consumption Approach: GDP = H.H. Consumption + Investment + Govt. Expenditure + Net Exports Income Approach: GDP = Wages + Interest + Rent + Profit + Tax + Depreciation Out of the two, the consumption approach is preferred as the expenditure can be traced easily. This approach is used in India. GDP of various Economies 1. United States – 19.45 tn $ 2. China – 12.23 tn $ 3. Japan – 4.87 tn $ 4. Germany – 3.69 tn $ 5. India – 2.65 tn $ 6. United Kingdom – 2.63 tn $

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To measure the sector's income, we used a concept known as per capita income, which can be used to measure the health of economies with different populations.

Per Capita Income

It is the average annual income of an individual expressed in dollars. It indicates the average income of an individual in a country or state. Formula = GDP/Population Per Capital Income Ranking of various Economies 1. Qatar 4. Singapore 17. Germany 27. United Kingdom 73. China 78. Iran 118. India

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In Macroeconomics, we also try and classify the types of market-based on the competition level and nature. Let us look at the various categories -

Types of Market

1. Perfect Competition A hypothetical market where no single producer or consumer has the market power to influence the prices. Characteristics A large number of buyers and sellers Goods are perfect substitutes of each other All buyers and sellers have perfect, complete and homogenous market information There are no entry and exit barriers 2. Oligopoly A market with a small number of sellers selling a similar commodity. Characteristics High interaction among sellers Sellers are price makers 3. Monopoly A market with a single seller with no close substitute for the product either due to technical reasons or licensing. Characteristics Seller is the price maker The firm can enjoy abnormal profit Fierce competitiveness of an existing firm To influence the economy of a nation, we have two tools known as the monetary and fiscal policy.

Monetary Policy	Fiscal Policy
The government’s policy of achieving economic objective (employment, per capita income, the balance of trade, economic parity) through money supply.   Contraction policy: deflation or decrease in prices Incremental policy: inflation or increase in prices	The government’s policy of achieving economic objective (employment, per capita income, the balance of trade, economic parity) through government revenue collection and spending.   Fund sources: Taxes, duties, fines, borrowings Fund uses: Infrastructure, mining, public welfare, defence, power generation, R&D

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Tools that RBI has: 1. Cash Reserve Ratio Cash Reserve requirements imposed on bank. It is the minimum level of funds to be kept with RBI every fortnight to tackle sudden consumer withdrawals or liquidity problems. CRR rate is 4% 2. Statutory Liquidity Ratio It is the minimum amount of money that a commercial bank needs to preserve in form of cash, gold or government securities before providing credit to its customers. SLR rate is 19.5%

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In addition to these, here is a list of other important terms related to Macroeconomics. Other Important Terms: 1. Goods and Services Tax: Consumption based tax levied on the manufacture, consumption and sale of goods and services at a national level. It is an example of indirect tax. 2. Inflation: It is the quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy rises over a period of time. 3. Deflation: Gradual decrease in the prices of goods and services typically a result of the contraction in the economy. 4. Recession: A period of temporary economic decline in trade identified by a fall in the GDP for consecutive quarter. It is a result of business cycle contraction in an economy. 5. Stagflation: Condition of slow economic growth and relatively high unemployment accompanied by rising prices. 6. Depreciation: Gradual decrease in the economic value of a capital, stock or firm. 7. Devaluation: Deliberate downward adjustment of the value of a country’s currency relative to the baseline. 8. Unemployment: It is the condition that arises when one is willing to work but cannot find any work at an economically productive age for a consecutive period of atleast 6 months. 9. Fiscal Policy: It is the means by which a government adjusts its spending level and the tax rates to monitor and influence a nation’s economy. 10. Balance of trade: This occurs when the total imports and the total exports of a country is equal. A positive balance of trade occurs when the exports are more than imports, whereas a negative balance of trade occurs when the imports are greater than exports. This was a brief overview of the Macroeconomics. In addition to this, keep yourself abreast with the current affairs and how it has an impact on the economy. Also, refer to this article for questions related to Economics.

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