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Class 12 Introduction to Macroeconomics: cheat sheet
CBSE Social Science. The economy as a whole: why macroeconomics arose after the Great Depression, the factors of production and their rewards, the four sectors and the unemployment rate.
Key ideas
- Macroeconomics studies aggregates of the whole economy, such as total output, employment and the general price level.
- It grew into a separate subject after the Great Depression that began in 1929, when output fell and unemployment stayed very high for years.
- Keynes’s General Theory (1936) argued that demand could be too low, leaving people unemployed for long periods.
- Land earns rent, labour earns wages, capital earns interest and entrepreneurship earns profit.
- In a capitalist economy private firms hire wage labour, produce for the market and aim at profit.
- The four sectors are households, firms, government and the external sector.
- Firms’ spending on new machines and buildings is investment expenditure, which adds to productive capacity.
Remember
| Unemployment rate | unemployed ÷ labour force × 100 |
| Factor rewards | land – rent; labour – wages; capital – interest; enterprise – profit |
| Total factor income | wages + rent + interest + profit = value added |
| Profit left over | value added − wages − rent − interest |
| Net exports | exports − imports (positive: surplus; negative: deficit) |
| Great Depression (USA) | unemployment rose from about 3% (1929) to 25% (1933); output fell by about a third |
Watch out
- Mixing up the rewards: interest goes to capital and profit to the entrepreneur.
- Finding the unemployment rate as a share of the whole population instead of the labour force.
- Calling the price of mangoes a macroeconomic variable.
Worked example
Suppose in an economy firms pay ₹780 crore wages, ₹170 crore rent and ₹190 crore interest, and earn ₹210 crore profit; exports are ₹220 crore and imports ₹170 crore. (a) What is the total factor income? (b) What is the net export figure? (c) Which sectors of the economy are involved in each flow?
Working: 780 + 170 + 190 + 210; 220 − 170
Answer: (a) ₹1,350 crore (b) ₹50 crore (c) households receive factor incomes from firms; exports and imports link firms and households with the external sector.
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