Basic Concepts of Macro Economics

Stock:

Stock is the quantity that can be measured at a particular point of time. Their value can be ascertained at a point of time such as October 02, 2025.

For eg.: national capital, money supply, total debt, stock of inventories.

Flow:

The flow concept refers to an economic variable that is measured over a period of time, such as a month, quarter, or year.

For eg.: income, expenses, investment, consumption, and national income.

Difference between Stock Variable and Flow Variable:

Gross National Product (GNP):

GNP is defined as the total market value of final goods and services produced in a year.

Gross Domestic Product (GDP):

It is the aggregate value of output of goods and services produced in a country without adding Net Factor Income from Abroad (NFIA).

GDP is measured at market price.

GDP = GNP – Net Factor Income from Abroad (NFIA)

Domestic Territory of India:

It refers to the geographical territory administered by a government within which persons, goods and capital circulate freely.

India’s domestic territory includes –

1. Political Boundaries: The geographical and political frontiers of India, including its territorial waters and airspace. 
2. Embassies and Military Bases Abroad: Diplomatic missions (embassies, consulates) and military establishments of India located in foreign countries are considered part of India's domestic territory. 
3. Ships and Aircrafts: Any ships or aircraft owned and operated by Indian residents between two or more countries are part of India's domestic territory. 
4. Fishing Vessels and Oil Rigs: Fishing vessels, offshore platforms, and oil/natural gas rigs operated by Indian residents in international waters or areas where India has exclusive jurisdiction (like the continental shelf) are also included.

India’s domestic territory doesn’t include –

1. Foreign Embassies and Military Bases in India: Diplomatic and military establishments of other countries located within India's geographical borders are not part of India's domestic territory; they belong to their respective nations' economic territories. 
2. International Organizations: Institutions like the United Nations (UN) or World Health Organization (WHO) located within India's geographical area are not part of the domestic territory. 

The concept of domestic territory is essential for calculating India's Gross Domestic Product (GDP) and other national income aggregates. GDP specifically measures the economic output generated within a country's domestic territory. 

Normal Residents:

Normal resident of a country refers to an individual or an institution who ordinarily resides in the country and whose centre of economic interest also lies in that country.

Centre of Economic Interest implies:

(1) the resident lives or is located within the economic territory.

(2) The resident carries out the basic economic activities of earnings, spending and accumulation from that location.

Types of Goods:

There are 4 types of goods, which are as follows: -

1. Final Goods – Those goods which are used for final consumption or for investment purpose. Eg.: (i) Milk or bread purchased by households, (ii) Machine purchased by a firm.

2. Intermediate Goods – Those goods which are purchased during the year by a firm from another for further production purposes in the same year or for resale. Eg.: (i) Raw materials such as steel sheets used for making automobiles and copper used for making utensils, (ii) Mobile sets purchased by a mobile dealer, etc.

3. Consumption Goods - are the final goods which are used by the ultimate consumers. Eg.: food, clothing, etc.

4. Capital goods (or investment goods) – are those final goods which help in further production of other goods and services, e.g. machinery.

Basic Economic Activities:

1. Production – process of converting raw materials into final goods.
2. Consumption – the use of final goods, not for re-sale.
3. Investment – the part of savings which is invested to generate income, is investment.

Y = C + S

Wherein,

Y = Income

C = Consumption

S = Savings

Aggregate Consumption:

Aggregate consumption refers to the total amount of goods and services consumed in an economy over a specific period of time.

Aggregate Consumption = total spending by households on final goods and services.

Components of Consumption –

Components of consumption are as follows: -

1. Durable Goods (eg.: cars, appliances)
2. Non-Durable Goods (eg.: food, clothing)
3. Services (eg.: healthcare, education)

Consumption Function:

The aggregate consumption function describes how total consumption relates to income and other factors. It includes –

a. Autonomous Consumption – there is consumption even at zero level of income.

b. Marginal Propensity to Consume - The marginal propensity to consume (MPC) is the fraction of an additional unit of disposable income that a person or household spends on goods and services, rather than saving it. It is calculated by dividing the change in consumption by the change in disposable income.

MPC = ΔC/ΔY 

Wherein,

ΔC = change in consumption

ΔY = change in disposable income

The function shows that as income (Y) increases, total consumption (C) also increases, but by a smaller proportion. 

The formula is often expressed as: C = f(Y)

or

C = c + bY

Where,

‘c' = basic or autonomous consumption

'b' = marginal propensity to consume

'Y' = income

Circular Flow of Income

Circular Flow of Income (in two-sector economy):

The circular flow of income is an economic model illustrating the continuous movement of money, goods, and services between different sectors of an economy, such as households and firms, showing how income is generated, distributed, and spent. 

Households render factor services to the firms and receive factor income, which will be spent on purchase of goods and services produced by the firms. Income received from the sale of goods and services becomes equal to factor payments made to the factors of production.

In every economy, 3 activities never stop: -

1. Production of goods and services.
2. Generation of income (wages, interest, rent, profit).
3. Expenditure (consumption expenditure and investment expenditure).

1. These activities are ‘lifeline of an economy.’
2. Difficult to trace the beginning and end.
3. Production, income and expenditure, are flow variables.
4. Existence like a circle, without a beginning and an end.

Phases of Circular Flow of Income:

1. Generation/Production Phase – firms produce goods and services by utilising goods and services (such as land, labour, capital and entrepreneurship) provided by households.

2. Distribution/Income Phase – flow of factor income from firms to households, in exchange for their services (wages, rent, interest, profit).

3. Disposition/Expenditure Phase – households spend income received by factors of production on the goods and services produced by the firms. This spending creates the demand for goods and services, which in turn allows firms to generate revenue and continue the production process, restarting the cycle.