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Factor Shares in Aggregate Income

• Macroeconomic analysis examines the distribution of total national income into functional factor shares:

  • Rent (return on land)

  • Wages (return on labour)

  • Interest (return on capital)

  • Profit (return on entrepreneurship)

Features of Macroeconomics

• Study of Aggregates:

  • Macroeconomics deals with the study of the economy as a whole rather than individual economic units.

  • It investigates aggregate concepts and overarching economic phenomena, including:

  • National income

  • National output

  • National employment

  • General price level

  • Business cycles

• Income Theory:

  • Macroeconomics is frequently designated as Income Theory because it studies the concept of national income in depth.

  • It encompasses:

  • The distinct elements of national income

  • Methods of measuring national income

  • Social accounting systems

  • It analyzes the interplay between aggregate demand and aggregate supply.

  • It explains the root causes of fluctuations in national income that trigger business cycles, specifically the phenomena of inflation and deflation.

• General Equilibrium Analysis:

  • Macroeconomics is based on general equilibrium analysis, which studies the behaviour of large aggregates and their functional relationships.

  • General equilibrium explains the simultaneous determination and behaviour of demand, supply, and prices across the whole economy.

• Interdependence:

  • Macroeconomic analysis explicitly incorporates the mutual interdependence existing between aggregate economic variables.

  • Key interdependent variables include aggregate income, aggregate output, total employment, total investments, and the general price level.

  • Transmission Sequence Example: A change in the level of investment initiates a ripple effect that alters the level of income, which subsequently alters the levels of output and employment, ultimately driving changes in the overall level of economic growth.

• Lumping Method:

  • Macroeconomics utilizes the lumping method, which entails studying the whole economy collectively rather than splitting it into isolated segments.

  • Prof. Boulding's Formulation: "Forest is an aggregation of trees but it does not reveal the properties of an individual tree."

  • This principle marks the central distinction between microeconomics (the study of the individual "tree") and macroeconomics (the study of the aggregated "forest").

• Growth Models:

  • Macroeconomics examines the diverse determinants and factors that contribute to sustained economic growth and development.

  • It provides the foundational framework for building growth models used