Introduction to Macroeconomics
Macroeconomics studies the economy as a whole — aggregates like national income, total employment, and the general price level. It was developed after John Maynard Keynes published "The General Theory" in 1936. Nepal's economy is an open economy with significant remittance inflows, summarised by Y = C + I + G + (X − M).
Meaning of Macroeconomics
Macroeconomics is the branch of economics that studies the economy as a whole. Instead of looking at one consumer or one firm, it looks at aggregates — total national income, total employment, total output, general price level, total money supply. The word "macro" comes from the Greek makros meaning "large". John Maynard Keynes developed modern macroeconomics in 1936 with his book "The General Theory of Employment, Interest and Money". While microeconomics studies a single tree, macroeconomics studies the whole forest. Example: microeconomics asks why the price of tomatoes in Kalimati rose last week; macroeconomics asks why Nepal's inflation rate was 7.9% last year.
Features of Macroeconomics
- Study of the whole economy — looks at aggregates, not individual units.
- Aggregative economics — uses totals like national income, total consumption, total investment.
- Theory of income and employment — explains how the level of national income and employment is determined.
- Developed after Keynes (1936) — modern macroeconomics emerged to explain the Great Depression.
- General equilibrium approach — studies all markets together, not in isolation.
Scope of Macroeconomics
Six Main Areas of Study
- Theory of national income — how GDP, GNP, NNP are measured.
- Theory of employment — what determines the level of employment and unemployment.
- Theory of money — money supply, demand for money, interest rate.
- Theory of general price level — inflation and deflation.
- Theory of economic growth — long-run increase in real GDP.
- Theory of international trade — exports, imports, exchange rate, balance of payments.
Closed Economy vs Open Economy
A closed economy does not participate in international trade — no exports, no imports, no foreign borrowing. This is just a textbook idea; no real country is fully closed. An open economy participates in international trade and capital flows — it has exports (X), imports (M) and remittances. Nepal is an open economy: in FY 2080/81, remittances inflow was about Rs 1007.31 billion (around 20.4% of GDP). The (X − M) term — net exports — captures the trade link with the rest of the world.
National income in a closed economy (no foreign trade)
National income in an open economy (with net exports)
Closed economy vs Open economy
| Basis | Closed Economy | Open Economy |
|---|---|---|
| International trade | No exports or imports | Has exports (X) and imports (M) |
| Net exports (X − M) | Zero | Usually positive or negative |
| Income identity | Y = C + I + G | Y = C + I + G + (X − M) |
| Foreign capital | No foreign borrowing/lending | Foreign investment & remittances flow |
| Real-world example | Textbook only — none fully closed | Nepal, India, USA, China |
Major macroeconomic variables with Nepal examples
| Variable | Meaning | Nepal Example (FY 2080/81) |
|---|---|---|
| GDP | Total market value of final goods & services produced in a year. | ≈ Rs 5381.34 billion |
| Unemployment rate | % of labour force without work but seeking work. | ~11% (youth) — underemployment is widespread |
| Inflation rate | Sustained % rise in general price level. | ≈ 7.9% (consumer price index) |
| Money supply | Total stock of money in the economy (M2). | ≈ Rs 6200 billion (NRB data) |
| Interest rate | Cost of borrowing money. | ~7–10% on bank deposits |
| Exchange rate | Price of one currency in terms of another. | Rs 133 ≈ US $1 (Nepal Rastra Bank fix) |
| Remittance inflow | Money sent home by workers abroad. | ≈ Rs 1007.31 billion (≈ 20.4% of GDP) |
Nepal as an Open Economy
Nepal has open trade with India, China and other countries, plus large remittance inflows from Nepali workers in Gulf countries, Malaysia and Korea. Remittances are part of NFIA (Net Factor Income from Abroad) — they push GNP above GDP. Without remittances, Nepal's national income would be much smaller. This is why macroeconomists treat Nepal as a textbook open economy.
Practice Problem
For a hypothetical open economy (like Nepal), given: Consumption C = Rs 1000 billion, Investment I = Rs 400 billion, Government spending G = Rs 300 billion, Exports X = Rs 100 billion, Imports M = Rs 200 billion. (a) Calculate net exports (X − M). (b) Calculate GDP (Y) using the open-economy identity. (c) What would GDP be if it were a closed economy?
Quick Revision
- Macroeconomics studies the economy as a whole — aggregates like GDP, total employment, general price level.
- Developed after Keynes (1936); the word "macro" means "large".
- Scope: national income, employment, money, price level, growth, international trade.
- Closed economy: Y = C + I + G (no foreign trade).
- Open economy: Y = C + I + G + (X − M) (with net exports).
- Nepal is an open economy — remittances ≈ 20.4% of GDP in FY 2080/81.
- Key macro variables: GDP, unemployment, inflation, money supply, interest rate, exchange rate.