(Introductory Macro Economics) Chapter 1: Introduction (NCERT Class-XII)


  • Macroeconomics, as a separate branch of economics, emerged after the British Economist John Maynard Keynes published his celebrated book The General Theory of Employment, Interest and Money in 1936. 
  • Classical Thinking: The dominant thinking in economics before Keynes was that all the labourers who are ready to work will find employment and all the factories will be working at their full capacity. This school of thought is known as the classical tradition.
  • The Great Depression of 1929 and the subsequent years saw the output and employment levels in the countries of Europe and North America fall by huge amounts. 
  • Unemployment rate may be defined as the number of people who are not working and are looking for jobs divided by the total number of people who are working or looking for jobs. 
  • Approach of Keynes: approach was to examine the working of the economy in its entirety and examine the interdependence of the different sectors. This is how Macro Economics was born.


  • Production in a Capitalist country: production activities are mainly carried out by capitalist enterprises.
  • Natural resources: a part consumed in the process of production (e.g. raw materials) and a part fixed (e.g. plots of land).
  • Labour: The most important factor to carry the production is human labor.
  • After producing output with the help of these three factors of production, namely capital, land and labour, the Entrepreneur sells the product in the market. The money that is earned is called revenue.
  • After paying rent for services, interest, and wages to labor, the remaining part of income left is known as Profit.
  • Investment expenditure: When producer keep his profit in order to buy new machinery, factors of production, new factories in order to expand its productivity, this process is called as Investment Expenditure.
  • In short, a capitalist economy can be defined as an economy in which most of the economic activities have the following characteristics

(a) There is private ownership of means of production

(b) Production takes place for selling the output in the market

(c) There is sale and purchase of labour services at a price which is called the wage rate (the labour which is sold and purchased against wages is referred to as wage labour).

Firms: Also known as Production Units.

  • In both the developed and developing countries, apart from the private capitalist sector, there is the institution of State. The role of the state includes framing laws, enforcing them and delivering justice. We shall use the term “Government” to denote state.
  • The state, in many instances, undertakes production – apart from imposing taxes and spending money on building public infrastructure, running schools, colleges, providing health services etc. These economic functions of the state have to be taken into account when we want to describe the economy of the country.
  • There is another section in an economy which is called as Household sectors. By a household we mean a single individual who takes decisions relating to her own consumption, or a group of individuals for whom decisions relating to consumption are jointly determined.
  • We must remember that the households consist of people. These people work in firms as workers and earn wages. They are the ones who work in the government departments and earn salaries, or they are the owners of firms and earn profits. Indeed the market in which the firms sell their products could not have been functioning without the demand coming from the households.
  • Fourth Important sector of economy: External Sector.
  • Trade with external sector is of two types: Imports and Exports.
  • All those goes out = Exports. And All those comes in = imports.
  • So we discussed four important factors: Production in capitalist economy, About State role, about household sector & External Sector. 

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