Macroeconomics formulas and graphs for CUET Economics

This is the short version of the thirteen Macroeconomics lessons. If a line here is not clear, the chapter it comes from is named in its heading.

Basic concepts and measuring national income

Idea	Formula or fact
Final good	Reached its final user; capital goods are final
Net investment	Gross investment − depreciation
Leakages and injections	Saving, taxes, imports out; investment, G, exports in
Value of output	Sales + change in stock
Value added	Value of output − intermediate consumption
Expenditure method	$\text{GDP}_{MP} = C + I + G + (X - M)$
Income method	NDP at FC = compensation of employees + operating surplus + mixed income
Operating surplus	Rent + interest + profit
Left out	Transfers, second-hand goods, shares, homemakers' work, capital gains

National income aggregates

Idea	Formula or fact
Gross → net	− depreciation
Domestic → national	+ NFIA
Market price → factor cost	− (indirect taxes − subsidies)
National income	NNP at FC
Basic prices	FC + production taxes − production subsidies
Personal disposable income	Personal income − personal taxes − fees and fines
GDP deflator	$\text{Nominal GDP} \div \text{Real GDP} \times 100$
GDP and welfare	Misses distribution, non-monetary exchange, externalities

Money, banks and the RBI

Idea	Formula or fact
M1	Currency with the public + demand deposits + other deposits with the RBI
M3	M1 + net time deposits of banks
Money multiplier	$1 \div r$; with cash drain $(1 + cdr) \div (cdr + rdr)$
Total deposits	Initial deposit × multiplier; credit created = total − initial
High-powered money	Currency with the public + bank reserves; M = mm × H
Repo / reverse repo	RBI lends to banks / RBI borrows from banks
CRR / SLR	Cash with the RBI / liquid assets with the bank
Inflation	Raise repo, CRR, SLR; sell securities; raise margins

Consumption, saving and equilibrium

Idea	Formula or fact
Consumption function	$C = \bar{c} + bY$, b = MPC
Saving function	$S = -\bar{c} + (1 - b)Y$
Identities	MPC + MPS = 1; APC + APS = 1
Break-even income	$\bar{c} \div \text{MPS}$: C = Y, S = 0
Equilibrium	AD = output, or planned S = planned I
Equilibrium income	$Y = (\bar{c} + \bar{I}) \div (1 - \text{MPC})$
Investment multiplier	$k = 1 \div (1 - \text{MPC}) = 1 \div \text{MPS}$; ΔY = k × ΔI
Paradox of thrift	Everyone saving more lowers income; saving stays = I

Excess and deficient demand

Idea	Formula or fact
Inflationary gap	AD at full employment − full-employment output
Deflationary gap	Full-employment output − AD at full employment
Excess demand	Prices rise; real output cannot
Deficient demand	Output and jobs fall; underemployment equilibrium
Remedies	Fiscal: G and taxes. Monetary: rates, reserves, OMO, margins

Budget and deficits

Idea	Formula or fact
Capital receipt	Creates a liability or reduces assets
Capital expenditure	Creates an asset or reduces a liability
Revenue deficit	Revenue expenditure − revenue receipts
Fiscal deficit	Total expenditure − (revenue receipts + non-debt capital receipts) = borrowing
Primary deficit	Fiscal deficit − interest payments

Open economy

Idea	Formula or fact
Balance of trade	Exports of goods − imports of goods
Current account	Trade balance + services + income + transfers
Capital account	FDI, portfolio investment, borrowing, banking capital
Overall balance	Current + capital account = change in reserves
Depreciation	More ₹ per $ in a floating market
Devaluation	Government lowers a fixed rate
Managed floating	Market rate with RBI intervention (India since 1993)

Which graphs must you be able to read?

• Consumption and the 45° line: C starts at $\bar{c}$ and meets the 45° line at break-even.
• Saving: starts at $-\bar{c}$ below the axis, crosses it at break-even.
• AD and the 45° line: equilibrium where they meet; above the line output rises, below it falls.
• S and I: equilibrium where the rising S meets the flat I.
• Gaps: measured vertically at full-employment income.
• Forex market: D$ slopes down, S$ slopes up; more demand depreciates the rupee.

What are the traps worth remembering?

• Capital goods are final goods, not intermediate.
• Transfers are never factor income.
• Cheques are money but not legal tender.
• Credit created = total deposits − initial deposit.
• Break-even (S = 0) is not equilibrium.
• The multiplier divides by the MPS, not the MPC.
• Interest is revenue expenditure; repaying the loan is capital expenditure.
• A higher rupees-per-dollar number is a weaker rupee.