MacroeconomicsI_working_version (1)

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Chapter 1
To understand the fundamentals of macroeconomics properly, let’s start with
explanation of basic economic terms such as scarce factors of production, economic
perspective or economic methodology. It is also necessary to grasp the meaning of
economics as a science in general and the difference between micro and macroeconomics.
Economics is the social science concerned with the efficient use of limited or scarce
resources to achieve maximum satisfaction of human material wants.
Economics is the study of the efficient use of scarce resources in the production of goods
and services to satisfy as many wants as possible.
Inputs
(Land, Capital, Labour)
Output
(GDP)
Figure 1.1 Relation between factors of production and output.
Factors of production (Inputs): scarce resources. Generally we identify all natural,
human, and manufactured resources, which get into production process of goods and
services. This covers lot of fields: all the equipment, tools, and machinery used to produce
manufactured goods and agricultural products; the factory and farm buildings;
transportation and communication facilities; the numerous types of labour; and land and
mineral resources of all sorts. Economists widely identify these as either human resources –
labour and entrepreneurial ability or property resources – land or raw materials and capital.
Capital. Capital (or capital goods or investment goods) involves machinery, equipment,
and factory, storage, all tools, transportation, and distribution facilities used in production
of goods and services and bringing them to the final (ultimate) consumers. In general we
can say that capital works as all manufactured aids to production. The described process of
producing and purchasing capital goods is also called investment.
Land. From the economic perspective the meaning of land is rather broader than most of
people think. Land includes all natural resources usable in the production process. These
resources as forests, mineral and oil deposits, water resources and of course arable or
cultivatable land count this classification.
Labour. Labour is a wide term for all the psychical and mental talents of individuals
available and usable in producing goods and services.