Concept of stock variable and flow variable
Those variable whose values are measures from particular point of time is known as stock variable such as weight of a car, water in a tank, etc. Similarly, in macroeconomics we have lots of stock variables such like supply of money, the deposits in the bank, the amount of wealth possess by a person, etc.
Those variable whose values are measured from particular period of time such as speed of a car during ten minutes, etc. is known as flow variable. In macro economics national income, consumption, saving, investment and rate of interest are all flow variables.
Concept of endogenous and exogenous variable:
The variable whose values are determined with in the model are known as endogenous variable. Eg. In two sector economy Y= C + I. Y is endogenous variable.
Similarly, those variables whose values are given outside model are known as exogenous variable. The values of exogenous variable are given. By changing the value of exogenous variable effect the model.
Economic Model:
An economic model consists of equation and functional relation which explains the operation of an economy or some economic unit. In other words, a macroeconomic model is an analytical load designed to describe the operation of the economy of a country or a region. These models are usually designed to examine the dynamic of aggregate quantities such as the total amount of goods and services produced, total income earned, the level of employment of productive resources and the level of prices.
Macroeconomics models may be logical, mathematical and/ or computational, the different types of macroeconomic model serve different purpose and have different advantages and disadvantages. Macroeconomics model may be used to clarify and illustrates basic theoretical principles, they may be used to test, compare, and quantify different macroeconomic theories, they may be used to produce “what if” scenarios and they may be used to generate economic forecast. Thus, macroeconomic models are widely used in academia, teaching and research and are also widely used by international organization, national government, large corporations as well as economic consultants.
Model contains:
- A behavior or statement regarding certain variables (endogenous and exogenous).
- Assumptions that influence the variable
- Hypothesis
- Functional relationship
- Policy implication
Aggregation problem in macroeconomics:
Aggregation problem is the difficulty of treating an empirical or theoretical aggregate. An aggregate in economics is a summary measure describing a market or economy. For example: price level and real GDP is different from price and quantity of individual items, money supply is different from paper currency. Similarly general unemployment rate is different from unemployment rate of engineers and doctors.
Problems of aggregation:
1. Problem of double counting
- To avoid the double counting problem we have to use the value of final goods only.
- We have to consider the value of value added only.
2. Change in Price
- The price of goods and services is dynamic so, aggregation problem is occurred.
3. Non- monetized economy
- In Nepal there exists barter economy therefore there is problem in aggregation.
4. Underground economy
- Non-reported economic activities such as illegal activities are prevalent in the nation.
5. Methods/ Formulae
- There is not effective and practical method in aggregation.
Types of aggregation:
Basically there are three types of aggregation they are:
1. Longitudinal/ Spatial aggregation:
It is the aggregation which is based on geography space or productive sector or different institutional units. E.g. Space, region wise, sector wise, etc.
2. Temporal aggregation:
It is based on time series from higher frequency to lower frequency data. E.g. quarterly data to annual data.
3. Contemporaneous aggregation:
It is done across the different variables to get composite index. E.g. construction of Human development Index (HDI) it includes health indication, education indicator and income indicator.