Macro Economics Ratios from Managerial Economics for Management of Business

There are only those ratios, which shall come across in the following chapters:

Consumption Income Ratio:

It is general income consumption relationship. It expresses the relationship between income (Y) and consumption (C). The relation is functional. We represent it as:

C = f (Y)

C – Consumption

Y – Income

f – Function

Saving Income Ratio:

Income is either spent or consumed. The saving function can be easily derived by subtracting consumption or spending from income.

S = Y-C

S – Saving

Y – Income

C – Consumption

Capital Output Ratio:

The number of units of capital required for each unit of output produced. More capital is required to produce more output for business and market. This ratio varies from firm to firm and industry to industry.

K = wY

K- Capital Stock

Y – Level of Output

W – Capital-Output Ratio

Capital Labour Ratio:

This ratio indicates factor proportion, the combination of labour and capital in the production process. It can be defined as:

K/L

K – Capital

L – Labour

Output-Labour Ratio:

It means the labour productivity. It can be written as

Y/L

Y – National Income

L – Employment.

Index Number:

Value in economy means value in exchange. The value of money is the buying capacity of money, which is expressed in terms of commodity and services you get in exchange.

If the price is high, then value of money decreases and vice-versa. They are reversely related to each other. Movement of price has two aspects: one is change in relative price and the other is change in overall price, which affects the purchasing power of money. Change in price is not uniform for all goods: for some goods it may decrease and for some goods it may increase. To bring the element of uniformity to the concept of general, price is used. This is done by index number.

Index number is statistical device which indicates relative changes of a variable over a period of time. It shows the general trend of prices. The value of money can be measured by means of price index numbers. We will discuss some types of prices indices. More specific price indices can be constructed which focuses on specific goods and services.

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