macro economics

Macro Economics

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Introduction of Macro Economics

Macro Economics is another important branch of economic analysis. Macro Economics studies such aggregates which represent the entire economy; like total employment, total income, total production, total investment, total saving, total consumption, aggregate demand, aggregated supply, general price level, etc. The term Macro in English has its origin in the Greek term Makros which means Large. In the context of Macro Economics, ‘large’ means economy as a whole. Thus, Macro Economics is defined as that branch of Economics which studies economic activities (including economic issues or economic problems) at the level of an economy as a whole.

Definitions of Macro Economics

The important definitions of Macro Economics are as follows :

1. According to K.E. Boulding, “Macro Economics deals not with individual quantities as such but with the aggregates of these quantities; not with individual incomes but with the national income; not with individual prices but with the price level; not with individual output but with the national output.”

2. According to Schultz, “The main tools of Macro Economics is national income analysis.”

3. According to M.H. Spencer, “Macro Economics is concerned with the economy as a whole or large segments of it. In Macro Economics, attention is focused on such problems as the level of unemployment, the rate of inflation, the nation’s output and other matters of economy-wide significance.”

The above definitions make it clear that Macro Economics studies the determinants of national income and causes of economic fluctuations in a country. Macro economics got due importance after the publication of Keynesian book ‘The General Theory of Employment, Interest & Money (1936)’.

Characteristics of Macro Economics

1. Study of Macro Units : Macro Economics studies the macro units of the economy like national income, total production, total employment, general price level, etc.

2. Related to Whole Economy : Macro Economics studies the policies related to the economy as a whole. It does not analyse the effects of macro policies on an individual unit but studies the effect on the society as a whole.

3. Macro Economic Variable : Macro Economic variables are important part of subject matter of Macro Economics. Macro economic variables are related with the entire economy. A few macro economic variables are : national saving and investment, GNP, National Income, total employment, aggregate demand, aggregate supply, etc.

4. Macro Tools : The various tools used in Macro Economics for the fulfilment of different objectives are called macro tools. Important macro economic tools are : (i) Fiscal Policy, (ii) Monetary Policy, and (iii) Income Policy.

Scope of Macro Economics

The important subject matter included in the scope of Macro Economics are as follows :

1. Income and Employment Theory : Macro Economics deals with the national income. It includes the study of various components of national income and measurement methods of national income. Macro Economics is also concerned with the determination of the level of employment in the whole system and variations in it. It studies about aggregate demand, aggregate supply, consumption, savings and investment functions relating to employment theory.

2. Theory of General Price Level and Inflation : Macro Economics studies various components of money supply and effect of them on the economy. Determination of wholesale price index and changes in general price level (i.e., inflation and deflation) are also studies in Macro Economics.

3. Theory of Trade Cycle : Every economy faces the problems of ‘boom’ and ‘depression’ during the process of its development. These phases are termed as trade or business cycles. The theories of trade cycles and policies to control cyclical fluctuations come within the sphere of Macro Economics.

4. Theory of Economic Growth : Study of problems relating to economic growth or increase in per capita real income forms part of Macro Economics. It studies the economic growth of underdeveloped economies. Various development policies are also studied therein.

5. Macro Theories of Distribution : Macro theories of distribution deal with the distribution of income among various factors. The analytical study of these theories help in equitable distribution of income and constitutes a part of Macro Economics.

Importance of Macro Economics

In modern economic world, the importance of Macro Economics is well-accepted. The following points show its importance :

1. Formulation of Economic Policies of the Government : Macro economic analysis is essential for formulating various economic policies. The objective of the state is to maximise the social welfare. The state has to deal with various macro units like total production, total consumption, total investment, general price level, etc., and for it, the use of macro tools is essential.

2. Economic Growth : Both developed and underdeveloped countries have a primary goal of achieving a higher rate of economic growth. It requires appropriate growth-oriented policies after a detailed investigation of forces operating in the economy. Macro Economics helps in providing basic raw materials in this study.

3. To Study the Working of the Economy : For studying the economy as a whole, macro economic analysis is needed. Nature of the economy, population, total employment level, national income, production, natural and human resources, savings, investment, consumption in an economy all are to be studied in an economy which needs the help of Macro Economics.

4. Helpful in Studying Micro Economics : Aggregative economics and policies act as a guidelamp to individuals while designing their policies. An investor may decline to an investment when an economy is passing through the phase of recession or contraction. A proper appreciation of individual problems can only be made if an overview of the entire economic system is made.

5. International Comparisons : The factors related with the comparison of economic progress in different countries are the part of Macro Economics. Comparison between national income, consumption, saving, investment become the basis for international comparison.

Limitations of Macro Economics

The limitations of macro economic analysis are as follows :

1. Macro Economics Paradoxes : Sometimes aggregates provide misleading conclusions. What is true for an individual may not be true for the entire group two examples can be placed here :

   1. Saving of Individual and Society : From individual point of view, saving is a virtue but if all people in an economy start saving, it shows the negative impact on the economy because

   2. Apprehension of Bank Deposit : If an individual withdraws money from bank, it creates no danger but if all people withdraw the amount simultaneously, the banking system will fail. The above situations signify macro economic paradoxes which implies “What is true for a individual is not necessarily true for the whole of economic system”.

2. Individual Units are Ignored : Macro Economics puts an emphasis on the entire society while individual units, which make the society, are ignored.