Macroeconomics is that branch of Economic Analysis in which groups created to the whole economies, like national income, Total production, total consumption, total savings, wage-level, general cost and general price level are studied.
Meaning and Definitions of Macroeconomics
“Macroeconomics, then, is that part of the subject which deals with the Great aggregates and averages of the system rather than with particular item in it, and attempts to define, these aggregates in a useful manner and to examine their relations.” Professor Bouding
“Macroeconomics deals with economic affairs in the large.” It looks at the total size and shape and functioning of ‘Elephant’ of Economics experience, rather than the working or articulation or dimensions of the individual parts. To alter the metaphor it studies the character of the forest, independently of the trees which compose it.” – Gardner Acley
From about definitions, we can analyze that in Macroeconomics problems related to the whole economy are studied.
Features & Characteristics of Macroeconomics
Following are the characteristics of macroeconomics:
In it, macro-units are considered as the variable (dynamic) whereas Micro units are considered as static.
Macro quantity is not always the total of Microquantities, nor we can get individual quantity by during Macro quantity by individual units. Determination of quantity of Micro and Macro is done by different methods. Benefits of the whole society are kept in view during Macroeconomic analysis.
Study of the Whole Economy
In Macroeconomics policies and problems related to the whole economy are studied. And effects of these policies not seen on individual units but on whole society.
Types of Macroeconomics
Macroeconomics is concerned with the study of aggregates or groups. It is of three types as given below:
Macro Static Analysis
It deals with an equilibrium point of macroeconomic variables at a given point of the time namely total consumption, and total investment in the country. The Macro static tells us the final equilibrium as shown in the in the following diagram:
The diagram shows that the equilibrium is at point E where national income (Y) is equal to total consumption (C), total investment (I)and government expenditures (G) which can be expressed as given below: Y=C+I+G
Learn about Business Cycle: A Definitive Guide With Diagram.
Macro Comparative Static Analysis
It deals with the comparison of two macro static points at a given point in time. The comparison between the points E and E1 are known as macro-comparative static. The initial point of equilibrium was at point E But after inducement of expenditure by the government the new equilibrium is attained at point E1 which is shown in the following diagram:
The initial point of equilibrium was at point E where consumption and investment and government expenditure are equal to Income. After the inducement by the government (G) the new equilibrium is attained at point E1 where the income is equal to (Y2=c+I+G+G) ) consumption, investment, government expenditure and inducement of expenditure by the government (G).
The level of income changes from OY1 to OY2 and consequently the point of equilibrium shifts from E to E1 point. The study between two points of Equilibrium is called Macro Comparative Static Analysis.
Macro Dynamic Analysis
It deals with the process of change or path of change between original equilibrium and the new equilibrium. It also explains the forces which have brought the change including the process of change the diagram source the operation of the analysis the diagram shows the process of change. The diagram shows the operation of the analysis.
The diagram shows the process of change from the initial point of Equilibrium (E) to the new equilibrium (E1). The change is not a sudden change but it has been caused by a process and time lag. In the beginning, the government has increased the investment (G) which might have resulted into more employment, high productivity and high level of income.
All these variables have been motivating to the government to take additional expenditure.
Scope of Macroeconomics
The scope of macroeconomics is very wide following points can be studied under it:
1. Theory of Income and Employment
In it, formulation of income and Employment level is done and study of consumption, function, investment, function, multiple and accelerator is also done.
2. Theory of General Price Level
In it, formulation of the general price level is studied and problems related to inflation, deflation are a prime subject matter of Macro Economics.
3. Theory of Development and Planning
For fast and balanced development, developing countries apply many economic theories. So, the study of process and theories of economic development and planning is also an important subject matter of Macro Economics.
4. Theory of trade cycle
In macroeconomics study of the trade, the cycle is done. The factor of Boom and Depression in trade cycle, there effects and removal of these effects are studied in Macro Economics.
5. Theory of International Trade and Foreign Exchange
It is also a subject matter of Macroeconomics. Under it theory of International Trade, terms of trade, determination of foreign exchange rates etc. Are studied.
6. Theory of Public Finance
In it, the study of theories, policies, and effects related to government income, expenditure loan etc. is done. Study of fiscal policy is the prime subject matter of public finance.
7. Principles of Money and Banking
In macroeconomics, theories related Money and banking, country’s monetary and credit system, functions of the central bank and other banks and international finance are studied.
8. Macro-Theory of Distribution
In macroeconomics study of Distribution of wages and profits in national income is done. So it is clear that scope of Macro Economics it’s very wide.
Importance or Goals of Macroeconomics
1. Useful in Formulation of Economic Policies
The Macroeconomics is very useful in the formulation of economic policies. Related to this matter professor Boulding has written, “Macro Economics is very important in the view of economic policies because economic policies of the government are related to the group of individuals and not with individuals.
2. Helpful in Understanding the Collective and Complex Operation of Economy
In Micro Economics knowledge of only individual units can be done but for the collective and complex operation of while the economy, Macroeconomics is helpful.
3. Helpful in Development of Micro Economics
It is helpful in the development of microeconomics because the formulation of laws and theories of microeconomics is done with the help of macroeconomics.
4. Useful in Solving various Economic Problems
Economists take the help of macroeconomics in solving the problem related to the whole economy, like-National income, National Savings, and investment, consumption, production etc.
5. Useful in Economic Planning
At present, for the solution of economic problems and for fast and balanced economic development.
Every nation takes help of economic planning and determination of targets in plans is done on the basis of Macro Analysis.
6. Analysis of trade cycle
On the basis of macroeconomics by doing the analysis of factors Boom and Depression, important steps are taken for the removal of the cycles.
7. Analysis of monetary problems
Knowledge of determination of monetary policy of a country, the study of its effect and cause of monetary problems and solutions for removal of these problems is done only by Macroanalysis.
8. Due to Micro Paradoxes, It is Essential to Study the Whole Economy
Due to micro paradoxes, it is essential to study the whole economy because those decisions which are applicable to individual units it is not necessary that same decision will be applicable to the whole economy.
9. Analysis of Unemployment
In a country reason for unemployment is due to lack of effective demand. So for removal of unemployment increase in effective demand is essential. This factors of unemployment, its effect, and solutions for removal of these effects is possible through Macro Analysis.
Limitations of Macroeconomics
Importance not given to Individual Units
It is not complete analysis because in it instead of the individual units whole economy is studied collectively, So by the study of its importance is given to an undivided unit.
Possibility of Wrong Predictions
Policies are framed on the basis of the whole economy sometimes maybe dangerous for some firms and commodities. For example: If the general price level is fixed, then it cannot be said that price of commodities will also remain fixed because, by increase price of some commodities and decrease in the price of some commodities, general price level can remain fixed.
Difficult to find out Macro Quantities
It is difficult to find out macro quantities. Index number, defective of giving weight to index no. Thus, it is very difficult to find correct data of total investment total savings, total consumption etc.
No Attention to Structure and Composition of Group
In Macroeconomics attention is given only towards groups and total not towards structure and composition of the group.
Mutual Interdependence of Micro and Macro Economics
Though Micro and Macro Economics are two different branches of economic analysis and both have different scope. Instead of it, both are not competitive but are complementary and helpful to each other. It means that both maintain a good relationship and we are mutually interdependent on each other. It can be explained as follows:
(A). How Microeconomics is dependent on macroeconomics:
- It can be explained by following examples :
- Price or payment given to Meant of production (interest, wages, rent) by an individual firm or producer does not depend on the demand of means of production in the whole economy.
- An individual firm can sell its product which extends, depends upon the purchasing power of whole society.
- Price of one commodity does not depend on demand and supply of that commodity but also on the prices of other commodities.
- An individual form while determining the demand for its commodity must keep in mind the demand of society, income employment etc.
(B). How Macro Economics depends on Micro Economics:
- Increase in demand of commodities means the increase in demand of all commodities of a country but it is also possible that there is the decrease in demand of some commodities or demand of some commodities is increasing at the slow rate compared to other commodities.
To know the effects of the increase in National Income individual study of Expenditure done by people is essential.
It is possible there is the increase in the price of some commodities and decrease in the price of some commodities while general price level is fixed.
Thus, from above example, it is clear that Micro Economics and Macro Economics are mutually interdependent on each other and forgetting correct economics conclusion knowledge of both is very important.
So, Samuelson has correctly stated that “There is really no opposition between Micro and Macro Economics. Both are absolutely vital and you are only half-educated if you understand the one while being ignored or the other.”
Microeconomics Vs Macroeconomics.
→ It is concerned with the study of individual units. For example an individual consumer, producer, individual farms, family etc. Macroeconomic is concerned with the study of aggregate, for Example, total output, total savings, total investment, total employment etc.
→ It is called price theory. Prices of goods and inputs are determined. Macroeconomic is called income and Employment analysis. It studies the effective demand and income, employment, investment economic variables.
→ It is based on the marginal analysis. Macroeconomic based on the Keynesian economics namely effective demand.
→ Its scope of the study is limited and it is a part of the macroeconomic analysis. Macroeconomics scope is wide and it studies the economic variable affecting the economy as a whole and other economies as well.
→ It provides policy guidelines for the solution of individual problems. Macroeconomic provides policy guidelines for the solutions of aggregative problems relating to normal and international problems.
→ Microeconomics studies the partial equilibrium analysis. Macroeconomic deals with general equilibrium analysis.
→ Its importance in the modern economic system is limited because it provides a solution to individual problems only. Macroeconomics importance has widened because it provides solutions to International and national problems.
→ It is studying is the fluctuation in the prices and output of individual units. Macroeconomic studies the fluctuations in the prices and output in the economy as a whole.
→ The microeconomics analysis deals with the individual economic variables and process of studying is very easy. The macroeconomic analysis deals with aggregate affecting the economy as a whole and process of studying such variables is the complicated one.
- Microeconomics: A Definitive Guide [Business Economics].
- Limitations of Microeconomics.
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- Role And Importance Of Managerial Economics In Choosing Right Decisions.
- What is Utility of a Managerial Economist In Business?
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