MACRO ECONOMIC
Macroeconomics is a social science that studies an economy at the aggregate (or economy-wide) level. For the sake of simplicity, one can consider the discipline of macroeconomics as being composed of three interrelated components: the key attributes that characterize a macroeconomy; the key macroeconomic theories that explain how these attributes behave over time; and the key macroeconomic policy recommendations that emerge from the macroeconomic theories.
Definition: The term macro is derived from the Greek word ‘uakpo’ which means large. Macroeconomics, the other half of economics, is the study of the behavior of the economy as a whole. In other words:
"Macroeconomics deals with total or big aggregates such as national income, output and employment, total consumption, aggregate saving and aggregate investment and the general level of prices". In the words ofBoulding:
“Macroeconomics deals not with individual quantities as such but with aggregates of these quantities, not withindividual i.e., but with the national Income, not with individual prices but with the price level, not with Individualoutputs but with the national output. It studies determination of national output and its growth overtime. It also studies the problems of recession, unemployment inflation, the balance of international payments and the policies adopted by the governments to deal with these problems".
NATURE:
The main issues which are addressed in macro economics are in brief as under:
(i) It helps understanding determination of income and employment. Late J.M. Keynes laid great stress on macro-economic analysis. In his revolutionary book, “General Theory, Employment interest and Money" brought drastic changes in economic thinking. He explained the forces or factors which determine the level of aggregate employment and output in the economy.
(ii) Determination of general level of prices. Macro economic analysis answers questions as to how the general price level is determined and what is the importance of various factors which influence general price level.
(iii) Economic growth. The macro-economic models help us to formulate economic policies for achieving long run economic growth with stability. The new developed growth theories explain the causes of poverty in under developed countries and suggest remedies to overcome them.
(iv) Macro economics and business cycles. It is in terms of macroeconomics that causes of fluctuations in the national income are analyzed. It has also been possible now to formulate policies for controlling business cycles i.e. inflation and deflation.
(v) International trade. Another important subject of macro-economics is to analyze the various aspects of international trade in goods, services and balance of payment problems, the effect of exchange rate on balance of payment etc.
(vi) Income shares from the national income. Mr. M. Kalecki and Nicholas Kelder, by making departure from Ricarde theory, have presented a macro theory of distribution of income. According to these economists, therelative shares of wages and profits depend upon the ratio of investment to national income.
(vii) Unemployment. Another macro economic issue is to explain the causes of unemployment in the economy. Stagflation is another important issue of modern, economics. The Keynesian and post Keynesian economists are putting lot of efforts in explaining the causes of cyclical unemployment and high unemployment coupled with inflation and suggesting remedies to counteract them.
(viii) Macro Economic Policies. Fiscal and monetary policies affect the performance of the economy. These two major types’ policies are central in macro economic analysis of the economy.
(ix) Global Economic System. In macro economic analysis, it is emphasized that a nation’s economy is a part of a global economic system. A good or weak performance of a nation’s economy can affect the performance of the world economy as a whole.
Limitations:
The main limitations of macro economics are as follows:
(i) The macro economies ignore the welfare of the individual. For instance, if national saving is increased at the cost of individual welfare, it is not considered a wise policy.
(ii) The macro economics analysis regards aggregates as homogeneous but does not look into its internal composition. For instance, if the wages of the clerks fall and the wages of the teachers rise, the average wage may remain the same.
(iii) It is not necessary that all aggregate variables are important. For instance, national income is the total ofindividual incomes. If national income in the country goes up, it is not necessary that the income of all the individuals in the country will also rise. There is a possibility that the rise in national income may be due to the increase in the incomes of a few rich families of the country.
Interdependence of Micro and Macro Economics:
The classical approach to macro economics is that individuals and firms act in their own best interest. The wages and prices adjust quickly to achieve equilibrium in the free market economy.
The Keynesian approach to macro economics is that wages and prices do not adjust rapidly and unemployment may remain high for a long time. The Keynesians are of the view that government intervention in the economy can help in improving economic performance.
Conclusion:
The micro and macro economics are interdependent. They are complementary and not conflicting. We cannot put them in water tight compartments. Both these approaches help us in analyzing the working of the economy. If we study one approach and neglect the other, we are considered to be only half educated.
We should integrate the two approaches for the successful analysis of the working of economic system. The macro approach should be applied where aggregate entities are involved and micro approach when individual cases are to be examined. If we ignore one and lay emphasis on the other, it will lead to wrong or inadequate conclusions.
Macroeconomics is a social science that studies an economy at the aggregate (or economy-wide) level. For the sake of simplicity, one can consider the discipline of macroeconomics as being composed of three interrelated components: the key attributes that characterize a macroeconomy; the key macroeconomic theories that explain how these attributes behave over time; and the key macroeconomic policy recommendations that emerge from the macroeconomic theories.
Definition: The term macro is derived from the Greek word ‘uakpo’ which means large. Macroeconomics, the other half of economics, is the study of the behavior of the economy as a whole. In other words:
"Macroeconomics deals with total or big aggregates such as national income, output and employment, total consumption, aggregate saving and aggregate investment and the general level of prices". In the words ofBoulding:
“Macroeconomics deals not with individual quantities as such but with aggregates of these quantities, not withindividual i.e., but with the national Income, not with individual prices but with the price level, not with Individualoutputs but with the national output. It studies determination of national output and its growth overtime. It also studies the problems of recession, unemployment inflation, the balance of international payments and the policies adopted by the governments to deal with these problems".
NATURE:
The main issues which are addressed in macro economics are in brief as under:
(i) It helps understanding determination of income and employment. Late J.M. Keynes laid great stress on macro-economic analysis. In his revolutionary book, “General Theory, Employment interest and Money" brought drastic changes in economic thinking. He explained the forces or factors which determine the level of aggregate employment and output in the economy.
(ii) Determination of general level of prices. Macro economic analysis answers questions as to how the general price level is determined and what is the importance of various factors which influence general price level.
(iii) Economic growth. The macro-economic models help us to formulate economic policies for achieving long run economic growth with stability. The new developed growth theories explain the causes of poverty in under developed countries and suggest remedies to overcome them.
(iv) Macro economics and business cycles. It is in terms of macroeconomics that causes of fluctuations in the national income are analyzed. It has also been possible now to formulate policies for controlling business cycles i.e. inflation and deflation.
(v) International trade. Another important subject of macro-economics is to analyze the various aspects of international trade in goods, services and balance of payment problems, the effect of exchange rate on balance of payment etc.
(vi) Income shares from the national income. Mr. M. Kalecki and Nicholas Kelder, by making departure from Ricarde theory, have presented a macro theory of distribution of income. According to these economists, therelative shares of wages and profits depend upon the ratio of investment to national income.
(vii) Unemployment. Another macro economic issue is to explain the causes of unemployment in the economy. Stagflation is another important issue of modern, economics. The Keynesian and post Keynesian economists are putting lot of efforts in explaining the causes of cyclical unemployment and high unemployment coupled with inflation and suggesting remedies to counteract them.
(viii) Macro Economic Policies. Fiscal and monetary policies affect the performance of the economy. These two major types’ policies are central in macro economic analysis of the economy.
(ix) Global Economic System. In macro economic analysis, it is emphasized that a nation’s economy is a part of a global economic system. A good or weak performance of a nation’s economy can affect the performance of the world economy as a whole.
Limitations:
The main limitations of macro economics are as follows:
(i) The macro economies ignore the welfare of the individual. For instance, if national saving is increased at the cost of individual welfare, it is not considered a wise policy.
(ii) The macro economics analysis regards aggregates as homogeneous but does not look into its internal composition. For instance, if the wages of the clerks fall and the wages of the teachers rise, the average wage may remain the same.
(iii) It is not necessary that all aggregate variables are important. For instance, national income is the total ofindividual incomes. If national income in the country goes up, it is not necessary that the income of all the individuals in the country will also rise. There is a possibility that the rise in national income may be due to the increase in the incomes of a few rich families of the country.
Interdependence of Micro and Macro Economics:
The classical approach to macro economics is that individuals and firms act in their own best interest. The wages and prices adjust quickly to achieve equilibrium in the free market economy.
The Keynesian approach to macro economics is that wages and prices do not adjust rapidly and unemployment may remain high for a long time. The Keynesians are of the view that government intervention in the economy can help in improving economic performance.
Conclusion:
The micro and macro economics are interdependent. They are complementary and not conflicting. We cannot put them in water tight compartments. Both these approaches help us in analyzing the working of the economy. If we study one approach and neglect the other, we are considered to be only half educated.
We should integrate the two approaches for the successful analysis of the working of economic system. The macro approach should be applied where aggregate entities are involved and micro approach when individual cases are to be examined. If we ignore one and lay emphasis on the other, it will lead to wrong or inadequate conclusions.