Introduction to Macroeconomics


Macroeconomics is the branch of economics which deals with the aggregate study of the economy. It studies the aggregate variables like national income, price level, unemployment, economic growth, etc. Therefore, it is also known as the aggregate economics.

In fact, macroeconomics is basically concerned with national aggregate or total values such as national income, aggregate consumption, aggregate saving, total investment, etc. that relates to the whole economy. It examines how the general price level is determined and how resources are allocated at the level of the economic system as a whole.

Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. ~ Wikipedia

Macroeconomics deals not with individual quantities but with aggregate of these quantities, not with individual incomes but with national income, not with individual prices but with price level, not with individual output but with national output ~ K.E. Boulding

Macroeconomics is the study of behaviour of the economy as a whole. It examines the overall level of national output, employment, prices and foreign trade. ~ P.A. Samuelson

Macroeconomics concerns the overall dimension of economic life. More specially, macroeconomics concerns with such variables as aggregate volume of an economy, with the extent to which its resources are employed, with size of national income and with the general price level. ~ Grander Ackley

Since Macroeconomics splits up the economy into big lumps for the purpose of the study; it is also called the "Method of Lumping". It explains how the level of income and employment is determined and analyses the factors that bring about fluctuations in income and employment. It also explains how national income grows over time. Thus, macroeconomics deals with the phenomena related to the level and growth of national income and employment and various factors governing their trends. Therefore, macroeconomics is also known as the "Theory of Income and Employment".

Features of Macroeconomics

  1. It is aggregative economics.
  2. It is concerned with the behavior of the economy as a whole.
  3. It is also called Theory of Income and Employment.
  4. It is based on general equilibrium.
  5. It deals with the problem of unemployment, trade cycles, international trade, etc.
  6. It studies economics as a whole.

Scope of Macroeconomics

1. Theory of National Income
Macroeconomics studies the concept of national income, its different elements, methods of measurement and social accounting.

2. Theory of Employment
Macroeconomics also studies problems relating to employment and unemployment. It studies different factors determining the level of employment such as effective demand, aggregate demand, aggregate supply, aggregate consumption, aggregate investment, aggregate saving, etc.

3. Theory of General Price Level
Determination of and changes in general price-level are also studied under macroeconomics. Problems concerning inflation or a general rise in prices and deflation or general fall in prices are also studied under macroeconomics.

4. Theory of Money
Changes in demand for and supply of money have a considerable effect on the level of employment. Macroeconomics, therefore, studies functions of money and theories relating to it. Banks and other financial institutions are also part of its study.

5. Theory of Economic Growth
Study of problems relating to economic growth or increase in real per capita income forms a part of macroeconomics. It studies the economic growth of both developed and underdeveloped economies. Monetary and fiscal policies of the government are also studied therein.

6. Theory of International Trade
Macroeconomics also studies trade among different countries. Theories of international trade, tariff, and protection, etc. are subject of great significance to macroeconomics.

Importance of Macroeconomics

  1. Helpful to understand the working of the economy
  2. Helpful in formulating economic policies
  3. Helpful in controlling economic fluctuations
  4. Helpful in international comparison
  5. Evaluate the performance of the economy
  6. Helpful to understand international trade
  7. Useful in business decisions making

Limitations of Macroeconomics

1. Dependency on individual units
Several conclusions of macroeconomics are based on the total sum of individual units. In fact, it is not correct, because what is true for individuals may not necessarily be true for the whole economy. For instance, an individual may save in terms of money but it everybody start saving, the aggregate demand will fall which results in the reduction in national income. It will results in fall and not rise in aggregate saving. Prof. Samuelson has called it, "Fallacy of Composition". According to him, the tendency of excessive generalization on the part of macroeconomics is to apply individual experience to the economy as a whole, is not proper.

2. Heterogeneous units
Under macroeconomics, heterogeneous units are studied. These units are measured in different ways. It is not possible to express these units in uniform numbers or homogeneous measure.

3. Different effects of aggregate
Another difficulty in the study of macroeconomics is that it doesn't study the different effects of an aggregate on different sectors of an economy. In other words, macroeconomics tendency has not a uniform effect on all sectors of an economy. For example, a rise in price-level benefits the traders and the industrialist but the wage-earners are the losers.

4. Limited application
Another limitation of macroeconomics is that most of the models relating to it have only theoretical significance. They have very little use in practical life. Moreover, it is very difficult to measure various aggregates of macroeconomics.

5. Ignores contribution of individual units
Macroeconomics analysis throws light only on the functioning of the aggregates. However, in real life, the economic activities and decisions taken by individual units on private-level have their effects on the economy as a whole. Such effects are not known by the study of macroeconomics alone.

Interdependence of Microeconomics on Macroeconomics

Microeconomics is the study of economic activities related to individuals such as the output of a firm, price of a commodity, individual demand or consumption, determination of wages, etc. but these microeconomic activities are dependent on macroeconomics. The dependency of microeconomics on macroeconomic can be explained as follows:

1. Determination of consumption
Consumption is the subject matter of microeconomics because it is an individual economic activity. Consumption of an individual depends upon the consumption of goods and services by society in a particular place. Hence, microeconomics is dependent on macroeconomics.

2. Determination of product price
The determination of the price of a commodity depends upon general price level in the economy. The determination of general price level is the subject matter of macroeconomics whereas the determination of individual price is the subject matter of microeconomics. Hence, microeconomic is dependent upon macroeconomic.

3. Determination of wages rate
The determination of the wage rate of labor is the subject matter of microeconomics. It is affected by the wages rate of all labor of the economy. Thus, in the determination of the wage rate of labor, microeconomics is dependent upon macroeconomics.

4. Determination of profit
The determination of profit is studied under microeconomics but it is dependent on macroeconomics variables like employment level, aggregate demand, national income, general price level, etc. Hence, in the determination of profit microeconomics is dependent upon macroeconomics.

5. Determination of interest rate
The interest rate is the subject matter of microeconomics but it is determined by the interaction between macroeconomic variables like demand and supply of money. Hence, microeconomics is dependent on macroeconomics.

Interdependence of Macroeconomics on Microeconomics

Macroeconomics in the study of activities related to aggregates such as national income, total output, general price level, etc. but this macroeconomics variable is the total sum of microeconomics variables. Therefore, macroeconomics is dependent upon the microeconomics. The dependence of macroeconomics and microeconomics can be explained as follows:

1. Determination of national income
National income is the subject matter of macroeconomics but national income is calculated by the total sum of individual incomes. The study of individual income is the subject matter of microeconomics. Thus, macroeconomics is dependent upon the microeconomics.

2. Determination of price level
The determination of price level is the subject matter of macroeconomics but it is the average of all price of individual goods and services. Thus, macroeconomics is dependent upon the microeconomics.

3. Determination of employment level
The determination of the level of employment is studied under macroeconomics but to find out the level of employment in an economy, the employment provided by each and every firm has to be studied. Thus, the study of microeconomics is necessary for the determination level of employment.

4. Determination of investment
Investment theory in the subject matter of macroeconomics but the investment is determined by the rate of interest except for the rate of profit. The rate of interest and profit studied under microeconomics. Thus, macroeconomics is dependent upon microeconomics.

5. Study of total saving
The total saving of an economy depends upon the saving of different sectors, i.e, total savings in the sum of personal savings, business saving and government saving. The saving in a different sector of an economy is a study under the microeconomics. Thus, macroeconomics is dependent upon the microeconomics.

Differences between Microeconomics and Macroeconomics

Different Concepts Of Macroeconomics

Stock and Flow variables

The economic aggregates used in macroeconomics are called macroeconomic variables. These variables are used to evaluate the performance and to analyze the behavior of an economy. And the macroeconomic variables are generally grouped under stock variables and flow variables. A brief description of stock and flow variables is given below:

1. Stock of variables
The macroeconomic variables which are measured at a point of time are called stock variables. In other words, stock variables are the macroeconomic quantities measurable at a specific point in time. For example, the water is stored in a tank at a point of time, number of books in a library on a particular date etc. are stock variables. In macroeconomics, the stock of capital in a country, the number of employed persons, money supply, total savings, labor force, business inventories, etc. Are measured at a point of time which are some examples of stock variables.

2. Flow Variables
the macroeconomic variables which are measured or expressed in a unit of time are called flow variables. In other words, flow variables are measurable only in terms of a specific period of time, i.e., per hour, per week, per month, or per year. For example, national income, total consumption, total savings, total investment, total export, total import, etc. are flow variables.

Equilibrium and Disequilibrium

The concepts of equilibrium and disequilibrium are used in both microeconomics and macroeconomic analysis. Microeconomic uses partial equilibrium analysis whereas macroeconomic largely uses general equilibrium analysis. The brief explanation of equilibrium and disequilibrium is given below:

1. Equilibrium
In the physical science, equilibrium means the balance between opposing forces or forces acting upon each other. In economics, equilibrium refers to a state or a situation in which opposite forces, e.g., demand and supply are in balance in there is no tendency of change over time. In macroeconomics, an economy is said to be in equilibrium when aggregate demand equals aggregate supply. Aggregate demand is the total sum of demand for all capital and consumer goods and services in a given period of time and price level. Aggregate supply is the total sum of all capital and consumer goods and services supplied in a given period of time and price level.

2. Disequilibrium
Disequilibrium refers to the situation in which opposite forces, (e.g. aggregate demand and aggregate supply) are in imbalance. In other words in macroeconomics, disequilibrium refers to a situation in which aggregate demand and aggregate supply or not equal. The disequilibrium causing factor arise out of the working process of the economy. The working of the market economy is governed by such a large number of interrelated and interacting forces that a continuous balance between market force (demand and supply) cannot be expected. In fact, an imbalance between economic forces is a routine matter in a market economy. The reason is that the decision undertaken by millions of consumers, producers, exporters, importers, workers, bankers and the government and their decision need not be always coinciding. The results could be disequilibrium in the economy.

Besides these concepts, there are some more concepts like static analysis, comparative analysis, and dynamic analysis. This post gets too long so I have not included them here, you  can read them in detail by visiting links below:

Static Analysis (Macro Statics)
Comparative Analysis (Comparative Macro Statics)
Dynamic Analysis (Macro Dynamics)


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