macroeconomics introduction

What is Macroeconomics?

As this tutorial you’ll able to learn complete guide about Macroeconomics types, limitation, scope etc. ,continue Reading………

Macroeconomics is the study economics as a whole. It deals with large aggregates of economics variables. And that believed that Norwegian economist Prof. Ragner Anton Kittel Frisch Used the word macroeconomics in 1933. It deals with great aggregates and average like national income, general price, total employment, total investment and so on.

According to K E Boulding, “Macroeconomics deals not with individual quantities but with aggregates of these quantities, not with individual income but with national income, not with individual price but with general price level, not with individual output but with national kevel output.” By the above analysis, it is clear that macroeconomics studies the economy not particular units but as a whole. Since J M Keynes had made an outstanding contribution in the development of macroeconomics so it is also known as Keynesian economics.

Scope of Macroeconomics

Here the some scope of macroeconomics:

  • Theory of income output and employment: The main concern of macroeconomics is to is to explain the determinants of national income, output and employment . The level of income and employment are determined by effective demand. The effective demand is the aggregate of total consumption demand and investment demand. The theories like national income, classical and Keynesian theories of output and employment are  studied under it.
  • Theory of general price level(inflation): Macroeconomics studies about general price level which includes, inflation, deflation and excess demand.  The theories like inflation, money system, banking etc. are included under it.
  • Theory of economic growth: Achievement of higher economic growth has been remain as the most important macroeconomic objective of every country. To achieve the sustainable economic growth, the income of the nation should grow for a long time. There are many economic growth and development theoris like, theory of Harrod-Dammor. Robert Lucas theory ,Paul Romer theory etc. are included under it.
  • Theory of distribution: The distribution of national income among the different factors of production is another issue of macroeconomics. Macroeconomics studies what factor and how the comparative share of different classes of people, national income is determine. The macro theories of distribution forwarded by David Ricardo, Karl Mark, Michael Kalecki etc. are studied under it.
  • Theories of saving and investment: Under the theory of consumption, aggregate consumption expenditure and saving of household sector is studied. Theories of investment, types and investment functions are also the subject matter of macroeconomics.
  • Theory of trade cycle: The rise and fall in economic activities is known as trade cycle. The reasons for economic fluctuation have remain the problem for every country in the world. We will study, monetary  theory, multiplier accelerator theory,  political business cycle etc are studied under it.

What is Limitations of Macroeconomics

Although Macro economics has a lot of importance and uses for the solution of  growing economic problems, but it is not free from criticism. Some of the major drawbacks or Limitations of Macro Economics are presented below: 

  • Difficulties in averaging: Macroeconomic study is not applicable for calculating averages like national income by the help of the estimates of the price of different goods and services. General price level requires for the construction of whole price index number. Thus it arises many problems regarding averaging  and index number.
  • .Problems in measuring: Heterogeneous aggregates:-  The aggregates which are homogeneous in nature can lead to accurate result. But there are many fact which are heterogeneous in nature. It is difficult to find out aggregates of such facts.
  • Unreliable estimates of aggregates: Due to lack of expert technicians and reliable statistical techniques predicted aggregates may become incorrect. It requires special ability to predict the result correctly.
  • Variation in degree of fluctuation: An  aggregative change may not influence all the sectors of the economy. For example, rise in general price level dos not mean that the prices of all the commodities have increased at the same proportion. Some sectors affected more and some may be less.
  • The falacy of composition: Aggregate economic behaviors’ is the some of individuals which is known as falacy of composition. Because what is true in case of individual may not be true with the case of aggregates.

What are the Types of macroeconomics?

The type of macroeconomics are Macro static, Comparative macro statics, Macro dynamics which are discuss below:

1.Macro statics:-

Macro statics explains the aggregate relation among different variable in a stationary state. It deals with the final equilibrium of the economy at the particular point of time. It explains the relationship between macro variables in the position of equilibrium without explaining the process of adjustment. The concept of macro statics can be analyze with the help of following figure:

In the given figure, NI is measured on X axis And aggregate Demand and supply on Y axis. The 45° Z line aggregate Supply function and C+I
represents aggregate. Demand function. Both the demand and supply curve interact with each other At point E and establishes equilibrium. The equilibrium level of NI is determined at the equilibrium. This equilibrium I called static equilibrium because at the equilibrium aggregate demand and supply remain static at the point.

2.Comparative macro statics

Comparative macro statics makes the comparative study of different equilibrium attained by the economic activities. The comparative macro statics shows the different still picture of the economy as a whole. It compares old equilibrium with new equilibrium but does not study the process how new equilibrium establishes from the break down of old equilibrium. It has been illustrated by the figure below.

macroeconomics type

In the given figure,  the economy is I equilibrium at point E. When the aggregate. Demand curve shift upward  in the form of C+I, due to increase in investment, a new equilibrium point has been established at point. At this equilibrium, NI is Y1. This shows the economy has moved from one condition to another condition. Thus comparative macro statics shows two still picture of the economy.

3.Macro dynamics

Macro dynamics  refers to a position by which the system passes from one equilibrium position to another due to change in macro variables. This shows system passes from one  equilibrium position to another.  It is the complete and comprehensive method of economic analysis. The transitional path how old equilibrium breaks down and new equilibrium establishes is shown by the figure below: 

macroeconomics type

In the given figure point E is the original Equilibrium point at which OY income is determined by the economy. When agg. demand increases in the form of C+ΔI, the new equilibrium point is at point E1. This Increases NI to OY1. Thus, the equilibrium shifts to E1 from E by which the NI reaches to OY1.

When output increases, due to increase in investment, the consumption demand also increases. Output further increases to meet increased demand. The rise in output causes, increase in income. So the income and output go on rising till the new equilibrium establishes. The oath by which the income increases through time is shown in the figure. The economy is seen moving through 1,2 and 3 to reach the new equilibrium. The increase in production causes income to move from Y to Y1 through point A. Thus macro dynamics helps to understand the moving picture of an economy.

Macroeconomics and Business environment

Macroeconomics studies the behavior of aggregate economy. It is concerned with the economy in a wide sense like national income, employment, saving and investment. It examines how resources are allocated at level of economic system as a whole and how the general price is determined for the entire economy. The study of macroeconomics is very important in order to deal with the issues in the business environment. Basically the trend of macroeconomics is cyclical, but it is not clearly predicted. Thus, business firm need to make a deep study of macroeconomics variables and analyze the market forces and national/international policy that determine the market fluctuation.

It includes the study of economic system, policies, status and the trend of macroeconomics indicators like Gross domestic product (GDP),GNP,PCI etc., Macroeconomic policies formulated by the government to control and regulate the economic activities also affect the Functioning of private business firm. Besides, the undertaking of the firm’s lead to considerable social cost in term of environmental pollution an other hazards. Such social cost not only create conflict of interest between the firm and the society, but also impose the social responsibility on the firms. Therefore, an efficient business manager has to take into consideration that an business organization must operate without disturbing the real quality of environment. The role of macroeconomics to study business environment are as follows:

  • To study the nature and extend(trend) of domestic business environment.
  • To study the nature and extent of international business environment.
  • To examine the role of government policies.
  • To examine the nature and extent of externalities in business environment.
  • Strategies formulation and implementation.

Microeconomics and Macroeconomics difference as follows:

  • Micro economics studies the individual or small economic variables of the economy such as individual consumption, saving investment and income, but macroeconomics deals with aggregates like national income, full employment and price level.
  • Microeconomics studies principles, problems and policies concerning the optimum allocation of resources whereas macro economics studies the problems, policies and principles relating to full employment and growth of resources.
  • The subject matter of micro economics deals with the determination of price, consumer’s equilibrium, distribution and welfare, etc., whereas the subject matter of macroeconomics studies full employment, price level, national income, trade cycles, etc.
  • Laws of microeconomics are formulate on assumptions such as, full employment, constant production and income, ceteris paribus (other things being equal).
  • Micro economics studies the equilibrium between the forces of market demand and supply. whereas macroeconomic analysis deals with the equilibrium between the forces of the whole economy (i.e., aggregate demand and aggregate supply).

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