Steve Ouma Oyugi Macro Economics Kimathi University College of Technology 2
The Relationship between Macro andMicroeconomics
deals with the behavior of individuals, consumers, factor owners, firms,individual industries and individual markets.
on the other hand dealswith a holistic approach of the economy bydealing with various aggregates, whichinclude:1.Total employees2.National income3.General price levels4.Inflation e.t.c.
Macroeconomics tries to explain what determines the level of total NationalEconomic activity and what causeseconomic growth.
The classical economists had the basicprinciple that the economy had self -adjusting mechanisms to remain at fullemployment. This was based on the
JB Saylaws of the market,
which says thatdemand creates its own supply.
British Economist JM Keynes
(1883 –1946) showed that an existence of greatand involuntary unemployment during thedepression of 1930 created the grounds onwhich macroeconomics is founded.
Central issues in Macroeconomics
Macroeconomics deals with the followingstudies, which makes up its scope:
income, output and employment.
The elements hereinare:
Theory of consumptionfunction
Theory of investment function
Theory of business cycle
4.Macro theory of Economic Growth These elements are explained further as:
Employments and unemployment
There are several causes of unemploymentand involuntary unemployment. Theyinclude:
National income/Gross NationalProduct
– this is the total value of allfinal goods and services produced ina country within a year. Itdetermines per capita income, alsodetermined by the level of physicalcapital, human capital andtechnology.
General price level and inflation
– The classical economists arguedthat inflation and prices wasdetermined by the amount of moneyin circulation.
Keynes introducedthe demand pool theory of inflation
caused by excessivedemand as can happen during boomor panic buying.3.Other causes of inflation could becost push inflation.
– this issustained growth in nationalincomes. Keynes concentratedmainly on short-term growth but weknow that economic growth is afunction of levels of investment. Acertain level of economic growth isneeded to sustain a steady growth asexplained by growth models.
– this is a special formof inflation resulting from the supplyside constraints. The Keynesianeconomy focuses mainly on demandside constraints, but modernmacroeconomists reveal supply sideconstraints, which can come fromsupply shocks.
Balance of payments (BOP)
and[Exchange rates] - this is an analysisof transactions of the residents of acountry with the rest of the worldwithin a certain period. It takesaccount of imports, exports andcapital exchange leading to eithersupply or deficits. Exchange rate isthe rate at which a country’scurrency exchanges with another’scurrency.A microeconomic approach has limitationsto the extent that there it creates self confusing paradoxes. A firm will make moreprofits by cutting wages and thusmaximizing profits. This, when looked atfrom a macroeconomics view reducesaggregate demand.
Steve Ouma Oyugi Macro Economics7
Kimathi University College of Technology