MACRECONOMICS

INTRODUCTION:
The word Macro is derived from the Greek word `Makros', meaning large or aggregate (total).
Macro-Economics, therefore, is the study of aggregates covering the entire economy such as
total employment, national income, national output, total investment, total savings, total
consumption aggregate supply, aggregate demand, general price level etc. It is therefore
aggregative economics. It deals with the study of economy as a whole.
Meaning and Definitions of Macro-Economics
Macro-Economics deals with the study of aggregates covering the entire economy. It is
concerned with total employment, national income, national output, aggregate demand,
aggregate supply, aggregate consumption and savings, total investment etc. It is an aggregative
economics.
In the words of Prof. Kenneth Boulding, "Macro-Economics deals not with individual
quantities as such, but with the aggregates of these quantities, not with the individual incomes
but with the national income, not with individual prices but with the price level, not with
individual output but with the ''national output".

The subject matter of macro economics are as follows: 

1. Determination of National Income: The first major issue in macro economics is to explain

what determines the level of employment and national income in an economy and therefore what
causes involuntary unemployment. The level of national income and employment are very low in
times of depression as in 1930s in various capitalist countries of the world. This will explain the
cause of huge unemployment that emerged in these countries. Classical economists denied that
there could be involuntary unemployment of labour and other resources for a long time.
Classical economist thought that with changes in wages and prices, unemployment would be
automatically removed and full employment established. But this did not appear to be so at the
time of great depression in the thirties (1930) and after. Keynes explained the level of
employment and national income is determined by aggregate demand and aggregate
supply. With aggregate supply curve remaining unchanged in the short run, it is the deficiency
of aggregate demand that causes under employment equilibrium with the appearance of
involuntary unemployment. According to Keynes it is the changes in private investment that
causes fluctuations in aggregate demand and is, therefore, responsible for the problems of
cyclical unemployment.
2. General Price-level and Inflation: 
Another macro economic issue is to explain the problem of inflation. Inflation had been a major
problem faced by both the developed and developing countries in the last 50 years. Classical
economists thought that it was quantity of money in the economy that determined the
general price level in the economy and according to them, rate of inflation depended on the
growth of money supply in the economy. Keynes criticized the ‘quantity theory of money’ and
showed that the expansion in money supply did not always lead to inflation or rise in price-level.
Keynes who before the second world war explained that involuntary unemployment and
depression were due to the deficiency of aggregate demand, during the war period when prices
rose very high, he explained in his booklet’ how to pay for war’ that just as unemployment and
depression were caused by the deficiency of aggregate demand, inflation was due to the
excessive aggregate demand. Thus, Keynes put forward what is now called ‘demand-pull
theory of inflation’. After Keynes, theory of inflation has further developed and many theories
of inflation depending upon various causes have been put forward, to analyze the problem of
inflation is an important issue in macroeconomics. 
3. Business Cycles: 
Throughout history market economics have experiences business cycles. Business cycles refer to
fluctuations in output and employment with alternating periods of boom and recession. During
boom or prosperity both output and employment are at high levels, whereas in recession both
output and employment fall as a consequence large unemployment came into existence in the
economy. When recession is extremely severe, they are called depression. What are the causes of
these business cycles is an important macro economic issue which has been highly controversial.
The objective of macro economic policy is to achieve economic stability with equilibrium at full-
employment, level of output and income. 
4. Stagflation: 
During the decade of 1970s and in the subsequent decades market economies have experienced a
still more intricate problem which has been described as stagflation. While in business cycles,
recession or depression is accompanied by not only high degree of unemployment but also rapid
inflation. This is a period which has high unemployment and recession (stagflation) which co-
exists with high inflation. This problem is called stagflation. Stagflation could not be explained
with Keynesian theory, which focuses on the demand side. Therefore, a new economic thought
which is called supply-side economies emerged which explained stagflation by laying stress on
the supply side of economic activity. Stagflation is an important issue of modern macro
economics. 
5. Economic Growth: 
Another important issue in macro economics is to explain what determines economic growth in a
country. Theory of economic growth has been recently developed as an important branch of
macro economics. The problem of growth is a long-run problem and Keynes did not deal with it.
It was Harrod and Domar who extended the Keynesian analysis to the long-run problem of
growth with stability. They laid stress on the dual role of investment- one of income generating,
which Keynes ignored because of his preoccupation with the short-run. Harrod and Domar in
their models showed that investment adds to productive capacity (capital stock), and then if
growth with stability (without stagnation or inflation) is to be achieved, income or demand must
be increasing at a rate large enough to ensure the full utilization of the increasing capacity. Thus,
macro economic models of Harrod and Domar have explained the rate if growth of income that
must take place if the steady growth of the economy is to be achieved. These days growth
economics has been further developed and extended a good deal and new theories of growth
have been put forward by Solow, Meade, Kaldor and Joan Robinson. 

Since the growth theories of Harrod, Domar, Kaldor, Meade and others apply particularly to the
present day developed countries, special theories which explain the causes of underdevelopment
and poverty in less developed countries and they also suggest strategies for initiating and
accelerating growth in them have also been propounded. These special growth theories relating
to less-developed countries are generally known as economies of development. 
6. Balance of Payments and Exchange Rate: 
Balance of payments is the record of economic transactions of the residents of a country with the
rest of the world during a period. The objective of preparing such a record is to present an
account of all the receipts of goods imported, services rendered, and capital received by the
residents of a country and the payments made for goods imported, services received and capital
transferred to other countries by residents of a country. There may be deficit or surplus in
balance of payments. Both create problems for an economy. An important effect is that the
transactions in balance of payments are influenced by the exchange rate. The exchange rate is the
rate at which a country’s currency is exchanged for foreign currencies. The instability in
exchange rate has been a major problem in recent years which has given rise to serious balance
of payments problems.

Importance of Macroeconomics:

Macroeconomics has become an important branch of economics because of the following

reasons:
Firstly, it provides us with tools to judge the performance of the economy as a whole. The
performance of the economy is judged by the Gross Domestic Product (GDP) of the economy
and this aggregative concept is discussed in macroeconomics. Again, the economic growth is
determined by the size of the per capita real income. Thus, to know the economy is working, an
elementary knowledge of macroeconomics is essential.
Secondly, macroeconomics is also useful to the government for formulating appropriate policies.
In a modern economy, the government interferes in economic activity. For this the government
adopts different policies such as fiscal and monetary policies and so on. Such macroeconomic
policies influence the entire economy. What policies — fiscal or monetary — would be
undertaken by the government depends on the phase of the trade cycle or business cycle.
If the economic activity is increasing (i.e. the economy is in boom), government policy will be
different from its policy when the economic activity is decreasing (i.e. the economy is moving to
depression). To know the nature of the trade cycle and to make forecasts about business cycle, a
knowledge of macroeconomics is necessary. Hence macroeconomics helps the government to
take an appropriate policy.
Thirdly, for any business firm, the knowledge of macroeconomics is necessary, because the
demand for many firm products is a function of income. The demand increases or decreases
along with the increase or decrease in the level of the economic activity. Thus, to make a forecast
about the demand for its product, the firm must be able to make an estimate about the level of the
economic activity which requires the knowledge of macroeconomics.
Fourthly, we know that economy suffers from many problems such as unemployment, inflation
etc. Why do such problems arise in the economy? Can such problems be automatically
corrected? Is there any automatic mechanism within the economic system to solve these
problems? These are some of the theoretical problems which require the knowledge of
macroeconomics to understand and deal with them.
From the above analysis, it is clear that the study of macroeconomics is useful. Though
macroeconomics is useful, it is not without limitations:
THE LIMITATIONS ARE:
Firstly, many propositions which are true for individuals may not be true for the economy as a
whole. For example, an individual can borrow from another individual during a period of time,
but the community as a whole cannot borrow from itself. There are many other examples which
could be true for an individual, but may not be necessarily true for the community as a whole.
Thus, it is difficult to generalise in macroeconomic theory.
Secondly, in macroeconomics, we deal with aggregates and these aggregates are taken as
homogeneous entities. But this is not true.
Thirdly, all aggregates are not useful. Only those aggregates which can be functionally related
happen to be useful.
Fourthly, the major part of the macro theory is applicable for a developed capitalist economy. It
is not suitable for less developed economies. The problems of the developing economies are not
same as those of the developed economics. Hence, the macroeconomic models built for the
developed economies are unlikely to be suitable for the developing economies.

Comparison between Micro and Macro-Economics

Micro-Economics may be distinguished from Macro-Economics on the following ground.

1) Nature -
Micro-Economics is a study of the behaviour of individual economic units, such as individual
consumers, individual firms, individual prices, individual industries, particular commodities etc.
Macro-Economics, on the other hand, is the study of economic system as a whole. It is the study
of the behaviours of large aggregates, such as national income, national output, aggregate
demand and supply, total consumption, total investment, general price level etc.
2) Scope and subject matter -
Micro-Economics basically deals with the determination of prices of commodities, prices of
factors and with the allocation of resources.
While Macro-Economics deals with the theory of determination of size of national income,
level of employment and general price level. Subject matter of Macro-Economics also covers
study of economic growth, business cycles, public finance and international trade.
3) Approach -
Micro-Economics is based on partial equilibrium analysis. This analysis explains the equilibrium
conditions of an individual consumer, a firm, an industry, a factory etc.
On the other hand, Macro-Economics is based on general equilibrium analysis. This analysis
studies the behaviour of number of large aggregates, their functional relationships and
interdependence, and deals with entire economy in the context of equilibrium.
4) Assumptions -
Micro-Economic is based on partial equilibrium. Partial equilibrium isolates an individual unit
from other forces and proceeds with the assumption "Other-things remaining constant (ceteris
paribus). This .approach neglects the interdependence between economic variables. On the other
hand, macro-economics deals with general equilibrium approach, which assumes everything
-
depends on everything else and explains the inter-relations and interdependence between
aggregate economics variables.
5) Mediuds -
Micro-Economics uses slicing method. This method splits up the entire economy into small
individual units for the purpose of an intensive detail study.
While Macro-Economics uses lumping method. Macro-Economics deals with national
aggregates or total values of economic variables related to whole economy. It uses method of
lumping to study macro quantities. This method splits up the economy into big lumps (or sectors)
for the purpose of study.
6) Economic variables -
Micro-Economics is concerned with the behaviour of micro variables or micro quantities, such as
an individual demand individual supply, price of a particular commodity, individual industries,
individual wages etc.
Macro-Economics is, however, concerned with the behaviour of macro variables or macro
quantities, such as national output, national income, total consumption, total investments,
aggregate demand, aggregate supply, general price level etc.
7) Quantity expressed -
In Micro-Economics analysis, commodities can be considered in real or physical terms. For
example, Law of Diminishing Marginal Utility, Law of Demand are explained in terms of real
quantities.
But Macro-Economics deals with aggregates i.e. total values of economic variables, which
cannot be expressed in terms of real quantities. Therefore, aggregates, such as total supply,
national output and income etc., are expressed in terms of money.
8) Objectives -
The objectives of the Micro-Economics on the demand side is to maximize utilities and on the
supply side is to maximize profits at the minimum cost.
The main objectives of Macro-Economics are full employment, price stability, economic growth,
increases in national output and income, and favourable balance of payment.
9) Theory of Distribution -
Micro Theory of Distribution explains factor pricing. It explains how wages (price for the use of
labour), rent (payment for the use of land), interest (price for the use of capital) and profits (the
reward for entrepreneur) are determined. Factor prices along with product prices determine the
allocation of resources to the production of various goods.
While Macro Theory of Distribution explains what determines the relative aggregative shares
from the total national income of the various social classes, especially workers and capitalist. It
deals with the relative shares of rent, wages, interest and profit in total national income.
10) Basic questions -
Micro-Economic Theory -deals with the following basic questions. i.e., what goods shall be
produced and in what quantities? How they shall be produced? How the goods and services
produced shall bedistributed? Whether the production of goods and their distribution for
consumption is efficient.
While Macro-Economic Theory deals with the problem of full employment of resources, i.e., are
all available resources being fully utilized? Is the economy's productive capacity increasing, i.e.,
problem of economic growth? Also it deals with the questions like, Is purchasing power of
money constant? Is the balance of payment favourable to the country? etc.
But though there are several differences between Micro and Macro-Economics, these two
branches are not altogether mutually exclusive.
In fact, they are complementary to each other rather than being competitive. Also these two
approaches are interdependent. Knowledge of both is necessary for complete understanding of
the working of an economy. In the words of Prof. Samuelson, "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 ignorant of the other."