Importance of Macro Economics

1. To understand the working of Macro economy

2. Important Nature of macroeconomic issues
3. Importance of Macroeconomics for Accelerating
Economic Growth
4. Understanding Business Cycles
5. Formulating Government’s Macroeconomic
Policies
6. Individual Decision Making
7. Importance in Business Decisions
1.To understand the working of Macro economy:
Macroeconomic Paradoxes.
• The first examples of macroeconomic paradox will
make it clear why the study of macroeconomic
analysis separate from microeconomics is important .
• The second examples of macroeconomic paradox
relates to saving.
• Suppose the economy is in the grip of recession and a
society as a whole decides to save more. This may
not only fail to increase national income but
ultimately even saving may not rise as well. This is
called paradox of thrift.
2.Important Nature of Macroeconomic
issues
• Macroeconomics is concerned with the study of
issues and problems which are of vital importance
for determining well being of the people.
• Macroeconomic problems such as unemployment,
inflation, instability of foreign exchange rate cause
a lot of human suffering.
• Macroeconomics explains the cause of such
important problems and help in formulating
economic policies to tackle them.
3. Importance of Macroeconomics for
Accelerating Economic Growth
• Macroeconomics explains the factors which determines
economic growth and brings out what causes slowdown in
productivity growth.
• Macro economic models of Harrod – Domar and Solow
reveal that increase in the rate of saving and investment and
improvement in technology are the important factors
determining economic growth.
• Macroeconomic theories also reveal that lack of growth in
aggregate effective demand may serve as constraint to the
growth process of an economy.
• Thus, macroeconomic provides us knowledge as to how to
achieve self-sustained economic growth.
4. Understanding Business Cycles
• Business cycles have been the biggest ailment of
market economies.
• Though there is no unanimity in macroeconomic
theory about the proper explanation of business
cycles, significant advances have been made in
bringing out the causes which lead to them.
• Fluctuations in aggregate demand due to volatile
nature of investment demand, as explained by
Keynes, together with the interaction of multiplier
and accelerator provides an adequate explanation
of business cycles.
• It is because of this understanding about business
cycles that has helped to adopt proper fiscal and
monetary policies to check business cycles and
also due to these policies that severity of business
cycles in recent years has greatly reduced.
5. Formulating Government’s Macroeconomic
Policies
• Understanding how the economy works which is
obtained from macroeconomics has a practical
value in formulation of government’s fiscal and
monetary policies.
• During recession, expansionary fiscal and
monetary policies are adopted to lift the economy
out of recession.
• On the other hand, inflation has been checked
quite successfully by tight monetary policy and
contractionary fiscal policy.
• Besides, the understanding about the factors which
determine economic growth, fiscal and monetary
policies have been so designed as to raise saving
and investment and also to promote technological
improvement of the production process.
6. Individual Decision Making
• The understanding about the working of the
economy as a whole helps the individuals to take
better decisions.
• For example, the knowledge about
macroeconomics helps them to assess the impact
of government’s economic policies.
• If on the basis of certain government’s economic
policy they predict that inflation rate will
increase, they may decide to act in the present in
a way to ward off the adverse effects of inflation.
7. Importance in Business Decisions
• The understanding of macroeconomics also helps a good
deal to businesses or their managers who are faced with
various decisions making problems.
• Business firms do not work in vacuum. The level of
overall economic activity, aggregate demand conditions,
government’s policies the rate of inflation affect business
firms.
• These aggregates of the economy make up overall business
environment which affects decisions of managers.
• Forecasts of future demand and investment decisions by
managers are especially based on the state of the economy
and its growth process.