Nature and Scope of Macroeconomics

What is Economics?
• The word 'economics' comes from two Greek words, 'eco'
meaning home and 'nomos' meaning accounts. The subject
has developed from being about how to keep the family
accounts into the wide-ranging subject of today.
• Economics is a social science concerned with the
production, distribution, and consumption of goods and
services.
• It studies how individuals, businesses, governments, and
nations make choices about how to allocate resources.
• Economics focuses on the actions of human beings, based
on assumptions that humans act with rational behavior,
seeking the most optimal level of benefit or utility.
 What is Microeconomics?
• Microeconomics deals with the analysis of small
individual units of an economy such as individual
consumers, individual firms, individual industries
and markets and explains how prices of products
and factors are determined.
• On the basis of these prices microeconomics
explains how resources are allocated among
various products and how income distribution
among factors is determined.
 What is Macroeconomics?
• Macroeconomics is concerned with the analysis of
the behaviour of the economic system in totality.
• Thus, macroeconomics studies how the large
aggregates such as total employment, national
product or national income of an economy and the
general price level are determined.
• Macroeconomics is therefore a study of
aggregates. Besides, macroeconomics explains
how the productive capacity and national income
of the country increase over time in the long run.
• Professor Gardner Ackley makes the distinction
between macroeconomics and microeconomics more
clearly when he says, “macroeconomics concerns itself
with such variables as the aggregate volume of the
output of an economy, with the extent to which its
resources are employed, with the size of the national
income, with the ‘general price level’.
• Microeconomics, on the other hand, deals with the
division of total output among industries, products and
firms and the allocation of resources among competing
uses. It considers problem of income distribution. Its
interest is in relative prices of particular goods and
services.
 Subject Matter of Macroeconomics
• To explain what determines the level of total
economic activity (i.e. the size of the national
income and employment) and fluctuations (i.e., ups
and downs) in it in the short run.
• It also explains what causes the general price level
to rise and determines the rate of inflation in the
economy.
• Besides, modern macroeconomics analyses those
factors which determine the increase in productive
capacity and national income over time in the long
run is called the problem of economic growth.
• Thus, what determines rate of growth of an
economy is also the concern of macroeconomics.
• Thus, why is national income higher today than it
was in 1950?
• Why does rate of unemployment in a free market
economy go up in a period and falls in another
period?
• Why do some countries have high rates of
inflation, while others maintain price stability?
• What causes alternating periods of depression and
boom?
• Why should government intervene in the
economy? and what policy it should adopt to
check inflation, control business cycles, raise level
of national income, reduce unemployment and
restore equilibrium in the balance of payments are
some of the important questions which
macroeconomics attempts to answer.
Scope of Macroeconomics
 Macroeconomics Theories

• Government is the regulatory body of a nation, it

considers the various aspects which are crucial and
impacts the lives of the citizens.
• There are six significant theories under
macroeconomics:
• Economic Growth and Development: The status of a
country’s economy can be evaluated in terms of the per
capita real income, as studied under macroeconomics.
• Theory of National Income: It covers the various
topics related to the evaluation of national income,
including the income, expenditure and budgeting.
• Theory of Money: Macroeconomics analyzes the functions of
the reserve bank in the economy, the inflow and outflow of
money, along with its impact on the employment level.
• Theory of International Trade: It is a field of study that
enlightens upon the export and import of goods or services. In
brief, it determines the impact of cross-border trade and duty
charged, on the economy.
• Theory of Employment: This stream of macroeconomics helps
to figures out the level of unemployment and prevailing
employment conditions in the country. Also, to know how it
affects the supply, demand, savings, consumption, expenditure
behaviour.
• Theory of General Price Level: The most important of all is the
analysis of product pricing and how these price levels fluctuate
because of inflation or deflation.
 Macroeconomics Policies

• The government and the reserve bank functions together

while determining the macroeconomic policies, for the
nation’s welfare and development.
• The two segments of this section are as follows:
• Fiscal Policy: Fiscal policy is a means of meeting the
deficit of income over the expenditure; it is a form of
budgetary decision under macroeconomics.
• Monetary Policy: Monetary policy is framed by the
reserve bank in collaboration with the government.
These policies are the measures taken to maintain
economic stability and growth in the country by
regulating the various interest rates.