Introduction to

Macroeconomics
Unit 1
Learning Objectives
On completion of this unit, students will be able to:
 define macroeconomics
 explain the scope of macroeconomics
 explain the importance and limitations of macroeconomics
 describe the static and dynamic analysis of macroeconomics
 apply macroeconomics to analyse business environment.
Introduction
• Economics is the study of how individuals and societies choose to utilize scarce
resources to satisfy unlimited human wants. Such scarce resources compel us to
make choice which is the source of all of the problems we study in economics.
• Modern economists have divided the whole economic theories into two parts:
microeconomics and macroeconomics.
• These words in economics were first used by Ragnar Frisch in 1933.
• The term micro is derived from the Greek word 'mikros', which means "small".
• Microeconomics, therefore, studies the economic behaviour of individual decision
makers, such as a consumer, a worker, a firm, or a manager.
• On the contrary, the term macro comes from the Greek word 'makros', which
means "large". Macroeconomics, thus, analyzes how entire national economy
performs.
Macroeconomics: Meaning
• Macroeconomics is the branch of economics which deals with economy as a whole.
• It examines how resources are allocated at the level of economic system as a whole.
• It is concerned with national income, national output, total saving, total
consumption, total investment, aggregate demand, aggregate supply, fiscal policy,
monetary policy, inflation and deflation, demand for money and money supply, etc.
that relates to the whole economy.
Features of Macroeconomics
 Aggregative economics.
 Concerned with the behaviour of the economy as a whole.
 Presupposes constant relative prices and given resource allocation.
 Policy science and more normative.
 Analytical tools: fiscal policy and monetary policy.
 Also called income and employment theory.
Features of Macroeconomics Contd…

 Also called method of Lumping.

 Objectives: determination of aggregate output, employment and general price
level and their rate of change.
 Relatively new and developed after the publication of Keynesian General
Theory in 1936 AD.
 Principal or main variables: national income, total consumption, total
expenditure, total saving, total investment, etc.
Scope of Macroeconomics
1. Theory of national income
2. Theory of employment
3. Theory of money
4. Theory of general price level
5. Theory of economic growth
6. Theory of international trade
Uses or Importance of Macroeconomics
1. Helpful to understand the working of the economy
2. Helpful in formulating economic policies
3. Helpful in controlling economic fluctuations
4. Helpful in international comparisons
5. Evaluate performance of the economy
6. To develop and expand the microeconomics
7. Helpful to understand international trade
8. Useful in business decisions making
Limitations of Macroeconomics
1. Dependence on individual units
2. Heterogeneous units
3. Different effects of aggregates
4. Limited application
5. It ignores the contribution of individual units
Static and Dynamic Analysis of Macroeconomics/
Types of Macroeconomics
Static Analysis (Macro Statics)
• Static analysis (macro statics) is the study of the final position of equilibrium of
the whole economy at a particular point of time.
• It shows a stationary picture of the economy as a whole.
• It also investigates the relation between macroeconomic variables in the final
position of equilibrium.
• But it does not tell the process of adjustment to the final equilibrium. The
following equation reflects the final position of equilibrium.
Y=C+I
 Y

Consumption and Investment

45 (Y = C+ I)

C+ I
E
C

O X
Y
National Income
Static and Dynamic Analysis of Macroeconomics/
Types of Macroeconomics Contd.
Comparative Analysis (Comparative Macro Statics)
• Comparative analysis (comparative macro statics) is concerned with a
comparative study of different equilibrium positions attained by the economy as a
result of change in macroeconomic variables.
• It compares the new and old equilibrium attained by the economy.
• But it does not deal with the transitional period and process involved in the
movement from one equilibrium point to another.
 Y

45 (Y = C+ I)
Consumption and
Investment
E1 C+ I + ΔI

C+I
E

O X
Y Y1
National Income
Static and Dynamic Analysis of Macroeconomics/
Types of Macroeconomics Contd.
Dynamic Analysis (Macro Dynamics)
• Dynamics analysis (macro dynamics) is the study of the process by which the
economy moves from one equilibrium point to another as a result of change in
macroeconomic variables.
• In other words, macro dynamics analyses the time and path taken by the
macroeconomic variables to move from one equilibrium to another.
• Thus, macro dynamic models involve time and path through which new
equilibrium in the economy is established.
• It provides answer to the causes of breaking initial equilibrium and establishing
new equilibrium.
 Y

45 (Y = C+ I)

Consumption and
Investment E1 C+ I + ΔI
c
a
b C+I
E

O X
Y Y1
National Income
Macroeconomics and Business Environment
• Aggregate economic variables determine the prospects of business firms and also
influence their functioning. Therefore, business firms need to make in-depth study
of macroeconomic variables and their trends.
• There are various factors like political, legal, natural, technological, socio-cultural,
economic, etc. which influences business environment.
• The economic environment of business includes economic system, economic
policies like fiscal and monetary policies, economic status, general trends of
macroeconomic indicators like GDP, GNP, per capita income, inflation, saving,
investment, etc., growth and trends of global economy, growth and trends of foreign
trade, economic structure, etc.
• Therefore, managers of the business firms must be aware of these components of
economic environment to make effective business decisions.
Importance or Uses of Macroeconomics to
Understand and Analyse Business Environment
1. To study the nature and extent of domestic business environment
2. To study the nature and extent international business environment
3. To examine nature and extent of externalities in business environment
4. To examine role of government policies
5. Strategies formulation and implementation
Thank You