Macroeconomics – Meaning, Objectives, Scope and Importance
Difference between Micro and Macroeconomics
Micro Economics Notes
Table of Contents
Meaning of Macroeconomics
Macroeconomics is the study of aggregates or groups of entire economy like national income, full employment, total investment, aggregate demand, aggregate supply etc. It is concerned with the aggregates and averages of the entire economy, such as national income, national output, total employment, total consumption, general per capital income, price level etc.
According to Shapiro, “Macroeconomics deals with the functioning of the economy as a whole”.
According to Boulding, “Macroeconomics deals not with individual quantities as such, but with aggregates of these quantities, not with individual income but with national income, not with individual output but with national output”.
Objectives of Macroeconomics
a) To determine income level of the economy.
b) To determine employment level of the economy.
c) To maintain high and sustainable economic growth.
d) To maintain satisfactory balance of payment.
e) To stabilize foreign exchange.
Scope of Macroeconomics
a) Theory of income and employment: Macroeconomics explains the causes behind fluctuations in the level of income and employment. It studies the problems of employment and unemployment.
b) Theory of National Income: Macroeconomics studies generation of national income by Income method, expenditure method and product method.
c) General Price level: Macroeconomics studied the inflation and deflation. Problems regarding inflation, excess demand, deflation, deficient demand, inflationary or deflationary gap are studied with the help of macroeconomics variables.
d) Theory of economic growth: Problems relating to economic growth are studies in macroeconomics. It studies fuller utilisation of resources and their growth to achieve the objective of economic growth ultimately.
e) Theory of international trade: Macroeconomics also studies trade among different nations. It studies economic transactions between two or more countries, balance of payment position of the country, determination of exchange rate etc.
f) Theory of Money: Changes in demand and supply of money effect level of employment. Therefore, under macroeconomics functions of money and theories relating to money are studied.
g) Theory of foreign exchange rates: It also studies the determination of foreign exchange rates.
Importance of Macroeconomics
Prof. J.K. Mehta feels that so long as men live in society, the economist cannot afford to neglect the study of macro-economy. The theoretical and the practical importance of macroeconomics would be clear from the following arguments:
1. Functioning of an Economy: Macroeconomic analysis is a paramount importance in getting us an idea of the functioning of an economic system. It is very essential for a proper and accurate knowledge of the behaviour pattern of the aggregative variables, as the description of a large and complex economic system is impossible in terms of numerous individual
items.
2. Formulation of Economic Policies: Macroeconomics is a great help in the formulation of economic policies. The days of ‘Iaissez faire’ are over and government intervention in economic matters is an accomplished fact. Governments deals not with individuals but with groups and masses of individuals, thereby establishing the importance of macroeconomic studies.
3. Understanding Microeconomics: The study of macroeconomics is essential for the proper understanding of microeconomics. No microeconomic law could be framed without a prior study of the aggregates; for example, the theory of individual firm could not have been formulated with reference to the behaviour pattern of one single firm, howsoever representative it might have been; the theory was possible only after the behaviour pattern of several firms had been examined and analysed.
4. Understanding and Controlling Economic Fluctuations: Economic fluctuations are a characteristic feature of the capitalist form of society. The theory of economic fluctuations can be understood and built up only with the help of macroeconomics, for here we have to take into consideration aggregate consumption, aggregate saving and investment in the economy. Thus, we are led to analyse the causes of fluctuations in income output and employment, and make attempts to control them or at least to reduce their severity.
5. Inflation and Deflation: Macroeconomic approach is of utmost importance to analyse and understand the effects of inflation and deflation. Different sections of society are affected differently as a result of changes in the value of money. Macroeconomic analysis enables us to take certain steps to counteract the adverse influences of inflation and deflation.
6. Study of National Income: It is the study of macroeconomics which has brought forward the immense importance of the study of national income and social accounts. In micro economy such a study was relegated to the background. It is the study of national income which enables us to know that three-fourth of the world is living in abject poverty. Without a study of national income, as a result of the development in macroeconomics, it was not possible to formulate correct economic policies.
7. Study of Economic Development: As a result of advanced study in macroeconomics, it has become possible to give more attention to the problem of development of underdeveloped countries. Study of macroeconomics has revealed not only the glaring inequalities of wealth within an economy but has also shown the vast differences in the standards of living of the people in various countries necessitating the adoption of important steps to promote their economic welfare.
Limitations of Macro Economics
1. Excessive Generalisation: Despite the immense importance of macroeconomics, there is the danger of excessive generalisation from individual experience to the system as a whole. If an individual withdraws his deposits from the bank, there is no harm in it, but if all the people rushed to withdraw deposits, the bank would perhaps collapse.
2. Excessive Thinking in terms of Aggregates: Again, macroeconomics suffers from excessive thinking in terms of aggregates, as it may not be always possible to get the homogeneous constituents. Prof. Boulding has pointed out that 2 apples + 3 apples = 5 apples is a meaningful aggregate; 2 apples + 3 oranges = 5 fruits may be described as a fairly meaningful aggregate, but 2 apples + 3 sky-scrapers constitute a meaningless aggregate; it is the last aggregate which brings forth the fallacy of excessive macro thinking.
3. Heterogeneous Elements: It may, however, be remembered that macroeconomics deals with such aggregates as consumption, saving, investment and income, all composed of heterogeneous quantities. Money is the only measuring rod. But the value of money itself keeps on changing, rendering economic aggregates immeasurable and incomparable in real terms. As such, the sum or averages of heterogeneous individual quantities lose their significance for accurate economic policy.
4. Difference within Aggregates: Under this approach one is likely to overlook the differences within aggregates. For example, during the first decade of planning in India (from 1951-1961), the national income increased by 42%; this however, doesn’t mean that the income of all the constituents – the wage earners or salaried persons – increased by as much as
that of entrepreneurs or businessmen. Hence, it takes no account of difference within aggregates.
Microeconomics and Macroeconomics – Interdependence and difference
Interdependence of Microeconomics and Macroeconomics
Both Microeconomics and Macroeconomics are interdependent. Microeconomics is not always restricted to individual units and also Macroeconomics deals with aggregate at smaller level. The interdependence between the two can be studied in the following ways:
1. Microeconomics Depends on Macroeconomics: Micro-variables depend on behaviour of macro-variables i.e., decisions at micro level depend on decision taken at macro level. For example, Increase in overall tax rate would influence an individual decision to buy a T.V. set as its price goes up.
2. Macroeconomics depends on Microeconomics: Macro-variables depend on micro-economic variables i.e., decisions at macro level depend on decision at micro level. For example, Aggregate demand depends on the demand of individual households of the economy.
Difference between Micro and Macroeconomics:
a) Micro economics studies individual economic units whereas macroeconomics is concerned with economy as a whole.
b) The word micro has been derived from the Greek word micros which means small. On the other hand, macroeconomics is also derived from the Greek word macros which means large.
c) Micro economics was developed by classical and neo-classical economist Adam Smith and Alfred Marshall. Macroeconomics was developed by modern economist J.M. Keynes.
d) Micro economics is known as Price theory because it helps in determination of price on the basis of individual demand and supply. Macroeconomics is known as aggregate theory because it helps in determination of income and employment with help of aggregate demand and supply.
e) Microeconomics is concerned with allocation of resources whereas macroeconomics is concerned with the full utilization of resources.
f) Micro economics is based on partial equilibrium analysis which helps to explain the equilibrium conditions of a individual, a firm, a industry and a factor. On the other hand, macro-economics is based on general equilibrium analysis which is an extensive study of a number of variables working of the economic system as a whole.
g) The objectives of micro economics on demand side is the maximize utility whereas on the supply side is to minimize profits at minimum cost. On the other hand, the main objectives of macro-economics are full employment, price stability, economic growth etc.