Concept of macroeconomics

 Concept:
 The modern economic science has two major branches:
Microeconomics and Macroeconomics. Compared to
microeconomics
 Macroeconomics is a younger branch of economics.
Until the great depression of 1930s the subject matter of
economic science was broadly limited to what is known
as microeconomics.
 Macroeconomics emerged as a separate branch in 1936
with the publication of “John Maynard Keynes” revolutionary
book, “The General Theory of Employment, Interest and
Money generally referred as “The General Theory “
1
 In macroeconomics, we study “Ordinary business of life” in
the aggregate we look at the behavior of the economy as
a whole. The key variables we study include: - Total output
in the economy, the aggregate price level, employment
and unemployment, Interest rates, wages rates, and
Foreign exchange rates.
 Macroeconomics deals the variables that how the
variables works over the time: the rate of growth of output,
the inflation rate, changing unemployment in periods of
expansion and recession and appreciation or depreciation in
Foreign Exchange Rate.
 Macroeconomics is a policy oriented
 According to K.E Boulding , “ Macroeconomics is the study of
the nature, relationship and behavior of aggregates of economic
quantities. Macroeconomics deals not with individual quantities but

2
 with aggregate of these quantities; not with individual income, but with
the national income; not with the individual prices, but with the price
levels; not with the individual output, but with the national output.

 Thus, Macroeconomics is essentially the study of the behavior and the

performance of the economy as a whole. More importantly, it studies the
relationship and the interaction between the “Factors or Forces” that
determine the level and growth of national output and employment,
general price level, and the balance of payments positions of an
economy.

Basic Issues in Macroeconomics

 Macroeconomics provides a sound theoretical framework for
investigating the causes and effects of economic problems i.e.
Unemployment, Inflation, recession and depression,
stagflation etc. Macroeconomics provides the effective
3
 guidelines for finding appropriate policy that measures to
solve the economic problems that mentioned above.

 Unemployment:-The general condition in which resources are

willing and able to produce goods and services but are not
engaged in productive activities
 Unemployment arises when scarce resources that could be used
to produce goods and services, resources that are “willing and
able “to engage in production, are not producing output.
 Cyclical unemployment: (unemployment is higher during
recessions and depressions and lower during periods of high
economic growth)
 Frictional unemployment: (unemployment that occurs because
it takes workers some time to move from one job to another)

4
 Seasonal unemployment: (unemployment that occurs because
the demand for some workers varies widely over the course of the
year)
 Structural unemployment: (occurs because some labor markets
have more workers than there are jobs available, and for some
reason wages don't decrease to bring the markets into
equilibrium)
 Inflation:- This is a persistent increase in the average price
level in the economy. It is measured by the Inflation rate,
the annual percentage change in Price Index such as the
Consumer price Index (CPI) or GDP price deflator
 Inflation occurs when average price level (that is Price in
general) increase over time
 Some prices might increase a lot, others a little, and still
other prices decreases or remain unchanged. Inflation
5
 results when average of these prices follows an upward
trend.
 Business Cycle:
 A business cycle is commonly divided into four well-defined
and inter-related recurring phases

6
 Economic growth:- Growth is attended by increasing the
quantity or quality of the economy’s resources such as:
land, labor, capital, and entrepreneurship – through such
resources the things given are possible as:
Population growth
Investment
Exploration
Technological Innovation, and
Education etc.
 Importance of macroeconomics:-
1. Helpful in formation of Economic Policies
2. Study of fluctuation in Economy
3. Helpful in comparison
4. Measurement of economic development
7
 5. Estimation of welfare
6. Study of Inflation and Deflation
7. Development of Microeconomics
8. Economic Fluctuation (Business Cycle)
9. Performance of economy
LIMITATIONS OF MACRO ECONOMICS

1. Excessive Thinking
(a) Six apples + Seven apples=Thirteen apples which
constitutes a meaningful aggregate.
(b) Six apples + Seven oranges=Thirteen fruits, which
constitutes a fairly meaningful aggregates.

8
 (c) Six apples + seven shoes constitute meaningless
aggregates

2. Difference in individual items: Sometimes, the features of

individual components may not be true to the aggregate so macro
suffers from the danger of excessive generalization
3. Unable to influence society equally: An aggregative
tendency may not influence the entire sectors of the
economy in the same way. For example, a general rise in
price as inflation may not similar effects on different sectors
of the economy
4. Contradictory:-. prices in agriculture fall, of industrial
products rise which have different affects on individual
factors but as an aggregate, there may not be any effect at
all. Thus, macro aggregate results may be misleading.

9
5. Role of less aggregative analysis: Aggregates itself suffer
from certain serious problems due to statical techniques
Differences between
Microeconomics
and
Macroeconomics:
Meaning The word ‘micro’ is derived The word ‘macro’ is derived
from Greek Word ‘mikros’ from Greek word ‘makros’
which means small. which means large

Scope It has very narrow scope i.e It has very wide scope i.e
an individual, a firm or a aggregate macro variable of a
market etc country.

10
Evolution Evolution of It evolved only after the
microeconomics took place publications of Keynes
earlier than book, “ general theory of
macroeconomics (1936) employment, interest and
money”

Related Concepts Demand, Supply, markets Aggregate demand,

firms etc are related to aggregate supply, national
microeconomics. income is related to
macroeconomics.

Purpose of It is helpful in analysis of an individual It is helpful in analyzing the level of

study economic units like firm employment, income, eco. growth etc

Theories Demand theory, theory of production, Theory of national income, theory of

price determination theory etc are employment level, theory of money,
developed and analyzed from the theory of general price level etc are
microeconomics. developed and analyzed from
macroeconomics.

11
Equilibrium It deals partial equilibrium i.e It deals general equilibrium of economics
individual, consumer, firm, demand, i.e whole consumer’s income. General
single price etc. price levels, total national income etc.

Problem & It does not analyze the present day It analyze the present day problems and
Solution problems and does not provide the provides the solutions of the problems
solutions of the problem into the into the economy i.e problem of
economy i.e inflation, Deflation, Inflation, deflation, Unemployment etc.
Unemployment etc. for example, it has tried to solve the
problem of great depression 1930,s.

Interdependences of Micro and

Macro economics:
Assignment

12