MACROECONOMICS

For AI & DS COURSE, NMIMS

Macroeconomics is the study of aggregates or
averages covering the entire economy, such as total
employment, national income, national output, total
investment, total consumption, total savings,
aggregate supply, aggregate demand, and general
price level, wage level and cost structure. In other
words, it is aggregative economics which examines
the interrelations among the various aggregates, their
determination and causes of fluctuations in them.
Macroeconomics enriches our knowledge of the
functioning of an economy by studying the behaviour
of national income, output, investment, saving and
consumption. Moreover, it throws much light in
solving the problems of unemployment, inflation,
economic instability and economic growth.
 Scope and Importance of Macroeconomics

• As a method of economic analysis macroeconomics is of much theoretical

and practical importance.
• (1) To Understand the Working of the Economy- The study of
macroeconomic variables is indispensable for understanding the working of
the economy. Our main economic problems are related to the behaviour of
total income, output, employment and the general price level in the
economy. These variables are statistically measurable, thereby facilitating
the possibilities of analysing the effects on the functioning of the economy.
• (2) In Economic Policies. Macroeconomics is extremely useful from the
point of view of economic policy. Modern governments, especially of the
underdeveloped economies, are confronted with innumerable national
problems. They are the problems of overpopulation, inflation, balance of
payments, general underproduction, etc. The main responsibility of these
governments rests in the regulation and control of overpopulation, general
prices, general volume of trade, general outputs, etc.
CIRCULAR FLOW OF INCOME
• The circular flow of income is a concept for better understanding of
the economy. In its most basic form, it considers a simple economy
consisting solely of businesses and individuals and can be
represented in a so-called "circular flow diagram." In this simple
economy, individuals provide the labour that enables businesses to
produce goods and services.
• Alternatively, one can think of these transactions in terms of the
monetary flows that occur. Businesses provide individuals with
income (in the form of compensation) in exchange for their labor.
That income is spent on the goods and services businesses produce.
• The circular flow diagram illustrates the interdependence of the
“flows,” or activities, that occur in the economy, such as
the production of goods and services (or the “output” of the economy)
and the income generated from that production. The circular flow also
illustrates the equality between the income earned from production
and the value of goods and services produced.
 ROLE OF GOVERNMENT

The extent of role of government differs in different

economies. An economic system is a way through which
economic resources are owned and distributed.
On the basis of the ownership and distribution of resources,
the economic system can be grouped into three categories,
which are shown in Figure-1:
• In the view of Meade, following are the responsibilities of a government in a
capitalist economy:
• a. Regulating and controlling various economic situations, such as inflation and deflation, by
formulating and implementing various fiscal and monetary measures
• b. Controlling the power of monopolistic and large corporations to elude various economic
problems, such as unemployment and inequitable distribution of resources
• c. Possessing the ownership of public utilities, such as railways, education, medical care,
water, and electricity, which are required by an economy as a whole
• d. Prohibiting discrimination among individuals and providing them equal educational and
job opportunities
• e. Limiting restrictive trade practices and power of trade unions
• f. Maintaining law and order, administering justice, and safeguarding the freedom of
individuals in an economy
• g. Supporting private ventures in an economy
• h. Creating central planning body that helps in the development of an economy on a larger
scale
• i. Handling problems to environment, extinction of natural resources, and growth of
population
• Therefore, we can conclude that the major role of government in a capitalist economy is to
control and encourage the free market mechanism. In addition, the government should
encourage private ventures for safeguarding the future of an economy.
• The private ownership of resources, in a socialist economy, is
changed by state ownership. In addition, in a socialist economy,
the government plans and regulates all the economic activities
centrally at a state level. Moreover, the decisions related to
production, allocation of resources, employment, pricing, and
consumption, are completely dependent on the government or
its central planning authority. In a socialist economy,
individual’s decisions are totally dependent on the limit decided
by the government.
• For example, individuals are given the freedom of choice, but it
is subject to the limitations of policy framework of the socialist
economy. The socialist way of managing an economy facilitates
the elimination of various evil activities of the capitalist
economy, such as labor exploitation, unemployment, and
inequality in the society.
• In a mixed economy, the private sector is encouraged to work on
the principle of the free market mechanism under a political and
economic policy outline decided by the government. On the other
hand, the public sector, in a mixed economy, is involved in the
growth and development of public utilities, which is based on the
principle of socialist economy.
• In a mixed economy the public sector comprises certain industries,
businesses, and activities that are completely owned, managed, and
operated by the government. Moreover, in a mixed economy, certain
laws have been enacted by the government to restrict the entry of
private entrepreneurs in industries reserved for the public sector.
• Apart from this, the government also strives hard for the expansion of
the public sector by nationalizing various private ventures. For
example, in India, the government has nationalized several private
banks, which has resulted in the expansion of the public sector.
Besides working for the growth and development of the public sector,
the government, in a mixed economy, controls the activities of the
private sector by implementing various monetary and fiscal policies.
• Business cycles are intervals of expansion followed
by recession in economic activity. These changes have
implications for the welfare of the broad population as well as
for private institutions. Typically, business cycles are measured
by examining trends in a broad economic indicator such as Real
Gross Domestic Production.
• Business cycle fluctuations are usually characterized by general
upswings and downturns in a span of macroeconomic variables.
The individual episodes of expansion/recession occur with
changing duration and intensity over time.
Business cycles
• Business cycles are a type of fluctuation found in the aggregate
economic activity of a nation -- a cycle that consists of expansions
occurring at about the same time in many economic activities, followed
by similarly general contractions (recessions). This sequence of changes
is recurrent but not periodic.
• The business cycle is an example of an economic cycle
• KEY TAKEAWAYS
• Business cycles are comprised of concerted cyclical upswings and
downswings in the broad measures of economic activity—output,
employment, income, and sales.
• The alternating phases of the business cycle are expansions and
contractions (also called recessions).
• Recessions often start at the peak of the business cycle—when an
expansion ends—and end at the trough of the business cycle, when the
next expansion begins.