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Introduction To Macro

The document provides an introduction to macroeconomics, including definitions and key topics such as national income, aggregate demand, inflation, fiscal and monetary policy. It discusses the scope of macroeconomics including theories of income, employment, price levels, economic growth, money, trade cycles and international trade. It also covers types of macroeconomics including macro statics, comparative macro statics and macro dynamics.

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Sophiya Prabin
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33 views12 pages

Introduction To Macro

The document provides an introduction to macroeconomics, including definitions and key topics such as national income, aggregate demand, inflation, fiscal and monetary policy. It discusses the scope of macroeconomics including theories of income, employment, price levels, economic growth, money, trade cycles and international trade. It also covers types of macroeconomics including macro statics, comparative macro statics and macro dynamics.

Uploaded by

Sophiya Prabin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Introduction to macroeconomics

 
The word macroeconomics is derived from Greek
word ‘Makros' meaning large. Thus,
macroeconomics is concerned with the analysis of
economy as a whole or its large aggregates such as
national income, total savings, aggregate demand,
total consumption, general price level, trade cycle,
Inflation, fiscal policy and monetary policy etc. it is
aggregative economics which examines the
interrelation among the various aggregates, their
determination and causes of fluctuation of them.
According to Boulding “macroeconomics deals
not with individual quantities but with aggregate of
these quantities not with individual income but with
national income not with individual prices but with
price level not with individual output but with
National output.”
According to Edward Shapiro “in brief
macroeconomics is the study of total output,
employment and price level”
Thus, macroeconomics is the study of aggregates
or averages covering the entire economy.
Macroeconomics is also known as theory of income
and employment, because the central problem of
macroeconomics is the determination of income and
employment in the country. Aggregate demand and
aggregate supply are its main tools of analysis. It is
concerned with the problem of unemployment,
economic fluctuation, economic growth, international
trade, money supply, price level in the country. It is
the study of causes of unemployment and various
determinants of employment. It studies the factors
that regard growth and those which brings the
economy on the path of economic development. 
Scope of macroeconomics
 The area covered by macroeconomics is called
scope of macroeconomics. The scope of
macroeconomics can be explained as:
1. Theory of income and Employment: The
main issue of macroeconomics is to study the
problem of unemployment and factors
determining the level of employment and
income. It studies the process of income and
employment determination. 
2. Theory of general price level: It studies about
the determination of general price level. it
explains about the inflation and deflation 
3.Theory of economic growth: Macroeconomics
studies about the problem relating to economic
growth and increase in real per capita income.
The growth theory explains causes of poverty,
unemployment in developing countries and their
remedial measures.
4. Theory of money: It studies about the demand
and supply of money. The change in demand
and supply of money have considerable effect
on the level of employment. Thus
macroeconomics studies about the function of
the money role of the banking system in the
economy.
 5. Theory of trade cycle trade cycle:
Trade cycle is the fluctuation in economic activities.
Macroeconomics studies about the various theories
of trade cycle, monetary policy and fiscal policy.
 6.  Theory of International Trade:
macroeconomics studies about international
trade, tariff, exchange rate, the problem of
balance of payment and correction in balance of
payment problem. 
7. Macro theory of Distribution:
Macroeconomics studies about the distribution
of national income among the various sectors of
economy and various classes of people. It
studies about the relative share of wages and
profit. The relative share of wages depends on
the ratio of investment and employment. 
 
. 
Importance of macroeconomics 
The study of macroeconomics is very important in
order to understand the entire economic system.
Because without accurate identification of macro
variables it is not possible to implement
development strategy. The importance of
macroeconomics are as follows 
1. Useful in understanding the working of an
economy macroeconomics helps in understanding
the working of the economy in aggregate form. It
helps to understand how macro variables behave in
an aggregate manner. Through macroeconomics we
can know the contribution of different sectors in the
economy.
2.  Formulation of public policy 
Macroeconomics helps in designing appropriate
economic policy for the government. Accurate and
reliable statistics of aggregate variables are the
precondition for the formulation of sound
governmental policies.
 3.  Understanding general unemployment 
 Macroeconomics helps to understand the causes,
effects and remedies of general unemployment in
the country. Unemployment is caused by deficiency
of effective demand. Effective demand should be
raised to solve the unemployment problem.
4. Formulate the strategy of economic growth
 Economic growth is also studied in
macroeconomics. Resources and capability of an
economy are evaluated on the basis of macro
variables. Plans are framed and implemented to
raise the level of economic development of the
country as a whole.
 5.  Solution of monetary problem 
The monetary policy can be understood and
analyzed from macroeconomics.  The problems of
inflation and deflation can be solved by the help of
various macroeconomic policies.
6.  Understanding socio- economic issues
 The major social economic problems in developing
countries are unemployment, vicious circle of
poverty, unequal distribution of income etc.
macroeconomics gives information about the socio-
economic issues and helps to solve these problems.
Types of macroeconomics
 There are three types of macroeconomics 
1. Macro statics: Macro static is the study of static
relationship between different aggregate variables. It
deals with the final equilibrium position of the
economy at a particular point of time. It
assumes there is no disturbance in the equilibrium
position of the economy. It shows a ‘still picture’ of
the economic system as a whole. It can be shown
from the following equation and diagram.

 Y = C + I ------ (i)  


Where, Y = total income
C = total consumption expenditure
I = total investment expenditure.
 This equation tells that the total income of an
economy at a certain point of time must be equal to
the total consumption and total investment.

In figure 450 line represents aggregate supply and


C+I represents aggregate demand. E is the
equilibrium point, which is determined by the
intersection between aggregate demand and
aggregate supply. Thus, oy level of income is
determined. This equilibrium is called static analysis,
because aggregate demand and aggregate supply
relate to the same point of time. 
2. Comparative macro statics: Comparative macro
statics is the comparative study of two equilibrium
position attained by the economy at different points
of time.  It compares the new and old equilibrium
attained by the economy, but it does not study how
the economy moves from one equilibrium to another
equilibrium.

In figure E is initial equilibrium where, o y level of


national income is determined.  now suppose, there
is increase in investment then aggregate demand
curve shift upward in the form of C + I + ∂ I as a
result of new equilibrium position E1 is established,
where oy1 level of national income is determined.
Comparative macro static is concerned with the
comparison of these two equilibrium E and E1, but it
does not deal the whole process of adjustment.
3. Macro dynamics: Macro dynamics is the
study of path taken by the macro variable to
move from old equilibrium to new equilibrium.
It explains how the economy adjust itself in
the gap between initial and new equilibrium. It
studies disequilibrium position or the
transitional period between two equilibrium.
This method helps to understand the moving
picture of an economy. It studies the causes
of changes of different factors of the economy
at different time period. We assumed that
consumption depends on the income of
previous period. i.e.
Ct = f (yt-1) -------- (ii)
In figure, economy is initially in equilibrium at point
E, where aggregate demand and aggregate supply
are equal and o y level of national income is
determined. now suppose there is increase in
investment then aggregate demand curve shift of
upward in the form of C + I + ∂I, when investment
increases by EA, it increases the level of income in
next period to AB. At this higher income people
desire to spend more on consumption and
consequently total expenditure increases to BC this
takes place total income increases to CD. This
process continues until the new equilibrium E1 is
reached. 
Limitation of macroeconomics
There are certain limitations of macroeconomics
which are as follows:
1. Aggregate tendency may not be effect all
sector equally: the increase in general price
level affects the different sector of the economy
differently. The increase in general price level
benefits the producer but it hurts the consumer.
2. The conclusion applied to individuals need
not be true of the entire economy. The
aggregate economic behavior is the sum of the
individual behavior but what is true in the case
of individual may not be true in the case of
economy as a whole. For example individual
saving is virtue whereas public saving is vice.
3. Aggregate variables may not be important
necessarily: the aggregate variables which
form the economic system may not be of much
significant. For example the national income of
a country is the total of individual income. The
increase in national income may be the result
of the increase in the income of few rich people
in the country. Thus a rise in national income of
this type has little significance from the point of
view of the community.
4. Difficult in the measurement of aggregates:
There is difficult to measure the aggregates. If
microeconomic variables are not related to
similar individual unit, their aggregation into one
macroeconomic variables may be wrong and
dangerous.

Macro economics and business environment


Macroeconomics studies how the economy as a
whole allocates scarce resources and how the total
level of employment is generated. These macro-
economic decisions are made on the basis of
macroeconomic theories.
Environmental issues are related to the general
business environment in which a business operates.
They are related to overall economic, social, cultural
and political atmosphere of the community. The
factors which contribute business environment of a
country are given below:
1. Type of economic system in the country.
2. General trends in national income, price level,
saving and investment.
3. Structure and trends in the working of financial
Institutions.
4. Trains in foreign trade.
5. Trains in labour supply and strength of capital
market.
6. Government’s economic policy.
7. Social factors like value system of the society,
property right, customs etc.
8. Socio economic organization like trade union, co-
operative etc.
9. Political environment.
10. The degree of globalization of economy.
The major economic and environmental issues
which are to be considered while making business
decisions and forward planning are also given
below:
1. To study the train of domestic business
environment: there are various issues that are
related to the trains in macro variables i.e. trains
of economic activities of the country, investment
situation, trends in output and employment and
price trends. These factors not only determine the
prospect of private business but also influence
the functioning of the individual firm.
2. To study the Trends of international
business environment: an economy is also
affected by its trade relation with other countries.
Fluctuations in the international market,
exchange rate and inflow and outflow of capital of
an open economy has a serious bearing on its
economic environment.

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