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Macroeconomics: Meaning, Scope, Importance and Limitations

Macroeconomics / Macro Economic Analysis:

The word “MACRO“. is derived from the Greek word “MAKROS“, which means large. Macroeconomics studies the economic actions and behaviours of an economy at aggregate or average levels and explains the problems at national and international levels. Macroeconomics is also called “The Theory of Income and Employment “, because it deals with the matters of unemployment, economic fluctuations, inflation, deflation, economic development, and international trade etc.

The concept of macroeconomics was introduced during 1930 when economies were facing economic crisis. Macroeconomics studies the economy as a whole. It is concerned with total income, total output, employment, total consumption, total saving, total investment and general price level. It, is aggregative economics that provides whole view of the economy.

Macroeconomics is called income and employment theory. It deals with the problems of unemployment, trade cycles, general price level and international trade and economic growth. It studies the causes of unemployment and different determinants of employment. It is concerned with trade cycles so it examines the effect of investment on total output, total income and total employment.

It deals with monetary matters in order to check effect of total quantity of money on general price level in the field of international trade it studies problems of balance of payments and foreign aid. In fact, macroeconomics examines problems relating to determination of total income of the country and causes of changes in total income. Moreover, it studies the factors relating to economic growth.

Definition:

According to Prof. K.B. 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 price but with general price level, and not with individual output but / with national output.”

According to John B. Taylor

“Macroeconomics is the branch of theoretical economics that examines the workings and problems of the economy as a whole economic growth, inflation, unemployment and economic fluctuations.”

According to Gardner Ackley

“Macroeconomics concerns with such variables as the aggregate volume of the output of an economy, with the extent to which its resources are employed, with the size of the national income and with the general price level.”

According to Allen

“The term macroeconomics is applied to study which deals with the relationship of large economic aggregates.”

According to Culbertson

“Macroeconomics means the theory of income, employment, prices and money”.

Scope of Macroeconomics:

From the above discussion we find that macroeconomics has the following scope.

1.Theory of National Income:

In macroeconomics we study ‘NI’; its different concepts and its measurement.

2. Theory of NI Determination:

The major part of macroeconomics deals with the theory of NI determination. Accordingly, in macroeconomics, we study classical and Keynesian theories of national income and employment.

3. Theory of NI Fluctuations:

In capitalist economies, the economic activities are never alike. Sometimes there is a brisk in economic life, while on the other occasions, the business activities are sluggish. Such fluctuations in economic life of a country are known as trade cycles. Why there are such fluctuations? In this context we study a lot of theories, particularly, “Samuelson’s Multiplier-Accelerator” interaction is of great importance for the readers of macroeconomics.

4. Theory of Consumption and Savings:

In macroeconomics, AD plays an important role. The AD has an important component which is Consumption (C). The consumption has a counterpart which is Saving (S). How people behave regarding consumption expenditures and savings? In this connection, starting from Keynes consumption function, we have a lot of consumption theories like Dusenberry’s Relative Income Theory”, ” Friedman’s Permanent Income Theory” and “Modigliani’s Life Cycle Income Theory “.

5. Theory of Money:

In an economy ‘money’ plays an important role. What will be the effects of changes in supply of money on the economy? What are inflation and deflation? What causes the inflation. What is demand pull and cost push inflation? What a Phillips curve shows? In this respect we study a lot of theories in macroeconomics.

6. Theory of Economic Stabilization:

As told earlier that in capitalist economies, inflation, unemployment, unequal income distribution, misallocation of resources, deficit in BOP and budget deficits are the routine problems. Therefore, to remove them or for the sake of economic stabilization, government has to intervene with the help of ” Fiscal and Monetary Policies”. The role of such policies will be analyzed in macroeconomics.

7. Theory of Growth:

The Keynes model of income and employment just deals with static and comparative static situations. But in addition to this model, we have a lot of dynamic growth models in macroeconomics where we study the growth path of the economy; effect of change in population on the level of NI: the effect of change in technology on the level of NI, etc.

Importance of Macro Economics:

We can realize the importance of the study of macroeconomics from the following points.

1. Working of Economy:

Macroeconomics is helpful to understand working of economy. Economic system is complicated. Many interdependent-economic factors affect the economy. Microeconomics cannot provide clear picture of whole economy.

2. Making Economic Policies:

Macroeconomics is used to make economic policies. There is need facts and figures abut national income, total employment, total investment, total saving and general price level. Macroeconomics can provide statistics about such variables.

3. Solves Economic Problems:

An economy can face problems like overproduction, unemployment, and rising price level. The government can solve its problems with the help of macroeconomics.

4. Studies Trade Cycles:

The capitalistic economies can face problem of trade cycles or ups and downs, in business activities. Such problems upset the proper working of economy. Macroeconomics provides solution to overcome difficulties of trade cycles.

5. Widens Scope of Microeconomics:

The laws of microeconomics are framed with the help of macroeconomics. The law of diminishing marginal utility is derived from analysis of aggregate behaviour of people.

6. Changes in Price Level:

Macroeconomics deals with the problems of changes in price level. There may be inflation, deflation, or stagflation. The changes in price level create disturbance for proper working of economy.

7. Study of National Income:

The study of national income explains various problems of economy. National income of any Country can show its economic conditions. The population control program or defense program depend upon national income. Macroeconomics is used to calculate national income.

8. Behaviour of Individual Firms:

Microeconomics studies behaviour of individual firms. Demand for a product depends upon total of such product in the economy. The causes for decrease in total demand are analyzed to note decrease in demand of a product.

Limitations:

1. Dependence on Individual Units:

Macroeconomics deals with aggregates and such aggregates are taken from individuals. The results of aggregates may be different from individual. What is good for individual may not be good for the economy. The saving for a person is good but it is bad for whole economy. There is decrease in national income due to saving of society. Thus, decisions for economy on the basis of individual behaviour are wrong.

2. Statistical Difficulties:

The measurement of macroeconomic problems involves statistical difficulties. These problems relate to aggregation of microeconomic variables. When microeconomic variables relate to dissimilar individual units the aggregates of such variable provide wrong results.

3. Indiscriminate Use is Bad:

Indiscriminate use of macroeconomics for analysis of problems is bad. The measures suggested to control general price level may to be useful in controlling prices of individual products.

4. Aggregate Variables May Be Useless:

The aggregate variables relating to an economic system may not provide significant results. The national income of any country may be divided by population provides per head income. An Increase in national income does not means that income of every individual has gone up.

5. Aggregates Are Not Similar:

Macroeconomics considers that aggregates are similar without checking their internal structure. Average wages are calculated with the help of total wages of all workers. The wages of one sector may increase while that of other may decreases but average will remain the same and aggregates may differ.

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