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Macro Economics and its Importance:

 

Definition of Macro Economics:

 

Economics is traditionally divided into two main branches:

 

(i) Micro Economics.

 

(ii) Macro Economics.

 

Micro economics is a branch of economics that examines the functioning of individual business firms and households. The goal of micro economics is to explain the determination of prices and quantitative individual goods and services. Micro economics is, therefore, often called price theory. In brief, Micro economics is the study of choices made by consumers, firms and government and how these decisions affect the market for a particular good and services.

 

What is Macro Economics?

 

The term 'Macro' is derived from the Greek word 'Uakpo' which means large. Macro economics looks at the economy as a whole. It examines the factors that determine national output and its growth overtime. It studies the economic aggregates such as the overall level of prices, output and employment in the economy.

 

According to R. G. D. Allen:

 

"The term macro economics applies to the study of relations between broad economic  aggregates such as total employment, income and production".

 

In the words of Edward Shapiro:

 

"The major task of macro economics is the explanation of what determines the economy's aggregate output of goods and services. It deals with the functioning of the economy as a whole".

 

Professor K. E. Boudling is of the view that:

 

"Macro economics is that part of economics which studies the overall averages and aggregates of the economic system. It does not deal with individual incomes but with the I national income, not with individual prices but with the price level, not  with individual output, but with national output".

 

In brief, Microeconomics looks at the individual units, household, the firm, the industry, It sees and examines the "trees". Macro economics looks at the whole, the economic aggregates. It sees and analyzes the 'forest'.

 

Importance/Issues/Scope of Macro Economics:

 

The importance/issues/scope, which are addressed in macro economics are in brief as under:

 

(i) It helps in understanding the determination of income and employment. Late J.M. Keynes laid great stress on macro economic analysis. He, in his revolutionary book, "General Theory, Employment interest and Money", brought drastic changes in economic thinking. He explained the forces or factors which determine the level of aggregate employment and output in the economy.

 

(ii) Determination of general level of prices. Macro economic analysis answers questions as to how the general price level is determined and what is the importance of various factors which influence general price level.

 

 

(iii) Economic growth. The macro economic models help us to formulate economic policies for achieving long run economic growth with stability. The new developed growth theories explain the causes of poverty in under developed countries and suggest remedies to overcome them.

 

(iv) Macro economics and business cycles. It is in terms of macro economics that causes of fluctuations in the national income are analyzed. It has also been possible now to formulate policies for controlling business cycles i.e., inflation and deflation.

 

(v) International trade. Another important subject of macro economics is to analyze the various aspects of international trade in goods, services and balance of payment problems, the effect of exchange rate on balance of payment etc.

 

(vi) Income shares from the national income. Mr. M. Kalecki and Nicholas Kelder, by making departure from Ricardo theory, has presented a macro theory of distribution of income. According to these economists, the relative shares of wages and profits depend upon the ratio of investment to national income.

 

(vii) Unemployment. Another macro economic issue is to explain the causes of unemployment in the economy. Stagflation is another important issue of modern economics. The Keynesian and post Keynesian economists are putting lot of efforts in explaining the causes of cyclical unemployment and high unemployment coupled with inflation and suggesting remedies to counteract them.

 

(viii) Macro economic policies. Fiscal and monetary policies affect the performance of the economy. These two major types of macro economic policies are central in macro economic analysis of the economy.

 

(9) Global economic system. In macro economic analysis, it is emphasized that a nation's economy is a part of a global economic system. A good or weak performance of a nation's economy can affect the performance of the world economy as a whole.

Limitations/Exceptions of Macro Economics:

The main limitations/exceptions of macro economics are as follows:

(i) The macro economies ignores the welfare of the individual. For instance, if national saving is increased at the cost of individual welfare, it is not considered a wise policy.

(ii) The macro economics analysis regards aggregates as homogeneous but does not look into its internal composition. For instance, if the wages of the clerks fail and the wages of the teachers rise, the average wage may remain the same.

(iii) It is not necessary that all aggregate variable are important. For instance, national income is the total of individual incomes. If national income in the country goes up, it is not necessary that the income of all the individuals in the country will also rise. There is a possibility that the rise in national income may be due to the increase in the incomes of a few rich families of the country.

(iv) The macro economic models are designed mostly to suit the developed  countries of the world. The developing countries face different economic  realities, so they do not benefit much from them.

Interdependence of Micro and Macro Economics:

The micro and macro economics are interdependent. We cannot draw  any precise line of separation between micro and macro economics. We cannot put them in water light compartments. Both these approaches help us  in analyzing the working of the economy. If we study one approach and  neglect the other, we are considered to be only half educated. We should integrate the two approaches for the successful analysis of the working of  economic system. The macro approach should be applied when aggregate entities are involved and micro approach when individual parts of the economy are examined. If we ignore one and lay emphasis on the other, it I may lead to wrong or inadequate conclusions. In the words of Gardner  Ackley:

"Actually, the line between macro economics and micro economics theory cannot be precisely drawn. A true general theory of the economy  would clearly embrace both. It would explain individual behavior, individual I outputs, incomes and prices and the sums or averages of individual results I would constitute the aggregates which macro economics is concerned".

Relevant Articles:

Macro Economics and its Importance
Concepts of National Income
Methods of Computing/Measuring National Income
Circular Flow of National Income in a Two Sector Economy
Difficulties/Problems in the Measurement of National Income
Determinants of National Income or Factors Affecting the National Income
Gross Domestic Product as a Measure of Welfare/Growth/Development
Measurement of Gross Domestic Product in Current Price and Constant Price
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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