Please Share the below Post
Rate this post

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 service.

Definition and Meaning of 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 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 and Scope:

The importance or issues or 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.

(ix) 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 or Exceptions:

The main limitations or 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.

Relationship between 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 outputs, incomes and prices and the sums or averages of individual results would constitute the aggregates which macro economics is concerned”.