INTRODUCTION TO MACROECONOMICS

Microeconomics is the study of how households and firmsmake decisions and how these decision makers interact in the

broader marketplace. In microeconomics, an individual chooses tomaximize his or her utility subject to his or her budget constraint.

Macroeconomic events arise from the interaction of manyindividuals trying to maximize their own welfare. Because

aggregate variables are the sum of the variables describingindividuals’ decisions, the study of macroeconomics

is based on microeconomic foundations.

What is Macroeconomics?

Microeconomics v/s macroeconomics Macroeconomics is concerned with

aggregates and average of the entire economy, such as national income, aggregate output, total employment, total consumption, savings and investments, aggregate demand, aggregate supply, general level of prices etc.

In macroeconomics we study how these aggregates and averages of the economy as a whole are determined and what causes fluctuations in them

Macroeconomics is concerned with the behavior of the economy as whole…with booms and recessions, with economy’s total output of goods and services, the growth of output, the rate of inflation and unemployment, the balance of payment, and exchange rate

Macroeconomics focuses on the economic behavior and policies that affects consumption and investments, trade balance, determinants of wages and prices, monetary and fiscal policies, the money stock, budget, interest rate and national debt

Important issues in macroeconomics

Why does the cost of living keep rising? Why are millions of people unemployed, even

when the economy is booming? What causes recessions? Can the government do

anything to combat recessions? Should it? What is the government budget deficit? How does

it affect the economy? Why are so many countries poor? What policies might help them grow out of

poverty?

Macroeconomics, the study of the economy as a whole, addresses many topical issues:

Economic models

…are simplified versions of a more complex reality irrelevant details are stripped away

…are used to Make testable predictions that can, when

proven, … … explain the economy’s behavior devise policies to improve economic

performance

Economists use models to understand what goes on in the economy.Here are two important points about models: endogenous variables and exogenous variables. Endogenous variables are those which the model tries to explain. Exogenous variables are those variables that a model takes as given. In short, endogenous are variables within a model, and exogenous are the variables outside the model.

Price

Demand

Q*

P

Supply

Quantity

*

This is the most famous economic model. It describes the ubiquitous relationship between buyers and sellers in the market. The point of intersection is called

an equilibrium.

Macroeconomic Analysis

Helps in understanding the complicated economic system

Formation and understanding of national economic policy

Tool for the solution of economic problems related to output, employment, and national income

Individual are ignored Individual differences are overlooked

Issues and Problems in Economics

What to produce Allocation of resources How to produce For whom to produce Problems of efficiency and

growth

Goals of Macroeconomic Policy

Full employment High standard of living Price stability Reduction of economic inequality and

removal of poverty Rapid economic growth External balance v/s overall balance

in economic relations with the rest of the world

Objectives of Macroeconomic Policies High and rising per capita incomes Avoiding excessively high inflation Efficient use of human and non-

human resources with minimum possible unemployment of labour

Poverty removal and removal of extreme inequalities of income

Avoidance of persistent imbalance in foreign trade and excessive resorts to foreign capital

Review Questions What is macroeconomic? What is the difference between

microeconomics and macroeconomics? What are the major issues in macroeconomic

analysis? Why do we need to study macroeconomics? What is macroeconomics model? Why do we

use macroeconomic models? What are the objectives of macroeconomic

policies?

Campus Overview

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Mumbai

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