Introduction to Macro Economics

By: VIKRAM.G.BLecturer, P.G dept. of Commerce

Bangalore-55

Meaning of Economics:Economics:- It is the study of the allocation of

SCARCE resources to meet unlimited human wants.

In other words, economics is the study of human behavior as it pertains to the material well-being of people (as either individuals or societies).

Robert Heilbroner describes economics as a "Worldly Philosophy." It is the organized examination of how, why and for what purposes people conduct their day-today activities, particularly as relates to the production of goods and services, the accumulation of wealth, earning incomes, spending their resources, and saving for future consumption.

STAGES OF DEVELOPING ECONOMICS AS A SUBJECTWealth concept (Adam Smith, J.B. Say and

Walkar)

Welfare concept (Marshal)

Scarcity concept (Lionel Robbins’.)

Development concept (Professor Samuelson)

Economics can be classified into two general categories; these are

(1)microeconomics and

(2) macroeconomics.

Microeconomics:- It is concerned with decision-making by individual economic agents such as firms and consumers.In other words, microeconomics is concerned with the behavior of individuals or groups organized into firms, industries, unions, and other identifiable agents.

Macroeconomics:- It is concerned with the aggregate performance of the entire economic system. Unemployment, inflation, growth, balance of trade, and business cycles are the topics that are discussed under macroeconomics.

Scope/Field of Macroeconomics:Theory of Income, Output and Employment

with its two constituents, namely the theory of consumption function and the theory of investment function. The theory of business cycles is also a part and parcel of the theory of income, output and employment.

Theory of Prices with its constituents of the theories of inflation, deflation and reflation.

Theory of Economic growth dealing with the long-run growth of income, output and employment as applied to developed and underdeveloped countries.

Importance of Macro-economicsThe study of macroeconomics becomes

indispensable for the formulation and successful execution of govt. economic policies.

The study of macroeconomics is indispensable for understanding the working of the economy of a country.

No science can study its entire field without attempting some sort of aggregative approach.

The study of macroeconomics is indispensable even for the purpose of building and developing microeconomics.

The study of microeconomics can be defended on the ground that it is indispensable for the proper and accurate knowledge of the behavior-patterns of the aggregate variables.

Macro economics has afforded an inconsiderable help to govt. all over the world in formulating and implementing appropriate economic policies.

The study of macro economics is very important for evaluating the overall performance of the economy in terms of national income.

The popularity of macroeconomics has greatly increased in recent years on account of the fact that it deals with most of the controversial and challenging issues of the day, namely, Unemployment, inflation, growth, balance of trade, and business cycles.

Why one should study Macroeconomics in the light of Business Decision??

It is concerned with the whole economy and studies the level and the growth of national income, the levels of employment, the level of private and government spending, the balance of payments, the consumption & the investment, saving functions and oscillations in business cycles. The objective of macroeconomics is to maintain macro equilibrium of the economy.

koutsoyiannis says, ‘the aggregate econometric models are relevant for the study and prediction of aggregate magnitudes, such as total output of any economy, total employment, consumption, investment etc.’

Managers face difficulty in decision making, understanding of macroeconomics helps CEO's in running the business.

Overall economic activity, economic policies (industrial policy, trade policy, monetary policy, fiscal policy), inflation affects the business. Decisions of CEO's or managers are affected by this aggregate which makes up the overall environment of business. Future demand and investment depends upon the growth and the state of the economy.

The role of macro economics in business policy formulation:

Macro economic policy

Economic planning

Solving macro paradoxes

Tracing effect of government policy on business

Help in solving problem of general unemployment

Analysis of trade cycles

Macro analysis helps in development of micro analysis

Inability of micro economics to study some areas

Macro economic models

Limitations of Macro economics:Fallacy of Composition:- Aggregate

economic behavior is the sum total of the economy of individual activities. But what is true of individuals is not necessarily true to the fiscal entirely.

To Regard the Aggregates as Homogenous:- The main defect in macro analysis is that it regards the aggregates as homogenous without caring about their internal composition and structure.

Indiscriminate Use of Macro Economics Misleading: An indiscriminate and uncritical use of macro economics in analyzing the complexities of the real world can frequently be misleading. For Example, measures aimed at controlling general prices cannot be applied with much advantage for controlling prices of individual products.

Statistical and Conceptual Difficulties: The measurement of macro economics concepts involves a number of statistical and conceptual complexities. These problems relate to the aggregation of micro economic variables. If individual units are almost similar, aggregation does not present much difficulty. But if micro economic variables relate to dissimilar individual units, their aggregation into one aggregation into one macro economic variable may be incorrect and hazardous.

Aggregate Variables may not be Important Necessarily:- The aggregate variables which form the economic system may not be of much significance. For instance, the national income of a country is the total of all individual income. A hike in national income does not mean that individual incomes have risen. The increase in national income might be the result of the increase in the incomes of a few rich people in the nation. Thus a rise in the national income of this type has little significance from the point of view of the community.

To conclude that macro economics enriches our knowledge of the functioning of an economy by studying the behavior of national income, productivity, investment, savings and consumption. Further more, it throws much light in solving the problems of redundancy, inflation, economic instability and economic growth. The concept of stock and flow are mainly used in the macro economics or in the theory of income, productivity and employment. Lastly, both the concepts of stock ad flow variables are very significant in modern theories of income, interest rate, business cycles etc.