"Macro – Economics concerns itself 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 with the general price level."
Teaching Points
7.1 Introduction
7.2 Historical Review of Macro Economics
7.3 Meaning and Definitions of Macro-Economics
7.4 Scope and subject-matter of Macro-Economics
7.5 Features of Macro-Economics
7.6 Comparison between Micro and Macro Economics
Teaching Objectives
To enable the students to understand meaning, nature, scope and subject matter of macro economics, and further enable them to compare Micro and Macro approaches to study economy.
Economics is the art of making the most of life – G.B. Shaw
7.1 Introduction
The word Macro is derived from the Greek word `Makros', meaning large or aggregate (total). Macro-Economics, therefore, is the study of aggregates covering the entire economy such as total employment, national income, national output, total investment, total savings, total consumption aggregate supply, aggregate demand, general price level etc. It is therefore aggregative economics. It deals with the study of economy as a whole. Macro-Economics is also known as theory of income and employment or simply as income analysis.
7.2 Historical Review of Macro Economics
Macro approach to study economy is comparatively new and is of a recent origin. Though it is a modern approach, this does not mean that it did not exist in the past. It is true that Macro-Economics did not exist as a separate branch of economic analysis in the past, but this approach did prevail even before the evolution of Micro-Economics.
In the 16th and 17th century, advisors advocated policies to the government which were based on macro approach. These people were the followers of merchantilist (a group of English merchants) school of thought. In the 18th century Physiocrats (French Thinkers) tried to analyse the concept of national income and wealth, and discussed relative share of landlords, tillers of the soil and unskilled workers in the flow of income. Even the Classical economic theory of Prof. Adam Smith, Prof. Ricardo and Prof. J.S. Mill also discussed the determination of national income and wealth, and the division of national income into total wages, total rent and total profit. But their macro analysis was combined with micro analysis.
Thus, from the beginning, some thinking was being done on macro economic level.
The neo-Classical economists, Specially Dr. Marshall and Pigou, relegated Macro-Economics to the background. There micro analysis ruled the world of economics till the' great depression of 1930's.
After the great depression, we find revolutionary and fundamental changes in economic thinking. Lord John Maynard Keynes published his very famous book "General Theory of Employment, Interest and Money" published in 1936. Keynes used macro approach to analyse economic problems. After the publication of Keynesian theory, macro economic analysis became more important and popular approach to economic analysis. Hence, credit for the development of Macro-Economic approach goes to Lord Keynes. Besides Keynes, Malthus, Karl Marx, Wicksell, Walrus, Irving Fisher are the other economists who have participated in the development of macro economics. After Keynes, Harrod and Domar used macro analysis to develop Theory of Growth and many post Keynesian economists developed it as a policy oriented science.
7.3 Meaning and Definitions of Macro-Economics
Macro-Economics deals with the study of aggregates covering the entire economy. It is concerned with total employment, national income, national output, aggregate demand, aggregate supply, aggregate consumption and savings, total investment etc. It is an aggregative economics.
We shall discuss some important definitions of Macro-Economics given by some renowned economist to understand its meaning properly.
1) In the words of Prof. Kenneth Boulding, "Macro-Economics deals not with individual quantities as such, but with the aggregates of these quantities, not with the individual incomes but with the national income, not with individual prices but with the price level, not with individual output but with the . ''national output"
2) Prof. J. L. Hansen Says, Macro-Economics is. that brand, of economics which considers the relationship between large, aggregates such as the volume of employment, total amount of savings, investment, national income etc."
7.4 Scope and Subject Matter of Macro-Economics
Macro-Economics is a study of very large, economy wide aggregate variables like national income, total employment, general price level, economic growth rate, total investment, etc. It examines the inter-relation among these various aggregates, their determination and causes of fluctuations in them.
Macro-Economics is known as Theory of Income and Employment, because it explains the forces which determine the level of national incomes and employment in an economy and analyses the causes of fluctuations in them. Further, it also w explains the determinants, which will bring about increase in national income, output and employment over a long period.
Subject Matter:
i) Theory of Income and Employment
Macro-economics analysis explains what determines the level of national income and employment, and what causes fluctuations in the level of income, output and employment. To understand how the level of income and employment is determined, we have to study the determinants of aggregate supply and aggregate demand and further we have to study consumption function and investment function. The analysis of consumption function and investment function are the important subjects to Macro-Economic Theory.
Theory of Business Cycles is also a part and parcel of the theory of income.
This theory also examines inter-relation between income and employment, and suggests policies to solve the problems related to these variables.
ii) Theory of General Price Level and Inflation: Macro-Economics analysis shows how the general level of prices is determined and further explains what causes fluctuations in it.
The study of general level of prices is significant of account of the problems created by inflation and depression. The problems of inflation and depression are the serious economic problems faced these days by most of the countries in the world. Theory of price level studies causes and effects of inflation and depression, and suggests economic policies to tackle these problems.
iii) Theory of Growth and Development: Another important subject matter of Macro-Economics is the theory of economic growth and development. It studies the causes of under development and poverty in poor countries and suggests strategies for accelerating growth and development in them. Growth Theory also deals with the problems of full utilization of increasing productive capacity in developed countries and explains how the higher rate of growth with stability, can be achieved in these countries.
iv) Macro Theory of Distribution:
Still another important subject matter of Macro-Economics is, to explain what determines the relative shares from the total national income of the various classes, especially a workers and capitalist. Ricardo and Karl Marx propounded theories, explaining the determination of relative shares of various social classes in the total national income. Afterwards, Kalecki and Kaldor also explained determination of relative shares of wages and profits in the national income.
Macro theory of distribution thus deals with the relative shares of rent, wages, interest and profits in the total national income.
In addition to this, study of public finance, international trade, monetary and fiscal policies are also a subject matter of Macro-Economics.
7.5 Features of Macro-Economics
1) Study of aggregates
Macro-Economics deals with the study of nations economy as a whole. It is a study of very large, economy, wide aggregates such as national output or income, total employment, aggregate demand, aggregate supply, total investment, total consumption, general price level etc.
2) Lumping method
Macro analysis deals with the behaviour of aggregates i.e. total values of economic variables related to whole economy. It uses method of lumping to deal with macro variables, such as aggregate demand, aggregate supply, national output etc.
3) A General equilibrium analysis
Macro-Economics analysis is based on General Equilibrium Analysis. This analysis deals with entire economy in the context of equilibrium. It studies the behaviour of number of economic variables at a time and takes into consideration their functional relationship and interdependence in doing so.
This approach assumes "Everything depends on everything else."
Since this approach deals with whole economy, it has to explain how aggregate supply and aggregate demand are brought into equality, and how equilibrium between these forces determine, not only price level, but also level of income and employment. This whole analysis involves the study of number of variables and their interactions.
4) Income analysis.
Macro-Economics is also known as the theory of income and employment or simply income analysis. Because, basic subject matter of Macro-Economic analysis is to explain what determines the level of national income and employment and what causes fluctuations in them. Further, it explains the growth of national income over a long period of time.
5) Policy-oriented
Macro-Economics, according to Keynes is a policy-oriented science. Macro-Economics analysis helps in formulating suitable economic policies to promote economic growth, to generate employment, to control inflation, to pull the economy out of depression etc.
6) Dynamic science
Macro-Economics studies the changes in aggregate economic variables and analyses dynamic nature of the economy. It enables us to study progress of an economy over a period of time.
7) Based on interdependence
Macro analysis takes accounts of interdependence between aggregate economic variables, such as income, output, employment, investment, price level etc. E.g., it explains how change in level of investment will finally change the level of national income, output and employment, and eventually the level of economic growth.
7.6 Comparison between Micro and Macro-Economics
Micro-Economics may be distinguished from Macro-Economics on the following ground.
1) Nature -
Micro-Economics is a study of the behaviour of individual economic units, such as individual consumers, individual firms, individual prices, individual industries, particular commodities etc.
Macro-Economics, on the other hand, is the study of economic system as a whole. It is the study of the behaviours of large aggregates, such as national income, national output, aggregate demand and supply, total consumption, total investment, general price level etc.
2) Scope and subject matter -
Micro-Economics basically deals with the determination of prices of commodities, prices of factors and with the allocation of resources.
While Macro-Economics deals with the theory of determination of size of national income, level of employment and general price level. Subject matter of Macro-Economics also covers study of economic growth, business cycles, public finance and international trade.
3) Approach -
Micro-Economics is based on partial equilibrium analysis. This analysis explains the equilibrium conditions of an individual consumer, a firm, an industry, a factory etc.
On the other hand, Macro-Economics is based on general equilibrium analysis. This analysis studies the behaviour of number of large aggregates, their functional relationships and interdependence, and deals with entire economy in the context of equilibrium.
4) Assumptions -
Micro-Economic is based on partial equilibrium. Partial equilibrium isolates an individual unit from other forces and proceeds with the assumption "Other-things remaining constant (ceteris paribus). This .approach neglects the interdependence between economic variables. On the other hand, macro-economics deals with general equilibrium approach, which assumes everything -depends on everything else and explains the inter-relations and interdependence between aggregate economics variables.
5) Mediuds -
Micro-Economics uses slicing method. This method splits up the entire economy into small individual units for the purpose of an intensive detail study.
While Macro-Economics uses lumping method. Macro-Economics deals with national aggregates or total values of economic variables related to whole economy. It uses method of lumping to study macro quantities. This method splits up the economy into big lumps (or sectors) for the purpose of study.
6) Economic variables -
Micro-Economics is concerned with the behaviour of micro variables or micro quantities, such as an individual demand individual supply, price of a particular commodity, individual industries, individual wages etc.
Macro-Economics is, however, concerned with the behaviour of macro variables or macro quantities, such as national output, national income, total consumption, total investments, aggregate demand, aggregate supply, general price level etc.
7) Quantity expressed -
In Micro-Economics analysis, commodities can be considered in real or physical terms. For example, Law of Diminishing Marginal Utility, Law of Demand are explained in terms of real quantities.
But Macro-Economics deals with aggregates i.e. total values of economic variables, which cannot be expressed in terms of real quantities. Therefore, aggregates, such as total supply, national output and income etc., are expressed in terms of money.
8) Objectives -
The objectives of the Micro-Economics on the demand side is to maximize utilities and on the supply side is to maximize profits at the minimum cost.
The main objectives of Macro-Economics are full employment, price stability, economic growth, increases in national output and income, and favourable balance of payment.
9) Theory of Distribution -
Micro Theory of Distribution explains factor pricing. It explains how wages (price for the use of labour), rent (payment for the use of land), interest (price for the use of capital) and profits (the reward for entrepreneur) are determined. Factor prices along with product prices determine the allocation of resources to the production of various goods.
While Macro Theory of Distribution explains what determines the relative aggregative shares from the total national income of the various social classes, especially workers and capitalist. It deals with the relative shares of rent, wages, interest and profit in total national income.
10) Basic questions -
Micro-Economic Theory -deals with the following basic questions. i.e., what goods shall be produced and in what quantities? How they shall be produced? How the goods and services produced shall be distributed? Whether the production of goods and their distribution for consumption is efficient.
While Macro-Economic Theory deals with the problem of full employment of resources, i.e., are all available resources being fully utilized? Is the economy's productive capacity increasing, i.e., problem of economic growth? Also it deals with the questions like, Is purchasing power of money constant? Is the balance of payment favourable to the country? etc.
But though there are several differences between Micro and Macro-Economics, these two branches are not altogether mutually exclusive.
In fact, they are complementary to each other rather than being competitive. Also these two approaches are interdependent. Knowledge of both is necessary for complete understanding of the working of an economy. In the words of Prof. Samuelson, "There is really no opposition between Micro and Macro Economics. Both are absolutely vital. And you are only half educated, if you understand the one while being ignorant of the other."
Q.1 A) Fill in the blanks with appropriate alternatives given in the brackets.
1) The Credit for the development of Macro Economic approach must go to ........................
(Dr. Marshall/ Prof. Pigou / Lord Keynes / Mrs. Joan Robinson)
2) .................... economics studies the problem of inflation in the country.
(Micro / Macro / Static / Industiral)
3) Macro-Economics does not study ………………..
(whole economy / national income / aggregate supply / product pricing)
4) ........... is the subject matter of Macro-Economics.
(Growth theory / Factory Pricing / Market Structures / Individual Incomes)
5) Micro and Macro approaches are …………………
(competitive / alternative / substitutes / complementary)
(B) Match the following
Group "A" Group "B"
1) Micro-Economics a) Harrod and Domar
2) Macro-Economics b) Partial equilibrium
3) Theory of c) Principles of Growth economics
4) Lord Keynes d) General equilibrium
e) General Theory of Employment,
interest and money
f) Business economics
(C) State whetherrthe following statements are TRUE or FALSE
1) Macro-Economics is known as income analysis.
2) Increase in national income is a Micro-Economic goal.
3) Macro-Economic adopts lumping method.
4) Study of price determination is a subject matter of Madro-Economics.
5) Micro-Economics deals with the study of aggregates.
6) National output is an example of macro variable.
Q.2 A) Define or Explain the following concepts
1) Macro-Economics
2) Macro variables
3) General equilibrium
(B) Give reasons or explain the following statements
1) Macro-Economics is the study of aggregates.
2) Macro-Economics is also known as income and employment theory.
3) The scope of Macro-Economics is wide.
4) Macro-Economics deals with whole economy.
5) Macro-Economics is different from Micro-Economics.
Q. 3 A) Distinguish between the following
1) Micro-Economics and Macro-Economics
2) Slicing method and Lumping method
3) Partial equilibrium and general equilibrium
(B) Write short notes on
1) Features of Macro-Economics
2) Subject matter of Macro-Economics
3) Historical review of Macro-Economics
Q. 4) Answer the following questions
1) What is the scope and subject matter of Macro-Economics?
2) What are the features of Macro-Economics?
Q. 5) Do you agree. with the following statements? Give reasons.
1) The scope of Macro-Economics is wide.
2) Macro-Economics deals with the study of individual behavior.
3) Macro-Economics is individualistic.
4) Macro-Economics is different from Micro-Economics.
5) Macro-Economics is a partial equilibrium analysis.
Q. 6) Answer in detail
1) State the features of Macro-Economics.
2) Explain the scope and subject matter of Macro-Economics
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