1.
Introduction to Macroeconomics
Points to be remembered:
Economy: A system of providing living to people.
Microeconomics: Study of the behavior of individual, small, isolated and disaggregated
units.
Macroeconomics: Study of groups and broad aggregates of the economy.
Firm: An individual producing unit.
Industry: A group of firms producing identical or closely related goods.
The term microeconomics and macroeconomics were first given by Ragner Frisch in
1933.
Prof. J.M. Keynes is known as father of modern macroeconomics.
Macroeconomics became popular after great depression of 1929- 33.
Prof. J.M. Keynes wrote the book General Theory of Employment, Interest and Money in
1936.
Meaning of Macroeconomics:
The term macro has been derived from Greek word ‘makros’ which means large. It is
the study of aggregates or groups or the entire economy such as gross domestic product,
total employment, aggregate demand, aggregate supply, total savings, general price
level, etc.
Scope of Macroeconomics:
Macroeconomics has a wider scope than microeconomics. The study of
macroeconomics extends to the following areas:
• Theory of National Income;
• Theory of Employment;
• Theory of Money;
• Theory of General Price Level;
• Theory of International Trade; and Theory of Economic Growth.
Goals and Importance of Macroeconomics:
• To Achieve Higher Level of Economic Growth (GDP-Gross Domestic Product);
• To Achieve Higher Level of Employment; (Labor Force)
• Stability of Prices;
• Equitable distribution of income.
Tools of Macroeconomics:
Fiscal Policy: relates to the management of government revenue, expenditure and debt
to achieve favorable effects and avoid unfavorable effects on income, output and
employment.
Monetary Policy: relates to the management of money supply and credit to step up
business activities, promote economic growth, stabilize the price level, achievement of
full employment and equilibrium in balance of payments. Ms. –Money supply, i-
Interest rate
Income Policy: through this policy direct control is exercised over prices and wages.
Major Issues and Concerns of Macroeconomics:
• Employment and Unemployment;
• Determination of National Income (or GNP);
• General Price Level and Inflation;
• Business Cycle;
• Stagflation;
• Economic Growth;
• Balance of Payments and Exchange Rate.
Differences between Microeconomics and Macroeconomics:
Differences based on Microeconomics Macroeconomics
1. Subject- matter: Small segments such as Large aggregates such as aggregate
individual household, individual demand, aggregate supply, national
firm, individual price, etc. income, general price level, etc.
2. Use of Partial equilibrium analysis General equilibrium analysis
techniques:
3. Assumptions: Full employment in the economy Underemployment of resources.
4. Core differences: Price is the main determinant of Income is the main determinant of
microeconomics. macroeconomics.
Trade / Business Cycle
Changes in aggregate demand bring about changes in the level of output, employment,
income and price. These changes are generally cyclical in nature and follow a cycle of
four different stages:
1. Prosperity or boom;
2. Recession;
3. Depression or slump; and
4. Recovery.
The cyclical nature of economic activity is known as a trade cycle or business cycle.
Prosperity or boom or peak: it is a phase of economic activity characterized by rising
demand, rising prices, rising investment, rising employment, rising incomes, rising
purchasing power and hence rising demand and so on. The investors, therefore,
voluntarily undertake risks and go in for investment, this further fuels boom conditions
through the working of the multiplier effect.
Recession: during the boom period, the economy may get over- heated and the
monetary authorities, the financial institutions and the business itself may begin to play
cautious. There may be cuts in investment, resulting in cuts in employment, fall in
incomes, decline in purchasing power and demand. Prices may begin to fall.
Depression or slump or trough: if the effective corrective measures cannot be
undertaken, the economy may find itself go into depression. It is a stage when the
business confidence is at its lowest. Investment, employment, output, income and prices
touch the bottom.
Recovery or expansion: as the economy moves out of depression, it enters the phase of
recovery. Sustained recovery will find the level of investment, employment, output,
income and prices moving upwards. This may finally results in boom conditions in the
economy.
Questions with Answer:
Ques: What is macroeconomics?
Ans: The term macro has been derived from Greek word ‘makros’ which means large. It
is the study of aggregates or groups or the entire economy such as gross domestic
product, total employment, aggregate demand, aggregate supply, total savings, general
price level, etc.
Ques: What are the scopes of macroeconomics?
Ans: Macroeconomics has a wider scope than microeconomics. The study of
macroeconomics extends to the following areas:
• Theory of National Income;
• Theory of Employment;
• Theory of Money Supply;
• Theory of General Price Level;
• Theory of International Trade; and
• Theory of Economic Growth.
Ques: what are the main objectives/goals of macroeconomics?
Ans: Followings are the main objectives or goals of macroeconomics:
• To Achieve Higher Level of Gross Domestic Product;
• To Achieve Higher Level of Employment;
• Stability of Prices;
• Formulation of Economic Policies; and
• Achievement of Economic Development.
Ques: What are the main tools of macroeconomics?
Ans: Fiscal Policy: relates to the management of government revenue, expenditure and
debt to achieve favorable effects and avoid unfavorable effects on income, output
and employment.
Monetary Policy: relates to the management of money supply and credit to step
up business activities, promote economic growth, stabilize the price level,
achievement of full employment and equilibrium in balance of payments.
Income Policy: through this policy direct control is exercised over prices and
wages.
Ques: What are the major issues and concerns of macroeconomics?
Ans: The major issues and concerns of macroeconomics are as follows
• Employment and Unemployment;
• Determination of National Income (or GNP);
• General Price Level and Inflation;
• Business Cycle;
• Stagflation;
• Economic Growth;
• Balance of Payments and Exchange Rate.
Ques: What are the main differences between microeconomics and
macroeconomics? Ans: The main differences between microeconomics and
macroeconomics are as follows:
Differences based on Microeconomics Macroeconomics
5. Subject- matter: Small segments such as Large aggregates such as aggregate
individual household, individual demand, aggregate supply, national
firm, individual price, etc. income, general price level, etc.
6. Use of Partial equilibrium analysis General equilibrium analysis
techniques:
7. Assumptions: Full employment in the economy Underemployment of resources.
8. Core differences: Price is the main determinant of Income is the main determinant of
microeconomics. macroeconomics.
