MACROECONOMICS (ECU_07202)
TOPICS TO BE COVERED
1.INTRODUCTION
2.NATIONAL INCOME ACCOUNTING
3.NATIONAL INCOME DETERMINANTION
4.MONEY AND BANKING
5.MACROECONOMIC INSTABILITY
6.INTERNATIONAL TRADE
7. ECONOMIC GROWTH AND DEVELOPMENT
1.Introduction to Macroeconomics
❑What is Macroeconomics?
❑Nature and Scope of Macroeconomics
❑Differences between Macroeconomics and
Microeconomics
❑Significances of Macroeconomics
❑Tools of Macroeconomics
❑Evolutions of Macroeconomics
❑Limitations of Macroeconomics
What is Macroeconomics?
• Macroeconomics is the study of the structure
and performance of national economies and of
the policies that governments use to try to affect
economic performance.
• Macroeconomics study the interaction of the
economy as a whole such as aggregate
demand, aggregate supply and national income.
• Instead of one business we study all businesses
• stead of analyzing one consumer, we analyze everyone
Nature of Macroeconomic theory
• By nature it deals with aggregates
and seek to explain the function and
performance of an economy as a
whole.
• It does this by using what is referred
to as economic indicators such as
national income, employment,
general price level etc.
Why Macroeconomics and not
Microeconomics?
• The two reasons for it as follows:
❑What is good at the micro level may not
be good for the economy as a whole.
Accordingly, separate theories are
needed to discuss micro and macro
issues.
❑The macroeconomic problems, e.g.,
inflation, deflation, BOP disequilibrium
and unemployment can be solved only
through macro level programmes.
Scope of Macroeconomics
Macroeconomics as a subject 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 and Banking;
❖Theory of General Price Level;
❖Theory of International Trade; and
❖Theory of Economic Growth.
Difference between Macro and
Microeconomics.
Microeconomics is the study of economic
actions of individuals and small groups
of individuals. WHILE
Macroeconomics deals with aggregates
of these quantities, not with individual
incomes but with the national income,
not with individual prices but with the
average price levels, not with individual
output but with the national output
Cont,,,,,
• The objective of microeconomics on
demand side is to maximize utility
whereas on the supply side is to
maximize profits at minimum cost.
WHILE
• The main objectives of macroeconomics
are full employment, price stability, stable
economic growth and favorable balance
of payments (BOP).
Cont.,,,,
• The basis of microeconomics is the price
mechanism which operates with the help of
demand and supply forces. These forces help to
determine the equilibrium price in the market.
WHILE
• The basis of macroeconomics is national
income, output and employment which are
determined by aggregate demand and
aggregate supply.
Cont.,,,,
• Microeconomics is based on partial equilibrium
analysis which helps to explain the equilibrium
conditions of an individual, a firm, an industry
and a factor.
WHILE
• Macroeconomics is based on general
equilibrium analysis which is an extensive study
of individuals and their interrelations and
interdependences for understanding the working
of the economic system as a whole. (e,g CGE
model, Leontief Model)
Interdependence of Micro and
Macroeconomics
The difference between the microeconomics
and macroeconomics is very vivid but these
two branches cannot be taken as totally
independent of each other. The changes in
one influence the other.
• For example, increased savings by individual
households shall definitely cause a fall in
aggregate consumption in the economy.
• This is known as paradox of thrift.
Significance of Macroeconomics
❑ It helps to understand the functioning of a complicated
modern economic system.
❑ It helps to achieve the goal of economic growth, higher
level of GDP and higher level of employment.
❑ Understand why economies grow
❑ Understand economic fluctuations
❑ Make informed businesses decisions
❑ Formulate and evaluate economic policy
❑ It explains factors which determine balance of payment.
❑ It helps to solve economic problems like poverty,
unemployment, business cycles, etc.,
Tools of Macroeconomics
❑Fiscal Policy: Uses of taxation and
government expenditure to stabilize the
economy.
❑Monetary Policy: relates to the
management of money supply and credit
to step up business activities, promote
economic growth, stabilize the price level.
❑Income Policy: through this policy direct
control is exercised over prices and wages
(EWURA, LATRA & TASAC)
ASSIGNMENT 1
Discuss the evolution of Macroeconomics
Limitations of Macroeconomics
1.Fallacy of Composition: In
Macroeconomic analysis the “fallacy of
composition” is involved, i.e., aggregate
economic behaviour is the sum total of
individual activities. But what is true of
individuals is not necessarily true of the
economy as a whole. For instance,
savings are a private virtue but a public
vice. Paradox of saving
Cont.,,
2.To Regard the Aggregates as
Homogeneous: The main defect in
macro analysis is that it regards the
aggregates as homogeneous without
caring about their internal composition
and structure. The average wage in a
country is the sum total of wages in all
occupations, i.e., wages of clerks, typists,
teachers, nurses, etc
Cont.,,
3.Aggregate Variables may not
be Important Necessarily: For
instance, the national income of a
country is the total of all individual
incomes. A rise in national
income does not mean that
individual incomes have risen.
Cont.,,
4.Indiscriminate Use of
Macroeconomics Misleading: For
instance, if the policy measures
needed to achieve and maintain full
employment in the economy are
applied to structural redundancy in
individual firms and industries, they
become irrelevant.
Cont.,,
5.Statistical and Conceptual Difficulties:
These problems relate to the aggregation
of microeconomic variables.
• If each data unit is different, it becomes
difficult to judge. The aggregate tendency
may not affect all sectors equally. (e.g
subsistence output)
Thank You
