ASHUTOSH KUMAR JAISWAL

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Meaning of Macroeconomics
How Macroeconomics Differs from Microeconomics?
Scope and Significance of Macroeconomics
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I. MEANING OF MACROECONOMICS
The term Macro in English has its origin in the Greek term Makros
which means Large. In the context of macroeconomics, 'large' means
economy as a whole. Thus, macroeconomics is defined as that branch
of economics which studies economic issues or economic problems at
the level of an economy as a whole. It studies such economic questions
that concern the welfare of all residents of a country. These questions
are like of employment for the residents, growth of output in the
economy, the problem of price rise (called inflation) or the problem
of depression (lack of demand for goods and services across different
sectors of the economy) and so on. Macroeconomics also studies how
government can improve the state of economy of a country.

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In the words of M.H. Spencer, "Macroeconomics is concerned with the economy as a whole or
large segments of it. In macroeconomics, attention is focused on such problems as the level of
unemployment, the rate of inflation, the nation's total output and other matters of economy-wide
significance."

2. HOW MACROECONOMICS DIFFERS

FROM MICROECONOMICS?
You have already studied microeconomics at +1 level. Now that you
have understood the meaning of macroeconomics, you can draw a
distinction between micro and macro economics, as under:

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Macroeconomic
Variables
Macroeconomic variables
are those economic
variables which are studied
at the level of economy as
a whole. These variables
are important components
of the subject matter of
macroeconomics.
The important ones are:
• Level of employment in
the economy,
• National income,
• Aggregate demand,
• Aggregate supply,
• Consumption
expenditure in the
economy, and
• Investment expenditure
in the economy.
4 Introductory Macroeconomics
(I) Basis of the Study
Microeconomics studies problems of scarcity and choice at the level
of an individual, a household, a firm or an industry.
Macroeconomics studies problems of scarcity and choice at the level
of an economy as a whole.
Illustration
Microeconomics studies how a consumer exercises his choice of goods
and services so that he maximises his satisfaction with a given income.
Macroeconomics studies how the national resources are used (for the
production of defence goods or consumer goods) so that the welfare
of all the residents is maximised.
(2) Economic Variables
Microeconomics uses microeconomic variables such as consumer's
demand or producer's supply.
Macroeconomics, on the other hand, uses macroeconomic variables
such as aggregate demand (referring to demand for all the goods and
services in the economy) and aggregate supply (referring to supply of
all the goods and services in the economy).
(3) Economic Agents
Economic agents refer to the individuals and institutions who take
economic decisions. Individual economic agents include consumers
and producers. They focus on the maximisation of personal gains.
Institutional economic units include state or statutory bodies [like
RBI (Reserve Bank of India), SEBI (Securities and Exchange Board of
India) and TRAI (Telecom Regulatory Authority of India)]. They focus
on the maximisation of social welfare. At the micro level, economic
decisions are taken largely by the individual economic agents, while at
the macro level institutional agents play a significant role.
(4) Degree of Aggregation
In microeconomics, there is a limited degree of aggregation of
economic variables, compared to macroeconomics.
Illustration
Microeconomics studies equilibrium of an industry; it is an aggregation
of all the firms producing a particular commodity.
Macroeconomics studies equilibrium of the economy as a whole; it is
an aggregation of all economic units in the economy.
However, important it is to note that with a view to examine structural
change in the economy, macroeconomics also studies the level of
economic activity in agricultural sector, industrial sector and services
sector, separately.

(5) Different Set of Assumptions

Microeconomics and macroeconomics are based on a different set
of assumptions. Certain variables are assumed to be constant in
microeconomics, whereas they are assumed to be changing in macro;
similarly, certain variables that are assumed to be constant in macro
are assumed to be changing in microeconomics.
Illustration
In microeconomics, total output and employment are taken as
constant while these are important variables in macroeconomics.
In macroeconomics, distribution of output/income is taken as
constant, while it is an important variable in microeconomics.

( 6) Central Issue
Allocation of resources is the central issue in microeconomics.
Determination of the overall level of output (and employment) is the
central issue in macroeconomics.

(7) Method of Study

Method of study in macroeconomics is often described as 'general
equilibrium analysis'. On the other hand, method of study in
microeconomics is often described as 'partial equilibrium analysis'.

t>TS
Q. Distinguish between partial equilibrium and general equilibrium.
Ans. Partial equilibrium refers to equilibrium in one market (say, commodity market) on the
assumption that there is no change in other markets (like labour market or capital market).
General equilibrium refers to simultaneous equilibrium in all the markets in the economy. Partial
equilibrium is the method of study in microeconomics. General equilibrium is the method of
study in macroeconomics.

(8) Micro-Macro Paradox

What is logical at the micro level may not be logical at the macro level.
Illustration
- If an individual saves more, he adds to his future prosperity.

Introduction 5
 - If all the people in an economy save more (and spend less), demand
for goods and services may decline. Consequently, investment may
decline; production and employment level may fall. The economy
will be driven towards future poverty rather than prosperity.

t>TS
Q. Is saving a virtue or a vice?
Ans. From the viewpoint of an individual, saving is a virtue. He can deposit his savings in a bank and can
earn a regular income. But, from the viewpoint of the economy as a whole, saving may prove to be
a vice. When everybody saves more, expenditure tends to decline. It causes a decline in aggregate
demand. A fall in aggregate demand causes a fall in investment. Implying a fall in production and a
fall in the level of employment. The economy may be driven into the state of depression.

3. SCOPE AND SIGNIFICANCE OF

MACROECONOMICS
Scope
Scope of macroeconomics refers to the field of study (or area of
study) of macroeconomics. It includes the following leading issues (in
accordance with the CBSE syllabus for the +2 graders):
(1) Estimation of National income and Related Aggregates:
Macroeconomics starts with the concept of national income. It
deals with the definition and estimation of national income and
its related aggregates like GDP (Gross Domestic Product) and
NDP (Net Domestic Product).
(2) Theory of Employment: Macroeconomics studies the theories
related to employment (or unemployment) in the economy.
Keynesian theory of employment is of notable significance in this
context. It explains the causes of unemployment, and suggests
the possible remedies to combat it.
(3) Theory of Money: Creation of money (or creation of credit) by the
commercial banks is an important component of macroeconomics.
Linked to it, is the role of Central Bank of a country (RBI in India)
in regulating the supply of money in the economy.
(4) Theory of General Price Level-Inflationary and Deflationary Gaps:
This is yet another significant component of macroeconomics.
It reveals the trend path of the general price level leading to
inflationary and deflationary gaps in the economy.
(5) Role of the Government (or Government Budget):
Macroeconomics studies how government budget impacts the
level of economic activity in the economy.

6 Introductory Macroeconomics
 (6) Exchange Rate and Balance of Payments: Determination of
exchange rate and the way it is managed (in the international
money market) is an important element of the scope of
macroeconomics.
Briefly, as a specialised branch of economics, macroeconomics focuses
on such issues which explain (i) how an economy functions, and (ii) how
can it be managed (or regulated), so that social welfare is maximised.

Significance
The following observations highlight the significance of macroeconomics:
(1) Description of the Economy: Macroeconomics offers a deep
description of the economy.
• Estimation of national income (across different sectors) reveals
the nature and level of economic activity in the economy.
• Study of unemployment reveals the magnitude of the problem
and the way it can be handled.
• Government budget reveals the way economy is regulated
by the government.
(2) Roadmap of Growth and Development: Macroeconomics
offers a roadmap of growth and development. Programmes and
policies of economic growth are drawn by assessing the needs
and means of the economy.
(3) Economic Stability: Study of macroeconomics helps achieve
economic stability. This is achieved through appropriate monetary
policy (pursued by the Central Bank of the country) and fiscal
policy/budgetary policy (pursued by the government).
(4) BoP (Balance of Payments) Status: BoP status of a country
reveals performance of the economy in relation to rest of the
world. Balance of trade (Export and Import) shows our capacity
to export and compulsion to import.
(5) Problems of Poverty and Environmental Pollution: Macroeconomics
offers insights into the problems of poverty and environmental
pollution. It is by using macro-models that these problems are
addressed.
(6) Poli cy Formulation: Information relating to macroeconomic
variables (like aggregate demand, aggregate supply, total
consumption and investment expenditure in the economy,
output across different sectors of the economy and the like) is
extremely useful in the formulation of policies for the growth and
development of the country.

lntrod{lction 7
 Emerging challenges of the economy become evident only
through macroeconomic data.
In short, we can say that the knowledge of macroeconomic variables
and macroeconomic models is extremely essential in understanding
the performance of the economy, as well as in the formulation of
policies and programmes for its growth and development.

Power Points & Revision Window ------------

Macroeconomics is that branch of economics which studies economic problems (or economic issues) at
the level of economy as a whole.

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Microeconomics as different from Macroeconomics
!
Microeconomics deals with the problem of choice and scarcity at the
individual level, while macroeconomics does it at the level of economy as a
whole.
Microeconomics uses microeconomic variables (like consumer's demand and
producer's supply}, while macroeconomics uses macroeconomic variables (like
AD and AS}.
Microeconomics involves lesser degree of aggregation than the macroeconomics.
Microeconomics and macroeconomics are based on different set of assumptions.
Allocation of resources is the central issue in microeconomics, while in macroeconomics the central
issue is the determination of national income and employment.
What is ideal at the micro level (like, saving by an individual) may not be ideal at the level of an economy
as a whole.

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Scope and Significance of Macroeconomics
! Scope: (i) Estimation of national income and related aggregates, (ii) Theory of employment, (iii) Theory
of money, (iv) Theory of general price level: inflationary and deflationary gaps, (v) Role of the
government (or government budget}, (vi) Exchange rate and balance of payments.
Significance: (i) Description of the economy, (ii) Roadmap of growth and development, (iii) Economic
stability, (iv) BoP (Balance of Payments) status, (v) Problems of poverty and environmental pollution,
(vi) Policy formulation.

rEXERCISEj
1. Objective Type Questions (Remembering & Understanding based Questions)

A. Multiple Choice Questions

Choose the correct option:
1. Macroeconomics is concerned with:
(a) the level of output of goods and services in the economy
(b) the general level of prices
(c) GDP growth
(d) all of these

8 Introductory Macroeconomics