Introduction to macroeconomics

The word macroeconomics is derived from Greek

word ‘Makros' meaning large. Thus,
macroeconomics is concerned with the analysis of
economy as a whole or its large aggregates such as
national income, total savings, aggregate demand,
total consumption, general price level, trade cycle,
Inflation, fiscal policy and monetary policy etc. it is
aggregative economics which examines the
interrelation among the various aggregates, their
determination and causes of fluctuation of them.
According to Boulding “macroeconomics deals
not with individual quantities but with aggregate of
these quantities, not with individual income but with
national income, not with individual prices but with
price level, not with individual output but with
national output.”
According to Edward Shapiro “in brief
macroeconomics is the study of total output,
employment and price level”
Thus, macroeconomics is the study of aggregates
or averages covering the entire economy.
Macroeconomics is also known as theory of income
and employment, because the central problem of
macroeconomics is the determination of income and
employment in the country. Aggregate demand and
aggregate supply are its main tools of analysis. It is
concerned with the problem of unemployment,
economic fluctuation, economic growth, international
trade, money supply, price level in the country. It is
the study of causes of unemployment and various
determinants of employment. It studies the factors
that regard growth and those which brings the
economy on the path of economic development.
Scope of macroeconomics
The area covered by macroeconomics is called
scope of macroeconomics. The scope of
macroeconomics can be explained as:
1. Theory of income and Employment: The
main issue of macroeconomics is to study the
problem of unemployment and factors
determining the level of employment and
income. It studies the process of income and
employment determination.
2. Theory of general price level: It studies about
the determination of general price level. it
explains about the inflation and deflation.
3.Theory of economic growth: Macroeconomics
studies about the problem relating to economic
growth and increase in real per capita income.
The growth theory explains causes of poverty,
unemployment in developing countries and their
remedial measures.
4. Theory of money: It studies about the demand
and supply of money. The change in demand
and supply of money have considerable effect
 on the level of employment. Thus
macroeconomics studies about the function of
the money, role of the banking system in the
economy.
5. Theory of trade cycle: Trade cycle is the
fluctuation in economic activities. Macroeconomics
studies about the various theories of trade cycle,
monetary policy and fiscal policy.
6. Theory of International Trade:
macroeconomics studies about international
trade, tariff, exchange rate, the problem of
balance of payment and correction in balance of
payment problem.
7. Macro theory of Distribution:
Macroeconomics studies about the distribution
of national income among the various sectors of
economy and various classes of people. It
studies about the relative share of wages and
profit. The relative share of wages depends on
the ratio of investment and employment.

.
Importance of macroeconomics
The study of macroeconomics is very important in
order to understand the entire economic system.
Because without accurate identification of macro
variables it is not possible to implement
development strategy. The importance of
macroeconomics are as follows:
1. Useful in understanding the working of an
economy: Macroeconomics helps in understanding
the working of the economy in aggregate form. It
helps to understand how macro variables behave in
an aggregate manner. Through macroeconomics we
can know the contribution of different sectors in the
economy.
2. Formulation of public policy
Macroeconomics helps in designing appropriate
economic policy for the government. Accurate and
reliable statistics of aggregate variables are the pre-
condition for the formulation of sound governmental
policies.
3. Understanding general unemployment
Macroeconomics helps to understand the causes,
effects and remedies of general unemployment in
the country. Unemployment is caused by deficiency
of effective demand. Effective demand should be
raised to solve the unemployment problem.
4. Formulate the strategy of economic growth
Economic growth is also studied in
macroeconomics. Resources and capability of an
economy are evaluated on the basis of macro
variables. Plans are framed and implemented to
raise the level of economic development of the
country as a whole.
 5. Solution of monetary problem
The monetary policy can be understood and
analyzed from macroeconomics. The problems of
inflation and deflation can be solved by the help of
various macroeconomic policies.
6. Understanding socio- economic issues
The major social economic problems in developing
countries are unemployment, vicious circle of
poverty, unequal distribution of income etc.
macroeconomics gives information about the socio-
economic issues and helps to solve these problems.
Types of macroeconomics
There are three types of macroeconomics
1. Macro statics: Macro static is the study of static
relationship between different aggregate variables. It
deals with the final equilibrium position of the
economy at a particular point of time. It
assumes there is no disturbance in the equilibrium
position of the economy. It shows a ‘still picture’ of
the economic system as a whole. It can be shown
from the following equation and diagram.

Y = C + I ------ (i)
Where, Y = total income
C = total consumption expenditure
I = total investment expenditure.
 This equation tells that the total income of an
economy at a certain point of time must be equal to
the total consumption and total investment.

In figure 450 line represents aggregate supply and

C+I represents aggregate demand curves. E is the
equilibrium point, which is determined by the
intersection between aggregate demand and
aggregate supply. Thus, oy level of income is
determined. This equilibrium is called static analysis,
because aggregate demand and aggregate supply
relate to the same point of time.
2. Comparative macro statics: Comparative macro
statics is the comparative study of two equilibrium
position attained by the economy at different points
of time. It compares the new and old equilibrium
attained by the economy, but it does not study how
the economy moves from one equilibrium to another
equilibrium.

In figure E is initial equilibrium where, o y level of

national income is determined. Now suppose, there
is increase in investment then aggregate demand
curve shifts upward in the form of C + I + ∆ I. As a
result, the new equilibrium position E1 is
established, where oy1 level of national income is
determined. Comparative macro static is concerned
with the comparison of these two equilibrium E and
E1, but it does not deal the whole process of
adjustment.
3. Macro dynamics: Macro dynamics is the
study of path taken by the macro- economic
variables to move from old equilibrium to new
equilibrium. It explains how the economy
adjust itself in the gap between initial and new
equilibrium. It studies disequilibrium position
or the transitional period between two
equilibrium points. This method helps to
understand the moving picture of an economy.
It studies the causes of changes of different
factors of the economy at different time
period. We assumed that consumption
depends on the income of previous period. i.e.
Ct = f (yt-1) -------- (ii) where, t = present period,
t – 1 = previous period.
In figure, economy is initially in equilibrium at point e,
where aggregate demand and aggregate supply are
equal and o y level of national income is determined.
now suppose there is increase in investment then
aggregate demand curve shifts upward in the form
of C + I + ∆I, when investment increases by eA, it
increases the level of income in next period to AB.
At this higher income people desire to spend more
on consumption and consequently total expenditure
increases to BC this takes place total income
increases to CD. This process continues until the
new equilibrium e1 is reached.
Limitation of macroeconomics
There are certain limitations of macroeconomics
which are as follows:
1. Aggregate tendency may not affect all
sector equally: the increase in general price
level affects the different sector of the economy
differently. The increase in general price level
benefits the producer but it hurts the consumer.
2. The conclusion applied to individuals need
not be true of the entire economy. The
aggregate economic behavior is the sum of the
individual behavior but what is true in the case
of individual may not be true in the case of
 economy as a whole. For example individual
saving is virtue whereas public saving is vice.
3. Aggregate variables may not be important
necessarily: the aggregate variables which
form the economic system may not be of much
significant. For example the national income of
a country is the total of individual income. The
increase in national income may be the result
of the increase in the income of few rich people
in the country. Thus a rise in national income of
this type has little significance from the point of
view of the community.
4. Difficult in the measurement of aggregates:
There is difficult to measure the aggregates. If
microeconomic variables are not related to
similar individual unit, their aggregation into one
macroeconomic variables may be wrong and
dangerous.

Macro economics and business environment

Macroeconomics studies how the economy as a
whole allocates scarce resources and how the total
level of employment is generated. These macro-
economic decisions are made on the basis of
macroeconomic theories.
Environmental issues are related to the general
business environment in which a business operates.
They are related to overall economic, social, cultural
and political atmosphere of the community. The
factors which contribute business environment of a
country are given below:
1. Type of economic system in the country.
2. General trends in national income, price level,
saving and investment.
3. Structure and trends in the working of financial
Institutions.
4. Trains in foreign trade.
5. Trains in labour supply and strength of capital
market.
6. Government’s economic policy.
7. Social factors like value system of the society,
property right, customs etc.
8. Socio economic organization like trade union, co-
operative etc.
9. Political environment.
10. The degree of globalization of economy.
The major economic and environmental issues
which are to be considered while making business
decisions and forward planning are also given
below:
1. To study the train of domestic business
environment: there are various issues that are
related to the trains in macro variables i.e. trains
of economic activities of the country, investment
situation, trends in output and employment and
price trends. These factors not only determine the
prospect of private business but also influence
the functioning of the individual firm.
2. To study the Trends of international
business environment: an economy is also
affected by its trade relation with other countries.
Fluctuations in the international market,
exchange rate and inflow and outflow of capital of
an open economy has a serious bearing on its
economic environment.
Interdependence between micro and
macroeconomics:
Micro economics is the study of individual units of the
economy. Whereas macroeconomics is the study of
aggregates or averages of the entire economy. However
the subject matter of micro and macroeconomics are
different but they are interdependent upon each other. So
the study of one is incomplete without the study of other.
i.e. full knowledge of economics cannot be obtained by
studying only one of them. For this reason they are
complementary to each other. Thus these two parts
cannot be studied separately, directly or indirectly they
are interdependent on each other.

Dependence of microeconomics on macroeconomics

the dependence of microeconomics on macroeconomics
can be explained from the following points:
 Determination of profit: determination of profit is
studied under microeconomics which depends on
macroeconomics. The determination of profit is
affected by general price level, employment level,
aggregate demand, trade condition etc.
 Determination of interest rate: the determination
of interest rate depends on various aggregate
economic variables. Rate of interest depends on
supply of money, total Savings and investment etc.
 Determination of wages: determination of wages
by a firm is affected by the average wage rate,
demand for labour, and supply of labour,
government policy in the entire economy.
  Determination of price: the price of a product not
only depends on its demand and supply but also on
the prices of other goods, trade condition etc.
 Sale of a firm: the sale of a firm not only depends
on price of a product but also on aggregate demand,
trade condition, national income etc.
In this way economic activities of every
individuals depends on the aggregate economic
activities of the country.
Dependence of macroeconomics on
microeconomics:
 Determination of national income: national
income is the sum of the individual income. Thus we
have to know about the individual unit find out the
aggregate.
 Determination of general price level: the general
price level is the subject matter of macroeconomics
but the price of product and price of factor are
essential to explain the general price level.
 Determination of aggregate demand: the
aggregate demand is the sum of total of the
individual demand function in the market.
 Determination of employment level: to find out the
level of employment we have to know about the
labour used by a firm and the industry.
In this way to find out abrogative variable have to
know about the individual or micro variables.

Difference between micro and macroeconomics

 Micro and macroeconomics have close interrelation with
one another. Despite this close relation there are some
distinction between these two. They are as follows:
1. Meaning of micro and macroeconomics
microeconomics studies the small units of the economy
such as individual consumer, firm, income, price etc.
macroeconomics studies large unit of the economy
such as national income, employment level,
international trade, total output, total expenditure etc.
2. Objective of the study the objective of
microeconomics is to maximize utility of the individual
whereas the objective of macroeconomics is to
maximize national income through full employment,
economic growth, balance of payment.
3. Assumption of full employment microeconomics is
based on the unrealistic assumption such as full
employment, perfect competition market, ceteris
paribus. But macroeconomics does not assume all
these assumption. According to macroeconomics the
level of employment depends on effective demand.
The economy is in equilibrium at less than full
employment.
4. Study of equilibrium: microeconomics is related to
partial equilibrium in the economy. Whereas
macroeconomics deals with the general equilibrium
which represent whole economy.
5. Study of price: micro economics is related to pricing
of single commodity which is based on demand and
supply of goods. But macroeconomics studies only the
general price level, which will be the representative of
the whole economy.
6. Relation between economic variables
microeconomic theory explains the relationship
between micro economic variables such as D = f (P),
S = f (P), Q = f (L, K) etc. whereas macroeconomics
explains the relation between various macro variables
such as C = f(Y), S = f(Y) etc.