• Definition of Macro Economics
• The Birth of Macroeconomics
• Objectives, Variables and Instruments/Tools of Macroeconomics
• Some Macro Economics Concepts
•  Importance/Issues/Scope of Macro Economics
•  Limitations/Exceptions of Macro Economics

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Introduction of Macro Economics

Definition of Macro Economics�

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• The term 'Macro' is derived from the Greek word ‘Macros' which means larger. Macro economics looks at the economy as a whole.
• It examines the factors that determine national output and its growth overtime.

• According to R. G. D. Allen:

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• "The term macro economics applies to the study of relations between broad economic aggregates such as total employment, income and production".

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In the words of Edward Shapiro:

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• "The major task of macro economics is the explanation of what determines the economy's aggregate output of goods and services. It deals with the functioning of the economy as a whole". 

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• Economist Augbum said, ‘Macro Economics is a branch of economics which deals with economy as a whole.’

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• Professor K. E. Boudling is of the view that: 

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• "Macro economics is that part of economics which studies the overall averages and aggregates of the economic system. It does not deal with individual incomes but with the national income, not with individual prices but with the price level, not with individual output, but with national output". 

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The Birth of Macroeconomics

• Every discussion of macroeconomic policy must begin with John Maynard Keynes (1883-1946). 

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• His principal contribution is macroeconomics and macroeconomic policy, which gained importance in economics literature. 

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• Before Keynes, most economists and policy makers accepted the high and low of business cycles as inevitable tides. 

• Macroeconomics was born as a distinct branch of economics during the Great Depression of the 1930s, a time when traditional economic theories failed to explain widespread unemployment and economic collapse.

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• But Keynes took an enormous intellectual leap in his 1936 book, The General Theory of Employment, Interest and Money. 

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• Keynes made twofold argument: first he argued that it is possible for high unemployment and underutilized capacity to persist in market economies.

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• In addition, he argues that government fiscal and monetary policies can affect output and thereby reduce unemployment and shorten economic downturn. 

Objectives, variables and Instruments of Macroeconomics

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• Having surveyed the principal issues of macroeconomics, we now turn to a discussion of the major goals and instruments of macroeconomic policy. 

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• How do economists evaluate the success of what are the tools that an economy's overall performance? 
• Can governments use to pursue their economic goals? 

Macro variables

• The macro economic variables which shape macro economics are called  macro variables.  Some major macro variables are cited below:
• Aggregate output/production
• Aggregate demand
• Aggregate supply
• National Income

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• Aggregate savings
• Aggregate consumption
• Aggregate price
• Aggregate investment
• Aggregate expenditure
• Inflation

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The Tools of Macroeconomic Policy

• What can your government do to improve economic performance? 

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• What policy tools can you put your hands on to reduce inflation, unemployment, to speed economic growth, or correct a trade or imbalance? 

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• Government has certain tools that they can use to affect macroeconomic activities.  A policy instrument is an economic variable under the control of government that can affect one or more macroeconomic goals. 

Monetary policy

• The major instrument of macroeconomic policy is monetary policy, which government conducts through the management of the nation's money, credit, and banking system. 

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• By changing the money supply, the central bank can influence many financial and economic variables, such as stock prices, interest rates, housing prices and foreign exchange rates. 

Fiscal Policy

• Fiscal policy denotes the use of taxes and government expenditures. 

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• Government expenditures come in two distinct forms. 

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• First there are government purchases of goods and services. 

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• Second there are government transfer payments, which boost the incomes of targeted groups such as the elderly or the unemployed. 

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• The other part of fiscal policy, taxation, affects people's disposable or spendable incomes. 

Some macroeconomics concepts

• Aggregate demand
• The total amount of demand for goods and services within a certain period usually a year termed as aggregate demand. 

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• Aggregate demand is considered in many cases from the viewpoint of aggregate expenditure.  That means aggregate demand refers to the total money needed for purchasing all goods and services within a certain period of time in a country. 

• The total expenditure occurs in an economy usually for consumption expenditure, investment expenditure, government expenditure and export. 
• Therefore the summation of all consumption expenditure, investment expenditure, government expenditure and net export within a specific period usually a year in an economy is termed as aggregate demand. 

Components of aggregate demand

• The desired expenditure of all sectors of an economy is termed as aggregate demand. The desired expenditure are consumption expenditure, investment expenditure, government purchases of goods and services and net export.  Therefore, it can be said that the components of aggregate demand are as follows.  Such as:

• 1. Consumption: One of the most important components of aggregate demand is consumption.  Consumption is usually determined by disposable income.  Disposable income is personal income minus personal tax. 

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• 2. Investment: Investment is the expenditure for machinery, factory, software and inventory.  The principal indicators for investment expenditure are production level, expenditure for capital and future expectation etc. 

• 3. Government expenditure: The third component of aggregate demand is government expenditure for purchasing different goods and services. The services of Judge, even cost for purchasing arms and tank, equipment all are included in the aggregate demand as government purchase. 

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• 4. Net export: The final component of aggregate demand is net export. It is the difference between export income and import expenditure.

Determinants of aggregate demand

• Following are the determinants of aggregate demand:
• 1. Rate of interest: The rate of interest is one of the most important determinants of aggregate demand.  If the rate of interest decreases then the aggregate demand increases and inversely if the rate of interest increases then aggregate demand decreases.

• 2. Expectation of profit: If the expectation of profit of investors increases then aggregate demand also increases.  The similarly if the expectation of profit of investors decreases then the aggregate demand also decreases. 

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• 3. Foreign exchange rate: Another most important indicator of aggregate demand is exchange rate of foreign currency.  If the exchange rate of domestic currency with foreign currency increases then the aggregate demand will increase.  But if the exchange rate of domestic currency with foreign currency decreases then the aggregate demand will decrease. 

• 4. Population: With increase in the population of a country, the aggregate demand will increase.  And with the decrease in the population, the aggregate demand will decrease. 

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• 5. Aggregate wealth: If the aggregate wealth of a country increases then the aggregate demand will increase and with the decrease of aggregate wealth, the aggregate demand will decrease.

• 6. Expected inflation: With the increase in expected inflation the aggregate demand  of an economy will increase and with the decrease of expected inflation of any economy the aggregate demand will decrease. 

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• 7. Quantity of money: With the increase in the quantity of money, the aggregate demand of an economy increases.  And with the decrease of the quantity of money of an economy, the aggregate demand will decrease. 

• 8. Tax: With the increase in tax the aggregate demand decreases. And inversely with the decrease in tax aggregate demand increases.

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• 9. Income of other countries: With the increase in the income of other countries they become able to purchase more from other country and thus aggregate  demand increases.  And inversely if the income of foreign countries decreases then aggregate for our goods decreases. 

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• 10. Government expenditure: With the increase in government expenditure aggregate demand of economy increases.  And with the decrease in government expenditure aggregate demand decreases. 

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• 11. Transfer payment: With the increase in transfer payment the aggregate demand increases  but with the decrease in transfer payment aggregate demand decreases.

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• 12. Price level: With the increase in price level aggregate demand decreases and with the decrease in price level aggregate demand increases. 

Aggregate supply

• The total amount of goods and services which all the producers of a country are ready to produce at a certain price level in a certain period of time is termed as aggregate supply. 

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• The aggregate supply is directly related to price level.  With the increase in price the producers are ready to produce more. So with increase price level aggregate supply increases.  On the other hand with the decrease in price level the producers decrease the production of goods and services as a result of which aggregate supply decreases. 

Determinants of aggregate supply

• The total quantity of goods and services which all producers are ready to produce at a given time and at a certain price level is as aggregate supply. 

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• The determinants of aggregate supply are discussed below

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• 1. Technology: As the technology of production of a country is higher and improved, the aggregate supply of the country is also higher.  For backward technology aggregate supply will be lower.

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• 2. Labor: For higher level of labor force the aggregate supply of an economy will be higher.  For lower labor force aggregate supply will be lower. 

• 3. Infrastructure: For improved or developed infrastructure aggregate supply of an economy will be higher.  For weak infrastructure the aggregate supply will be lower. 

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• 4. Whether: If the weather of a country is in favor of production then the aggregate supply will be greater.  For this in dis-favorable whether the aggregate supply will be lower. 

• 5. Capital: For higher capital stock of an economy the aggregate supply will be higher.  For lower level of capital of an economy the aggregate supply will be lower. 

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• 6. Availability of raw materials: For availability of necessary raw materials the aggregate supply will be higher and important on availability of raw materials the aggregate supply will be lower.

• 7. Education system: For quality education of a country human resource will be higher consequently aggregate supply will  higher but for lower quality of education system the aggregate supply will be lower. 

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• 8. Law and order situation: For maintaining peaceful law order situation the aggregate supply will be higher.  But if law and order situation is not in favor the aggregate supply will be lower.

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• 9. Political stability:

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For political stability of a country the aggregate supply increases. On the other hand for unstable political situation the aggregate supply will be decreases.

 Importance/Issues/Scope of Macro Economics�

• 1. Functioning of an Economy
• Macroeconomic analysis is of paramount importance in getting us an idea of ​​the functioning of an economic system. 

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• It helps to understand the functioning of a complicated modern economic system.  It describes how the economy as a whole functions and how the level of national income and employment is determined on the basis of aggregate demand and aggregate supply. 

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• 2. Formulation of Economic Policies
• Macroeconomics is of great help in the formulation of economic policies. 

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• The days of 'laissez faire' are over and government intervention in economic matters is an accomplished fact.

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• Governments deal not with individuals but with groups and masses of individuals, thereby establishing the importance of macroeconomic studies. 

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• For example, during depression, when the machines lie idle and men roam from pillar to post in search employment, macroeconomics helps us to analyze the cause leading to depression and unemployment and to the adoption of suitable policies to cope with such a situation.

• 3. Understanding Microeconomics

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• The study of macroeconomics is essential for the proper understanding of microeconomics.  No Macroeconomic law could be framed without a prior study of the aggregates; 

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• for example, the theory of individual firm could not have been formulated with reference to the behavior pattern of one single firm, however representative it might have been; 

• The theory was possible only after the behavior pattern of several firms had been examined and analyzed,

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• for example, the forest, though an aggregation of trees, does not exhibit the behavior and characteristics of individual trees. 

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• Microeconomics has been, and to some extent, remains a jungle of special assumptions, special cases, unsatisfactory measurements and abstract theorizing. 

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• 4. Understanding and Controlling Economic Fluctuations

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• Economic fluctuations are a characteristic feature of the capitalist form of society. 

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• The theory of economic fluctuations can be understood and built up only with the help of macroeconomics, for here we have to take into consideration aggregate consumption, aggregate saving and investment in the economy. 

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• Thus, we are led to analyze the causes of fluctuations in income, output and employment, and make attempts to control them or at least to reduce their severity. 

• 5. Inflation and Deflation

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• Macroeconomic approach is of utmost importance to analyze and understand the effects of inflation and deflation.  Different sections of society are affected differently as a result of changes in the value of money. 

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• Macroeconomic analysis enables us to take certain steps to counteract the adverse influences of inflation and deflation. 

• 6. Study of National Income

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• It is the study of macroeconomics which has brought forward the immense importance of the study of national income and social accounts.

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• It is a very important indicator to know the whole economy of a country.  It is the study of national income which enables us to know that three - fourth of the world is living in abject poverty. 

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• Without a study of national income, as a result of the development in macroeconomics, it was not possible to formulate correct economic policies.

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• 7. Study of Economic Development

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• As a result of advanced study in macroeconomics, it has become possible to give more attention to the problem of underdeveloped countries.

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• Study of macroeconomics has revealed not only the glaring inequalities of wealth within an economy but has also shown the vast differences in the standards of living of the people in various countries necessitating the adoption of important steps to promote their economic welfare. 

• 8. Performance of an Economy

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• Macroeconomics helps us to understand and analyze the performance of an economy.  It implies the result - oriented study of an economy in terms of actual and factual achievements. 

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• Gross National Product (GNP) or National Income (NI) estimates are used to measure the performance of an economy over time by comparing the production of goods and services in one period with that of the other periods the composition of GNP gives information about the quantum  of contribution of each sector of the economy to GNP. 

• 9. Nature of Material Welfare

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• Macroeconomics enables us to study the nature and size of the material welfare of the nations. 
• The problem of measuring social welfare is not easy;  even welfare economics does not help us. 

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• Those who are interested in the material and social welfare of all most study problems in their macroeconomic setting.  This adds to the importance of macroeconomics because when the chief objective of the studies of economics is the welfare of entire society, economics becomes the study of macroeconomics. 

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• 10. Balance of Payment

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• It explains factors which determine balance of payment.  At the same time, it identifies the causes of deficit in balance of payment and suggests remedial measures. 

• 11. Solve Economic Problems

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• It helps to solve economic problems like poverty, unemployment, business cycles, etc.  , whose solution is possible at macro level only.  i.e.  , at the level of whole economy.

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Limitations/Exceptions of Macro Economics�

• 1. The macro economies ignore the welfare of the individual.
• For instance, if national saving is increased at the cost of individual welfare, it is not considered a wise policy.

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• 2. Many propositions which are true of either individuals or of small groups of individuals turn out to be false when the economy as a whole is considered.

• 3. The macro economics approach focuses attention on the aggregates as homogeneous but forget the significance of its internal composition.

• For instance, if the wages of the clerks fail and the wages of the teachers rise, the average wage may remain the same.

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• 4. It is not necessary that all aggregate variables are important.
• For instance, national income is the total of individual incomes.
• If national income in the country goes up, it is not necessary that the income of all the individuals in the country will also rise.
• There is a possibility that the rise in national income may be due to the increase in the incomes of a few rich families of the country.

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• 5. Since most macroeconomic models are constructed to approximate the reality of developed countries of the world.

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• The developing countries face different economic realities, so they do not benefit much from them.

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• Books Recommended:
• P.A. Samuelson: Economics
• K.K. Dewett: Modern Economic Theory
• Shapiro, E. (2003): Macroeconomic Analysis
• Hall and Taylor: Macro Economics
• Baumol and Blinder: Economics: Principles and Policy
• H.L Ahuja: Modern Economics Theory.
• E. K. Browning and J. M. Browning: Microeconomics Theory and Applications.

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Thank You All

Dr. ANUP KUMAR MANDAL

Professor

Department of Economics and Sociology