Download Macro-Economics

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Term Macro is derived from Greek language
which means large. Macroeconomics studies
the problem from the point of view of entire
economy like Aggregate Demand, Aggregate
Employment, National Income.
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According to M.H. Spencer, ”Macro economics
is concerned with the economy as a whole or
large segments of it. In macro economics ,
attentions is focussed on such problems as the
level of unemployment , the rate of inflation ,
the nation’s total output and other matters of
economy-wide significance.”
10. ROLE OF NATIONAL INCOME: Macro
economics has given great importance to the
study of national income. It study makes
available to us necessary statistical data
pertaining to consumption, saving,
employment, investment etc.
SHORT-RUN NATURE OF MACRO
ECONOMICS: Short-run nature of macro
economics can b e expressed as below:
i) In the short period, the quantity and quantity of
labour, the amount of capital , the existing
techniques, the extent of competition, the
degree of monopoly, tastes of the people
,broad social structure ,etc., remain constant
and there is no significant change in them
1.
(ii) Although employment can be increased by
increasing both consumption and investment,
yet in macroeconomic in order to increase
employment more stress has been laid on
increase in investment as against increase in
consumption.
(iii) National output or aggregate supply is
assumed to be constant in the shortrun.
2. STUDY OF THE WHOLE ECONOMY : Macro
economic analysis is a study of the economy as
a whole. It deals mainly with national income
or national output, aggregate consumption,
aggregate investment, effective demand, price
level, full empolyment, less than full
employment.
3. MACRO ECONOMICS-SYSTEMATISE AND
COMPRESSIVE BODY OF THPOUGHT:
Macro economics is a comprehensive study of all
conditions. It studies all conditions of
inflacation and deflacation.Boom and
depression, full employmeny and under
employment.
4.MACRO ECONOMICS – REFORMED
CAPITALISM OR NEO LIBERALISM : Macro
economics aims at reforming and not
destroying capitalism. It asserts that capitalism
as existed prior to world war I has no place in
the changed conditions of the present-day
world. Different law s of macro economics are
based on different features of capitalism, like,
private property , freedom of choice, profit
motive and price mechanism
5. MACRO ECONOMICS – A MONETARY
ECONOMICS: Classical economics laid more
stress on real, rather than monetary factors in
their economics analysis ,because to them the
main function of money was medium of
exchange.
6. MACRO ECONOMICS- MAINLY
INSTITUTIONAL: Another feature of macro
economics is that it is institutional in nature,
saving, investment, supply of money and
psychological and institutional factors
influencing propensity to consume.
7. IMPORTANCE OF STATE INTERVENTION:
Micro economics has laid great stress on the
role of state intervention in economic . In order
to make up the shortfall in private investment,
public investment is regarded most desirable.
8. THE CRLUCIAL ROLE OF INVESTMENT: In
macro economics, a very important role is
assigned to investment. Investment means
addition to the stock of goods and creation of
new capital assets.
9. ROLE OF CONSUMPTION: Consumption
expenditure and psychological law of
consumption are of great importance in macro
economics. In determining the level of
employment the role of consumption is no less
important than that of production. More
production implies more employment.
1.
2.
SHORT PERIOD : macro economics theories are applicable in
the short period. The time is too short to increase production
by installing new plants or new machines. Thus, in the short
period, production capacity,technique,number of laborers,
tastes of the consumers, their habits and fashion remain
constant. Lord Keynes assumed that the problem of
unemployment in developed countries was a short term
problem because “in the long run we are all dead”. Aggregate
supply remains constant in the short period. It is only by
increasing demand ,that the volume of employment can be
increased and unemployment can be removed.
PERFEC T COMPETITION : macro economics is based on
the assumption of perfect competition under the conditions
of perfect competition ,there is no external interference in
the determination of prices . Prices may rise or fall in
accordance with changes in demand and supply position
1.
.
3. CLOSED ECONOMY : it is assumed under macro economics , that a
developed capitalist economy is a closed economy . A closed
economy is one which is free from the influence of foreign trade on
income and employment level . In other words , aggregate demand
will not be influenced by the difference between imports and exports .
4. IGNORES THE ROLE OF THE GOVERNMENT AS A SPENDER OR
TAXER: Macro economics overlooks the role of the government as
a taxer or a spender . It implies that macro economics is based on
AD =C+I. Keynes has ignored the influence of government
5. DIMINISHING MARGINAL PRODUCTIVITY: Another assumption of
macro economics is that as more and more units of labour are employed ,
their marginal productivity goes on diminishing . It means production is
subject to the operation of the law of diminishing returns. Keynes also
assumed that under perfect competition, wages of the labourer were equal
to his marginal productivity (W= MRP). It implies that more labourers will
be employed only when their real wages are low.
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6.LABOUR IS THE ONLY VARIABLE FACTOR OF PRODUCTION :
Macro economics assumes that labour alone is a variable factor of
production in the short period. It means production increases when the
number of labourers are increased, that is,
P= f(N)
it reads : production (P) is a function (f) of labour (N).
7. LABOUR HAS MONEY ILLUSION : labourers entertain the wrong notion
that value of money which their money wages increase in the same
proportion in which their money wages increase . Similarly , their real
wages will decrease in the same proportion in which their money
wages decrease . Labourer thus , ignores the effect of change in the
price - level .
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8. MONEY ALSO ACTS AS A STORE OF VALUE:
Another assumption of macro economics is that
money is not only a medium of exchange but also a
store of value. It is not necessary therefore, that people
must spend all their monetary income as soon as they
get it.
9. NO TIME TAG: Macro economics assumes that
adjustment among different economic variables take
place without any time lag. For e.g.: consumption
expenditure of Monday depends upon the income of
Monday ;or ,that present consumption is a function of
present income. It is thus, taken for granted that the
period in which income changes is also the period in
which consumption and investment changes
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10. UNDEREMPLOYMENT EQUILIBRIUM:
Macro economics assumes that position of
equilibrium is also possible in case of
underemployment. Equilibrium position is that
position in which there is no tendency to
change, that is aggregate demand is equal to
aggregate supply. This equality is possible both
under the condition of full employment and
underemployment.
11. SAVING AND INVESTMENT FUNCTION:
Macro economics is based on the assumption that
saving depend upon income ,that is,
S=f(Y)
On the other hand, investment depends on the rate of
interest ,that is
I=f(r)
12. INTEREST IS THE MONETARY
PHENOMENON: Macro economics also assumes
that determination of interest depends upon
monetary factors , that is :
Demand for and supply of money
demand for money refers to liquidity preference.
People prefer liquidity on account of transaction ,
precautionary and speculative motives
13. OPTIMUM UTILISATION OF RESOURCES :
Macro economics also assumes that there is
optimum utilization of resources.
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1.MICRO ECONOMICS ANALYSIS DEPENDS
UPON MACRO ECONOMICS ANALYSIS:
micro economics aeconomics .
For example :
1). The rate of wages paid by a firm to its
workers depend on the rate of wages being
nalysis is based on the assumption of
“other things being equal”. This underlines
the influence of macro economics on micro
paid by the other firms in the economy .
2). The price fixed for a commodity is governed
not by its demand and supply alone but by
the demand and supply of other goods as
well.
3).The amount of a goods that a firm is able to
sell depends not only on the prices of the
goods produced by that firm but also on the
total supply of money in the society.
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Study of macro- economics call foe the
study of micro. In fact, society is the
aggregate of individuals. Just as society is
composed of individuals, similarly, an
industry is composed of several firms
producing homogeneous products. Many
industry constitute an economy. Need of
micro economics for macro economics
analysis is evident from the following :
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1). Economy as whole consists of the
aggregate of several economic units. To
understand the functioning of the whole
economy, it is essential to know the economic
behavior of different.
2). Study of national income necessitates the
study of per capita income. It is so because
per capita real income influences
consumption and investment of consumer.
Consumption and investment decisions of
individuals influence the determination of
national income.
3). Collection of all firms constitutes industry
and several industries form an economy.
BASIS
1. DIFFRENCE IN
THE DEGREE OF
AGGREGATION
MICRO
ECONOMICS
MACRO
ECONOMICS
Micro economics
studies economic
problems relating to
a single economic
unit like a firm or a
small group of
economics units like
an industries.
Macro economics
studies the
economic
problems of all
firms in an
economy .
2.
DIFFERENCE IN
OBJECTIVES
Aim of micro
economics is to study
the principles ,
problems and
policies relating to
the optimum
allocation of
resources.
Aim of macro
economics is to study
the principles
problems and
policies concerning
full employment and
growth of the
resources of the
economy.
3.
DIFFERENT
IMPORTANCE
TO PRICE AND
INCOME
Economic units like
consumer , producer ,
factors of production
etc. take their
decisions mostly on
the basis of price .
Economics decision
regarding aggregate
consumption,
aggregate investment,
aggregate saving
etc.are taken mainly
on the basis of
income
4. DIFFERENCE IN
THE METHOD OF
STUDY
In this we study only
the significant factors
relating to an economic
activity.
Mutual dependence of
the factors is studied.
E.g. aggregate demand,
aggregate supply.
5. DIFFERENT
ASSUMPTION
In micro economics it is
assumed that there is
full employment in the
country, total output
and total expenditure
are fixed.
There is optimum
allocation of the
resources in the country.
6. ANALYTICAL
DIFFERENCE
It deals with the study
of the behavior of
economics variables in
equilibrium position.
It deals with the study
of the behavior of
economic of economic
aggregate in
disequilibrium
position.
7.DIFFERENCE
RELATING TO
CHANGE
Many economic
units go on
changing from
micro point of
view.
Remain
unchanged from
macro point of
view.