Macroeconomics is the economic theory branch that deals with the aggregate analysis of the economy with a particular emphasis on unemployment, inflation, business cycles, productivity, monetary and fiscal policy. In fact, macroeconomic policy is a Keynesian approach to economic issues and demonstrates a clear cut-off from classical economic thought. The economics of until 1930 focused primarily on microeconomic policy, such as the actions of a customer or producer or a business, and is concerned with the study of individual behavior. The basic policy of classical politics was macroeconomic policy. A laissez-faire policy, the policy of government non-intervention in economic affairs, was preferred by classical economists, while Keynesian economics favored government intervention in the economy. The aggregate supply and demand functions are the fundamental tools for evaluating production, price levels, inflation, and growth. The relationship between spending on goods and services and the level of prices is aggregate demand. The aggregate price of supply specifies the relationship between the companies’ product quantity and the price level. The level of output can change due to a shift in either aggregate supply or sufficient demand.
The word ‘Macro’ is derived from the Greek word ‘MAKROS,’ which means big, as used in English. Macroeconomics is an analysis of the overall economic environment. It is the analysis of an economy’s general conditions, such as its total output, total consumption, total saving, total expenditure, etc. It addresses aggregates such as national income, output, jobs and the level of general prices, etc. Therefore, it is also known as ‘Aggregative Economics’. Therefore it does not deal with one family, but with all families, not with one company, but with all companies in an economy; not with one industry, but with an economy’s entire industrial structure.
KEY CONCEPTS IN MACROECONOMICS
Macroeconomics is the analysis of the economy’s aggregate mode models, with particular emphasis or issues associated with those models. Growth challenges, market cycles, joblessness, and inflation. The Macroeconomic Theory is intended to describe the aggregate interaction of low supply and demand to resolve these four issues. The main macroeconomic concepts are growth, business cycle, unemployment, and inflation.
The areas that Macroeconomics covers are as follows:
- National Income Theory: Macroeconomics studies the principles of national income, various components, calculation methods, and social accounting.
- Jobs theory: It studies the issues of employment and unemployment. Several jobs deciding variables, such as productive production, aggregate demand, aggregate supply, total consumption, total savings, and total expenditure, etc.
- Money theory: There are high levels of jobs with shifts in demand and availability of money. The functions and theories of capital, banks, and financial institutions are therefore studied in macroeconomics.
- General Price Level Theory: Issues related to inflation and deflation are part of macroeconomics analysis.
- Economic Growth Theory: In addition to the study of government fiscal and monetary policies, macroeconomics also examines the issues of economic growth or the rise in per capita real income and living standards. It studies the factors that delay growth and those that put the economy on the road to growth.
- International Trade Theory: It also studies the principles which decide trade between different countries. Free trade and security policies, tariff quota reports, and international assistance come within the framework of macroeconomics.
- Distribution Macro Theory: It studies distribution macro theory, which is how the share of various output factors in the national income is calculated.
- Trade Cycle Theory: deals with fluctuations in the level of employment, spending, and general price levels, and how to manage these fluctuations in the business. It describes the turning points from depression to boom and vice versa in the economy.
Since the release of J.M ‘Keynes’ famous book, General Theory of Work, Interest and Wealth, published in 1936, has gained greater prominence in Macroeconomics and Money. Its key uses are as follows:
- Helpful in understanding the functioning of an economy: We can only have an idea of the aggregate production, profits, consumption, saving, employment, and the like of an economy through macroeconomic analysis. It gives the whole economy a bird’s eye.
- Helpful in the formulation and execution of economic policies:’ In a modern set-up, macroeconomics is important. Laissez-faire policy is no longer a policy anywhere, it is now defunct; the primary target of modem governments is ‘Full Social Welfare.’ Thus for policymakers, macroeconomics has become realistic.
- Economic Development Study: Macroeconomics is of particular importance to developing countries with resources in recognizing their fundamental problems and in proposing different ways and means of achieving the destination of economic development.
- National Income Study: Macroeconomics has demonstrated the great importance of national income and social accounting research, without which it is difficult to formulate any economic policy or strategy. The GNP estimates provide economists with the most valuable tool to evaluate an economy’s performance; to compare overtime growth patterns in the economy. The GNP also offers details about the sectoral contribution to the estimates of national income. At any given period of time, it also tells us about growth patterns.
- Economic Fluctuations Study: Macroeconomic analysis allows us to understand how economic fluctuations are governed.
- Full employment: The determination of the amount of full employment or close full employment is clarified by macroeconomics, because of everything. Jobs determinants, viz. The spectrum of macroeconomics includes aggregate demand and aggregate supply, aggregate consumption, aggregate spending, aggregate savings,
There are also some limitations of macro-economics. These are included below:
- Person Unit Dependence: We know that aggregates are the cumulative total of individuals that Macroeconomics deals with aggregates. But often the effects of these aggregates vary from individual actions. This is often referred to as ‘Composition Macroeconomic Paradoxes’ or 1-FallaCies.’ For instance, saving can be a virtue for a person, but as a whole, it becomes a vice for all economies. It barely makes any sense if a single entity withdraws his entire money from the bank, so if there is ‘Run on Banks in general, the whole financial system will fail.
- Heterogeneous Groups: Macroeconomics explores the shared existence of various units of commodities. Different materials have different dimensions. Both items with a common measuring rod can not be weighed in this manner. As Prof. Boulding states, fruits or oranges may be added or subtracted, but apples and houses may not be added or subtracted. Therefore, the aggregates of individual products should not be derived.
- Misleading Aggregates: It can also be misleading to research aggregates. The continuous national income in an economy, for example, is not a promise that no one’s income has either risen or decreased. The growth in the income of some people could have reversed the decline in the income of some individuals or businesses, thereby holding steady national income. Similarly, the constant general price level does not mean that the price of all goods has remained the same. It may offset the prices of certain other goods due to the rise in the price of the required goods. In this way, a straightforward and accurate picture is not necessarily available in the assumptions drawn from aggregates. Micro chases are much more important than macro chases.
- The aggregates that make up a structure may not be significant: for example, in a country that is an aggregate,’ the general price level’ contains all categories of markets in a country, wholesale and retail prices of various items, and prices of variables, viz. Rent, salaries, benefits, and interest. Certain markets change very rapidly, e.g. stock prices, while others, for example, house rent, are highly rigid. Some prices may change in one direction, while others may shift in the other. We have nothing but a hotch-potch that lacks meaning when these different prices are taken together to make up the general price level in a country.
- The arrangement of the aggregate is more important than the aggregate itself: for this, the aggregate must be divided into its component parts and the value of this composition must be understood. For this case, an improvement in national income hardly tells us much about the quality of life of the population and the level of growth of the economy. Studying the composition of the sectoral composition of national revenue or adjustments in overtime is more significant. There is a reduction in the share of agriculture in the national income and a related rise in the share of manufacturing and services in economic production. An analysis of natural figures masks a collection of substantial details concerning a nation’s economy.
- Micro Changes often it is more critical than Macro Changes: while the average price level stays stable, the prices of vital goods may increase. It may not be of much value if the aggregates under consideration are too broad and not descriptive. The analysis then becomes ambiguous.