Macroeconomics

Definition: Macroeconomics refers to the field of study in Economics in which we learn about those factors which have an impact on the entire economy, as well as how these factors interact in the economy.

It talks about broad economic issues such as full employment or unemployment, high or low rate of growth, policies on money supply, inflation or deflation, government expenditure and so forth.

So, the study is concerned with the behaviour of large economic aggregates like total consumption, total savings, total investment, the overall level of output and the manner in which these variables shift over time.

Key Indicators

It explains economic processes concerning the aggregates. It focuses on three primary indicators of the economy’s performance and the fundamental explanations for their behaviour. These are:

  • Rate of growth of real national income
  • Rate of inflation
  • Rate of unemployment

The concept of Macroeconomic analysis embraces a combination of all the units to provide an overall view of the entire economic system, so as to deal with the economic affairs at a broad level. The key areas include aggregate economic variables, representing that they hold a close relationship with one another.

Scope of Macroeconomics

In macroeconomics we study the following theories:

  1. Theory of National Income
  2. Theory of Employment
  3. Theory of Money
  4. Theory of General Price Level
  5. Theory of Inflation
  6. Theory of Economic Growth
  7. Theory of Distribution
  8. Theory of Production

Macroeconomics takes into account the economy-wide phenomena, i.e. it analyzes the performance, relationship, structure, behaviour and decision making, that determines the level and growth of national output and employment, general price level and balance of payment.

Now we will have a look at some questions which the macroeconomics attempts to answer:

  • What causes fluctuations in the national output and employment?
  • What are the factors which determine the level of economic activity in the country?
  • How the general price level is determined in an economy?
  • Why the price of goods and services increase at some time and fall at some other time?
  • What are the factors which determine the level of economic activities, total output and employment?
  • How the level of foreign trade and trade balance is determined?
  • How the income level is determined in the economy?
  • What determines the standard of living in a country?
  • What are the causes of disequilibrium in the balance of payment?
  • What are the reasons for the economy’s slow down or growth?
  • What causes recessions?
  • How do the government’s monetary and fiscal policies affect the economy?

Importance of Macroeconomics

Macroeconomics has emerged as the vital branch of economics, at present. The importance of macroeconomics is discussed in the points below:

  1. It lays down the overall picture of the growing issues of an economic system.
  2. It provides a useful mechanism which explains the working of the complex economic system.
  3. It also provides a fundamental and rational framework so as to formulate appropriate macroeconomic policies, to direct and govern the economy, towards intended goals.
  4. It is helpful in analysing the causes of economic fluctuations and providing solutions for the same.
  5. The studies can be applied in various areas such as formulation and implementation of policies, the study of economic development, welfare studies, and international comparisons.

Apart from the above-mentioned importance, there is a limitation also, as it does not consider structural changes, in the individual units of the aggregate. Hence the deductions made according to the aggregate variables can be misleading.

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