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An Introduction to Macroeconomics

Updated on May 31, 2014

Introduction

Macroeconomics is concerned with the study of a nation's economy as whole or substantial sections of it. Macroeconomics has become an eminent discipline in economics during the great depression of 1930s. Modern macroeconomic principle is the product of the economic literature that has exploded from the income and employment concepts developed by Keynes in his General Theory. Macroeconomics is fascinating since it slashes elaborate matters of an overall economy to straightforward fundamentals. Because macroeconomics divides the overall economy into considerable lumps for the purpose of research, it is furthermore termed as the ‘Method of Lumping’.

Dissimilarities between Microeconomics and Macroeconomics

For better understanding, it is essential to study the differences between microeconomics and macroeconomics. The major distinctions between microeconomics and macroeconomics are the following:

Purpose

Microeconomics is concerned largely with the price determination process and allocation of scarce resources among unlimited human wants under the assumption of full employment. Macroeconomics focuses on the investigation of variations in the levels of employment, national income and the general price level, and on the means of combating such type of variations. The subject matter of microeconomics is the determination of prices and consumer’s equilibrium, optimal distribution of resources, enhancing welfare, and so on. At the same time, the focus of macroeconomics is achieving full employment, monitoring trade cycle, attaining economic growth, calculating national income and the like.

Techniques of Analysis

Microeconomics employs partial equilibrium analysis with some assumptions. Macroeconomics on the contrary makes use of general equilibrium analysis to investigate the movements of total price and output values.

Assumptions

In microeconomics, the distribution of output and employment of resources among the various sectors is given. In macroeconomics, the distribution of output and employment of resources among different sector varies.

In microeconomics, price level is variable but relative prices are given. However, in macro analysis, price level is given but relative prices are variables.

In microeconomics, the total output of an economy is variable. In macroeconomics, the total output of an economy is given.

Unit of Study

The unit of study under microeconomics is a part(s), a sector(s) and the like. It focuses on the economic behavior of individual units such as particular consumers, firms and so on. The unit of study under macroeconomics is the overall economy. It is concerned with aggregates like savings and national income.

Why do we need macroeconomics?

Economics at present is incredibly the house that Keynes built. Macroeconomics has obtained a large amount of reputation among the contemporary economists because of the publication of Keynes’ General Theory of Employment, Interest and Money in 1936. If a nation wants to prosper, economists must not afford to ignore the examination of its macro economy.

  • Macroeconomics provides significant assistance in the composition of economic policies and theories.
  • It is advantageous in the calculation of national income and in the examination of the complications associated with national income. Therefore, macroeconomics facilitates us to comprehend and evaluate the overall operation of an economy.
  • The research of macroeconomics is crucial for interpreting the operation of an economy, and growth and development of nations.
  • It is beneficial in the review of standards of taxation and public expenditure and in the consequence of inflation and deflation.
  • Besides explaining macroeconomic paradoxes, macroeconomics empowers us to scrutinize the characteristics and scale of the material welfare of the countries.

Furthermore, according to Richard G .Lipsey, macroeconomic analysis helps to rectify the following problems:

  • Problems relating to the multinational trade activities and the levels of employment
  • Problems regarding variations in the level of employment of labor
  • Problems concerning fluctuations in the general level of money wages
  • Problems associated with volatility in the average price level
  • Problems with regards to the rate of growth of production capacity
  • Problems involved with the distribution of resources between the manufacturing of consumer goods and the manufacturing of capital goods

Limitations of Macroeconomics

Though the study of macroeconomics is indispensable for the growth of overall economy, it consists of certain limitations. The following are some of the limitations of macroeconomics:

Firstly, Prof. Boulding expresses concerns over national income accounting. He addresses that you possibly can add or subtract apples or oranges; however, it is unfeasible to add or subtract apples and skyscrapers. Thus, it may not be likely that you can obtain aggregates of individual goods.

Secondly, there is a likelihood of substantial scope for generalization of particular experience to an economic system as a whole. As a result, studying the real problem of an economy is doubtful.

Thirdly, macroeconomics is probably not effective in inspecting the sectorial behavior of an economy.

Lastly, you can find conceptual and practical complications in the composition of macroeconomic parameters.

Integration of Microeconomics and Macroeconomics

Recently, the boundary line between microeconomics and macroeconomics has become substantially less definite. To put it simply, these two incredible subjects are interdependent and not competing. The microeconomic parameters have an effect on macro parameters and vice versa. Consider that we are curious about examining the welfare of individuals. From the macro perspective, welfare could be increased at a stage of full employment of the available resources. From the micro perspective, economic welfare could be extended in a situation of ideal distribution of scarce resources.

Bottoms-up Approach versus Tops-down Approach

Few economists state that even though we explore macroeconomic issues, we must always consider those issues from the microeconomic standpoint. These economists talk about micro fundamentals of macroeconomics. This process is known as “the bottoms-up approach” as opposed to macroeconomic technique that is a “tops-down approach”.

For instance, an experiment of individual household budgets can be very helpful to comprehend the character of aggregate consumption of products or services in a society. You can name a number of other instances of micro foundations of macroeconomics. Hence, the two economic principles are mutually cooperative. The majority of economic problems possess both microeconomic and macroeconomic aspects.

© 2013 Sundaram Ponnusamy

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