Macroeconomics- Definition | Importance | Limitations | Scope | Goals | Uses

    Meaning of Macroeconomics

    Economics is divided into two categories, micro and macroeconomics, but this has not always been the case. It was Ragnar Frisch who, in 1933, classified the economics into two categories. Before that, there was only one  'Economics.' Initially, economics was known as Political Economics.

    The word 'macro' is derived from the Greek word 'makros' meaning large. 

    Macroeconomics is that branch of economic theory that studies an economy (generally a country and sometimes a regional area) as a whole, using aggregate measures of output, consumption, prices, and employment. Gross Domestic Product is one of the most important macro measures.

    Macroeconomics deals with issues such as economic growth, unemployment, inflation, and government policies that might influence the overall level of economic activity.

    Macroeconomics target questions such as, how an economy allocates resources, how an economy determines overall savings, how the total investment is generated, what's the pattern of imports and exports, how unemployment changes. It also targets questions that governments and consumers overall make decisions.

    Macroeconomics looks at the big picture, at the way things are and how they develop after we add everything up, in the whole economy, or in large segments or sectors of the economy.

    Macroeconomic relationships explain the aggregate behavior of economic agents – individuals and firms – for various levels of income, assets, liquidity, interest rates, relative prices, and other economic variables.



    Macro economic theory is that part of economics which studies the overall averages and aggregates of the system. - Boulding

    Macroeconomics deals with the functioning of the economy as a whole. - Shapiro

    Examples of macroeconomics

    Examples of macroeconomics are:
    • National income and savings
    • Aggregate demand and supply
    • Level of employment
    • Price level
    • Rate of inflation 
    • National and International policies
    • Exchange Markets
    • International Economy(Import/Export) etc.

    Importance of macroeconomics

    Macroeconomics is a relatively more challenging branch of economics. 
    The significance of economics is reflected in the points given below:

    1. Macroeconomics studies and analyses the economic problems/issues in the economy as a whole and tackle those issues with the help of economic tools. 
    2. Macroeconomics facilitates the formation of economic policies. Without it, economic policies and schemes cannot be formulated as it provides the aggregate data of different economic activities of the economy.
    3. It also examines and analyses the reasons and causes of economic boons and banes and provides suitable solutions.
    4. Macroeconomic factors have a substantial impact on financial markets and on-demand for goods and services produced by companies; hence they are an important determinant of corporate performance.

    Limitations of macroeconomics

    Some of the major limitations of macroeconomics are:

    1. Macroeconomics fails to address the structural changes that come in an individual economic unit of an aggregate, say, change in the technology, availability of resources to an economic unit.
    2. "Most of the macro magnitudes which figure so largely in economic discussions are subject to errors and ambiguities."- Hicks.
    3. Macroeconomics analysis describes variables in averages, say average per capita income' which may be misleading if the impact of the income distribution is highly uneven.

    Scope of macroeconomics

    Areas that are covered under the scope or subject matter of macroeconomics are:

    scope of macroeconomics

    Uses of macroeconomics/ Why study macroeconomics

    Macroeconomics is studied to solve many problems of an economy, such as monetary problems, economic fluctuations, general unemployment, inflation, and disequilibrium in the balance of payment.

    1. In business decision making:

    Managers need to understand the domestic and global economy's institutional structure. A firm must understand the behavior of other organizations such as firms, governments( national and international) that affect its market. 

    Government policy and the structure of government constitute the environment in which firms operate. To survive in the market, a firm needs to understand the strategies of the opponent, behavior of the government and its policies. Hence, this requires a good understanding of macroeconomics. 

    2. To understand macroeconomic uncertainties: 

    The economic health of a company and people working in companies depends on the macroeconomy. Factors like rising in the wages, the strength of the competing firm, changes in interest rates, fluctuations in exchange rates, and shifts in the overall level of stock market prices affect individuals and companies. All of these factors are uncertain.

    There are two types of uncertainties - (1) aggregate, (2) distinguishing. Aggregate uncertainty affects all firms and sectors in the economy, whereas distinguishing uncertainty affects only a few individuals, firms, or industries. 

    Macroeconomics studies about the aggregate sources of uncertainty that affect firms, workers, and consumers. Aggregate uncertainty is significant because it generates a risk that all firms and consumers share. Understanding macroeconomic uncertainty will, therefore, be useful to employees and companies.

    3. To understand long-run factors: 

    Macroeconomics reflects the decisions and actions of all economic agents in the economy. An innovation in one firm or sector will eventually spread to the rest of the economy. 

    Macroeconomics is about dynamics that ultimately change the nature of a firm’s markets, its competitors, and the demands of a firm from its managers and workforce/employees. Studying macroeconomics is also important because it considers the long-run effect on the economy.

    4. To understand economic growth: 

    With the increase in income, the level of living standards also increases, which means better quality of goods and services. People in a growing economy can consume more of all goods and services because the economy has more of the resources needed to produce these products. 

    Macroeconomics explains why resources increase over time and the consequences of our standard of living.

    5. To understand economic fluctuations:

    All economies are subject to economic fluctuations. Economic fluctuations affect the economy's resources, labor, physical capital, human capital, and entrepreneurship. 

    Economic fluctuations cause prices to rise or fall. Macroeconomics helps us understand why these fluctuations occur and what the government can do to moderate the fluctuations. 

    6. To understand economic policies: 

    The government uses various policies to influence interest rates and the inflation rate. A manager could use macroeconomics knowledge to predict the effects of current public policies. 

    A manager who studies macroeconomics will be better equipped to understand the complexities of government policies and its consequences.

    Macroeconomic Goals

    Economists and all the society at large agree on the three important macroeconomic goals: economic growth, full employment, and stable prices.

    1. Economic growth: 

    Economic growth is the increase in the production of goods and services that occur over a long period of time. It is measured by keeping track of real gross domestic product (GDP), that is, the total quantity of goods and services produced in a country over a year. 

    When real GDP rises faster than the population, output per person rises, and so does the average standard of living.

    2. Unemployment: 

    It is an important microeconomic goal. A high unemployment rate means the economy is not achieving its full economic potential. A large number of people who want to work and produce additional goods and services are not able to do so. The same number of people but fewer goods and services are distributed among that population; hence the average standard of living will be lower. 

    This general effect on living standards gives us another reason to strive for consistently high rates of employment and low rates of unemployment.

    3. Inflation: 

    The third microeconomic goals is stable prices. Inflation is costly to society and can lower living standards. Price stabilization requires not only preventing the inflation rate from rising too high but also preventing from falling too low, where it would be dangerously close to turning negative.

    Circular flow in macroeconomy

    The center point of macroeconomics is the level of income. Incomes are paid out to factors of production(land, labour, capital and entrepreneur) that are employed by firms to produce goods and services, and people buy the same output in the market.

    Households provide factors of production to the firms and get income form firms in the form of wages, salary and rent. Loopholes in this process are:

    1. Firms may not use all available production factors to produce output, leaving factors idle in the form of unemployment or slacking.
    2. People may not want to buy all that is produced, that is demand may fall short of output.

    circular flow of income and spending


    Macroeconomics is not simply an aggregated version of microeconomics. The error of composition states that what is true for individuals may not be true in the aggregate. For instance, if everyone tries to boost their real income by raising wages and prices, aggregate real income might not rise at all. 

    Because different economic factors drive decisions by different households, strict aggregation sometimes leads to the wrong answers. Some consumers choose to save a large part of their income at any given level of income, while some prefer not to save anything. Some owners of businesses are confirmed risk-takers, while others are relatively not.

    Macroeconomics is an applied discipline. Abstract theories based on unrealistic assumptions that provide inaccurate results in the real world are of no use in macroeconomics. Furthermore, any useful theory must be able to explain what economic policies are likely to be implemented under certain circumstances, and how they affect
    the economy.

    diagram: diagrams
    image: pixabay


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