Definition of Macroeconomics – Importance and its Features

Definition of Macroeconomics – Importance and its Features

Introduction Macroeconomics

Macroeconomics is defined as that branch of economics which study economic activity including economic issues and economic problems at the level of an economy as a whole. It focuses on Macroeconomic variables like aggregate demand, aggregate supply, general price level, national income, and output, etc.

Meaning of Macroeconomics

Macroeconomics is a study of economic problems from a wider perspective. Example- aggregate consumption, aggregate employment, general price level, etc.

According to Professor Shapiro “Macroeconomics deals with the functioning of the economy as a whole.”

Significance of Macroeconomics

These are the important significance of macroeconomics, which are very necessary and knowledgeable for the student of economics.

a) Theory of national income –

Macroeconomics studies the concept of national income, its different elements, methods of measurement, and social accounting.

b) Theory of employment –

Macroeconomics also study problems relating to employment and unemployment. It studies different factors determining the level of employment i.e. – effective demand, aggregate supply, aggregate consumption, and aggregate saving, etc.

c) Theory of money –

Changes in demand for and supply of money have considerable bearing on the level of employment. Macroeconomics studies functions of money and theories related to it. The system of a Banking institution also studies in this context.

d) Theory of general price level –

Determinations of changes in the general price level are the core issues of macroeconomics. Problems concerning deflation and inflation are the principal issues involved in this context.

e) Economic growth and development –

Study of problems relating to economic growth or increase in per capita real income forms a part of macroeconomics.

f) Theory of International Trade –

Macroeconomics also studies trade among different countries. Theory of International Trade, tariff protection are subject of great significance in macroeconomics.

g) Budgetary deficit and fiscal policy –

In the wake of privatization and globalization of the world economies, budgetary deficit and fiscal policy have emerged as a central issue of macroeconomics.

h) Interest rates and monetary policy –

Monetary policy involves monetary measures by the government in term of changing, interest rate with a view to stimulating economic growth with stability. It is also an important area of study of macroeconomics.

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Importance and uses of Macroeconomics

a) Helpful in understanding the functioning of an economy-

The modern economy has become a very complex affair. Several economic factors which are interdependent operate in it.

To have an understanding of its organization and functioning, one cannot depend on individual units alone. Study of the economy as a whole has there for becomes very essential.

b) Study of national income –

In modern times it is the study of national income of almost every country that enables us to know about the economic condition of different countries of the world. It is possible through macro analysis alone.

c) Economic planning –

Knowledge regarding mutual dependence of different sector, the composition of national income, level of employment, nature of poverty is essential for formulating an economic plan

Knowledge of those aggregate is possible through the study of macroeconomics only.

d)  Formulation of Economic policy-

Study of macroeconomics is of great significance in formulating economic policy.

Almost all Modern Government take Resort to aggregate data -national income, aggregate employment, aggregate investment, etc. in formulating economic policy.

e) Study of Trade cycles – 

Trade cycle of the problem of economic fluctuation is an economic problem of great importance. In a capitalist economy, rapid economic changes take place. These changes have an adverse effect on the economy. Economic fluctuation depends on aggregate factors like aggregate saving, demand, output supply, etc. Study of macroeconomics becomes imperative to know about the causes responsible for the trade cycle and measures necessary to check them

f) Estimate material welfare –

Whether material welfare has increased or not cannot be ascertained from the study of individual units.

It can be made sure by the studying aggregate, such as total income, total employment, aggregate consumption, etc. Macroeconomics, therefore help in assessing material welfare.

Definition of Macroeconomics – Importance and its Features

Limitations of Macroeconomics

a)  The fallacy of composition –

Several conclusion of macroeconomics is based on the simple composition of individual units. However, what is true for an individual may not necessarily be true for the whole economy. 

Surely saving is a virtue for an individual, but if everybody starts saving, aggregate demand will fall causing a reduction in national income.

b) Heterogeneous units –

Study of aggregates embarrassing in its folds various heterogeneous units.

Definition of Macroeconomics – Importance and its Features

Professor Boulding – illustrates this point –

6 Apples + 7 Apples = 13 Apples (Meaningful Aggregate)

6 Apples + 7 Oranges = 13 Fruits (Also a meaningful aggregate)

6 Apples + 7 Houses = 13 ? (Meaningless aggregate)

The above illustration proves that aggregation of the heterogeneous unit is often ambiguous.

c) Diverse effects of aggregates –

Another limitation of macroeconomics is that it does not study the diverse effect of aggregate on the different sectors of an economy.

Macro parameter, do not have a uniform effect on all sectors of an economy.

For Example –

Rising price level benefits the Traders and Industrialist but the wage earners are the losers.

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