macroeconomics

what is macroeconomics?

macroeconomics is the study of economy as a whole.

important variables of macroeconomics

• aggregate consumption :- it means consumption of all goods and services in the economy during the period of an accounting year.

• aggregate investment :- it refers to expenditure by all the producers `in  the economy on the purchase of such goods  which producers can add their stock of capital during the year.

• aggregate demand :-it refers to total expenditure on the purchase of all goods and services of all goods and services in the economy during the period of an accounting period .

• aggregate supply :-it is the total production of goods and services in the economy during the year.

• domestic income :- it means income generated with in the domestic country during the year.

              concepts and issues related to macroeconomics

1. growth and development :-economies need to grow continuously over time and growth (in terms of goods and services) must reflect itself to rise standard of living of the masses or the overall quality of life must be improved.  

2. unemployment :- there is a large scale  rural unemployment  among the unskilled workers in urban areas . in developed countries it is cyclical in nature and occurs owing to lack of demand for goods and services. its actual means that there are number of workers which are able and willing to work but they have no work.

    inflation

inflation means when the price level of all goods and services in he economy tends to rise over a period of time . value of money increases and purchasing power of the people falls. in the situation of hyper inflation . cost of production increases and equally decreases in business competitiveness.

business cycles

economic activity always shows ups and downs it never shows a stable pattern of change for all time to come. when economic activity goes down it is called recession when it reaches bottom it is called depression , when it starts rise it is called recovery , when it peaks up it is called boom.

budgetary deficit and fiscal policy

budgetary deficit refers to a situation when budget expenditures of the government are greater than the government receipts .budgetary deficit and the related fiscal policy . when balance of payments of our country is on deficit then government  can borrow from different countries . through fiscal policy instruments government can complete deficit of our country like increases taxes, reduce government expenditure, increases deficit financing .

monetary policy

monetary measures by the government in terms of changing 

1. interest rates

2. open market operations

3. cash reserve ratio

4. statuary liquidity ratio

through this instruments government can manage the money supply of the whole economy . when economy are in inflation government can control the money supply to increases the interest rates, purchase the government securities in the open market, increase the cash reserve ratio ,and increase the statuary liquidity ratio.

importance of macroeconomics

1. study of national income :- national income is the sum total of factor income(rent , wages ,interest , profits )earned by normal residents of the country during an accounting period.

                NY = summation of factor income

    2. study of business cycles :- economy faces from different phases like boom, recession , depression, recovery etc. these changes have an adverse effect on the economy. these changes depend on aggregate factors like aggregate saving,  aggregate output , aggregate demand , aggregate supply .

   3. change in the general price level :-different changes occur in the general price level. fall in the value of money or rise in price level is called inflation. fall in price le    vel is called deflation.

   4. helpful in the study of microeconomics :-  economy as a whole can be divided into different economic units. to know the whole economy it is important to know the economic behavior of different units.

   5.economic growth :- the problem of increasing the  rate of economic development assumed great significance in underdeveloped countries . macroeconomics made it possible to know the factors accounting for economic growth.

limitations of macroeconomics

1. dependence on individual units :- macroeconomics are based on the sum total of individual units . it is necessary to know the individual units for knowing the whole economy like individual consumers , individual producers etc.

2. heterogeneous units :- these units are measured in different ways . it is not possible to express these units in uniform numbers or homogenous measure.

6 strawberry + 7 strawberry = 13 strawberry(it is meaningful aggregate)

6 strawberry + 7apples = 13 fruits (it is also a meaningful aggregate)

6 strawberry + 7 chairs = (it is a meaningless aggregate)

     3. limited application :-  another drawback of macroeconomics is that it is all related to theories . but they have very little use in practical life . it is very difficult to find out the various aggregates of  macroeconomics.

     4. it ignores the contribution of individual units  :- in actual life, the economics activities and the decisions are taken by the individual units on private level and their effects on the whole economy.

     5. different effects of aggregates :-  another drawback of macroeconomics is that there is no equal effect on the different sectors. there is different effects of aggregates on the different sectors of the economy. for example rise in price level benefits the traders and industrialists and losses to producers to produce the product.

                 salient features of macroeconomics

1. study of the whole economy :- macroeconomics is the study of whole economics . it mainly deals with national income , aggregate consumption , aggregate investment, effective demand , price level, full  employment, and less than full employment etc. macroeconomics proves that their theories and law it is not necessary to applicable in the whole economy.

2. macroeconomics :- macroeconomics is the study about inflation and deflation, full employment and under employment boom and depression. according to macroeconomics deficiency of effective demand causes deflation and its excess causes inflation. its deficiency causes unemployment and depression and its excess amounts for increase in employment and price level

3. short run nature of macroeconomics :- macroeconomics is a short run study. short run is that time period in which production cannot be increased by installing new plants and new machinery or not by changing the technique of production.

        I) in  short tie period , the quality and quantity of  labour, the amount of capital, the existing technique, the extent of competition , broad social structure, etc.

    4. role of national income ;- macroeconomics has given great importance to the study of national income. according to Keynes, without help of national income , problems of national output and employment cannot be solved.its study  makes available to necessary data to consumption , saving , employment, investment etc.

    5. role of consumption :- simply meaning of consumption it shows the consumption at different level of income. consumption is a function of income if level of income increases consumption also increases. there is direct relationship between income and consumption.

             assumption of macroeconomics

1. macroeconomics  theories are applicable in the short period only.

2. macroeconomics is based on the assumption of perfect competition. there is no external interferences in the determination of price .prices may automatically change with change in demand and supply.

3. macroeconomics is assumes labour is variable factor of production . because in short run labour cannot be changed.

4. it is assumed under macroeconomics , that in developed capitalist economy is a closed economy.it means there is no exports and imports in the economy.

5. another assumption of macroeconomics is that money is not only medium of exchange but also act as a store of value. it is not important that people spend all the income as soon as they get it.

6. under macroeconomics there is proper utilization  of resources in the economy.

              relation between microeconomics and macroeconomics

1. study of macroeconomics analysis is necessary for microeconomics analysis :- firstly microeconomics simple meaning is that it is a study of individual economic unit of an economy for example a consumer, a producer , etc. microeconomics analysis is based in the assumption of (other things  being equal). the price fixed for commodity is not governed by its demand and supply alone but by the demand and supply of other goods as well.

2. study of microeconomics analysis is necessary for macroeconomics analysis :-study of macroeconomics calls for the study of microeconomics . like a society it is composed of individuals, similar an industry is composed of several firms producing homogenous products.

    I) economy is a whole consists of the aggregate of several economic units . it is essential to know the economic behavior of different units

    ii)collection of all firms composed industry and several industries  form an economy

 difference between microeconomics and macroeconomics 

1. difference in the degree of aggregation

2. differences in objectives

3. different importance to price and income

4. differences in the methods of study

5. different assumptions

6. differences relating to change

7. analytical differences