Introduction to Macro Economics

1. UNIT -1
INTRODUCTION TO MACROECONOMICS
- DR. ABHAY SINGH CHAUHAN

2. CONCEPT OF MACROECONOMICS
The prefix 'macro' is derived
from the Greek word 'makros'
meaning, 'large'.
Macroeconomics is the study
of economy as a whole
Deals with functioning of the
economy as whole.

3. CONT…
 Macroeconomics is the branch of economics that studies the behavior and
performance of an economy as a whole. It examines the behavior of economic
aggregates such as aggregate income, consumption, investment and the overall level
of price.
 Aggregate Behavior refers to the behavior of all households and firms.
 Macroeconomics studies the relationship and interaction between the “factors” or
“forces” that determine the level and growth of national output and employment,
general price level, and the balance of payment position of an economy.

4. CONT…
 Macro economics deals not with
individual quantities as such but with
aggregate of these quantities; not with
individual incomes but with national
income; not with individual prices but
with the price level; not with individual
outputs but with the national output.
- KENNETH E. BOULDING

5. 3 GOALS OF MACROECONOMICS
ECONOMIC GROWTH
FULL EMPLOYMENT
ECONOMIC STABILITY

6. NATURE OF MACROECONOMICS
Relatively new branch of economics
Monetary economics
Study of economy as a whole
Examines interrelationships among various aggregates
Role of consumption and national income
Based on firm empirical foundation

7. SCOPE OF MACROECONOMICS
SCOPE OF
MACROECOMICS
MACROECONOMIC
THEORIES
ECONOMIC GROWTH AND
DEVELOPMENT
THEORY OF NATIONAL INCOME
THEORY OF MONEY
THEROY OF INTERNATIONAL
TRADE
THEORY OF EMPLOYMENT
THEORY OF GENERAL PRICE
LEVEL
MACROECONOMIC
POLICIES
MONETARY POLICIY
FISCAL POLICY

8. MAJOR CONCERNS OF MACROECONOMICS

9. IMPORTANCE OF MACROECONOMICS
Economic Policies Formulation
Trade cycle Analysis
Explains working of the economy as a whole
Helpful in International Comparison
Resolves economic issues
Economic Development
Facilitates Material welfare

10. LIMITATIONS

11. ORIGIN AND GROWTH OF MACROECONOMICS
 Macroeconomics is of relatively recent origin, the foundation of macroeconomics, as
a separate branch of economics, was laid down by a British economist, John
Maynard Keynes (1883-1946) in his revolutionary book The General Theory of
Employment, Interest and Money (1936).

12. CONT…
 Growth and origin of macroeconomics is sub-dividend into 3 sections:
Classical Macroeconomics
Keynesian Revolution and macroeconomics
Post Keynesian Revolution

13. THE CLASSICAL MACROECONOMICS
 The school of economic thoughts that dominated the economic world before the
"Keynesian Revolution is called the 'classical school'.
 According to classical school of thought, if market forces of demand and supply are
allowed to work freely, then
 There will always be full employment in the long run and unemployment, if any,
will be short-run phenomenon;
 There will be neither over-production nor under-production
 The economy will always be in equilibrium in the long run.

14. THE GREAT DEPRESSION
 The Great Depression was a severe
worldwide economic depression, it was the
longest, most widespread and deepest
depression of the 20th century.
 Great Depression of 1930s however proved
all the classical postulates wrong. It exposed
the inadequacy of the theoretical
foundations of the laissez-faire doctrine.
 During the period of Great Depression, there
was large scale unemployment in most
industrial economies and their GNP declined
disastrously.

15. CONT…
 In the United States, for example,
unemployment increased from about 3
percent in 1929 to 25 percent in 1933;
production of goods and services declined by
30 percent; price level fell by 23 percent; and
business investment dropped to almost nil.
 The classical economics could offer neither
an explanation nor a solution to the
economic problems created by the great
depression. This marked the collapse of the
classical macroeconomics.

16. THE POST CLASSICAL DEVELOPMENTS
: KEYNESIAN REVOLUTION
 The major proponent of this revolution is
John Maynard Keynes who in his
General Theory laid the foundation of
macroeconomics.
 Keynes's departure from the classical
school was caused by his realization that
the classical economics was not capable
of predicting, explaining and providing
solution to economic problems resulting
from economic catastrophe like the
Great Depression.

17. CONT…
 The Keynesian macroeconomic theories are associated mainly with (a) employment,
(b) growth, and (c) stability.
 The central theme of the Keynesian macroeconomics may be summarized as follows.
 The level of output and employment in an economy is determined by the aggregate
demand given the resources,
 The unemployment in any country is caused by lack of aggregate demand and economic
fluctuations are caused by demand deficiency.
 The demand deficiency can be removed through compensatory government spending.

18. CONT…
 Keynesian economics stresses the role of demand management by the government for the stable
growth of the economy. "Perhaps the most fundamental achievement of the Keynesian
revolution was the reorientation of the way economists view the influence of government activity
on the private economy.
 The period between the late 1930s and the mid 1960s is called the period of “Keynesian
Revolution" or the "Keynesian era".
 During this period most economists were Keynesian and most governments, especially in
developed countries, had adopted Keynesian policies.
 The Keynesian thoughts had pervaded also in the underdeveloped countries as most less
developed countries struggling to emerge out of their 'low-equilibrium trap' adopted Keynesian
approach to their economic development.
 In fact, India's Development Plans are largely based on the Keynesian theory of growth and
employment.

19. THE POST KEYNESIAN REVOLUTION
 The Keynesian economics started showing signs of its failures in the early 1970s.
Keynesian economics, especially Keynesian fiscal measures, failed to provide solution
to economic problems of low growth, high unemployment with high rate of inflation,
faced by most developed countries, especially by the US.
 It could offer neither a reasonable explanation nor an effective solution to the
problem of "stagflation“ faced by the US in the early 1970s.
 This lead to growth of a new school of macroeconomic thought called "monetarists".
This was subsequently followed by the emergence of other schools of
macroeconomic thoughts.

20. CONT…
 The post-Keynesian developments in macroeconomics include the following schools
of thoughts:
Monetarist school
Neo-classical macroeconomics
Supply-side economics
Neo-Keynesianism

21. MONETARISM: A COUNTER-REVOLUTION
 A group of economists called
"monetarists” led by Milton Friedman
claimed that Keynesian theory had failed
to predict national output, price level, rate
of employment and unemployment, and
interest rate.
 The monetarists came out with a new
revolutionary thought, that is, the role of
money is central to the growth and
stability of national output, not the role of
aggregate demand for real output as
Keynesians believe.

22. CONT…
 In their opinion, money supply is the main determinant of output and employment in
the short run and price level in the long run.
 The monetarists added a new dimension to both macroeconomic theory and policy.
In theory, emphasis shifted from the analysis of aggregate demand for real output to
aggregate demand for and supply of money, and in policy, emphasis shifted from
demand management to monetary management.

23. NEW CLASSICAL MACROECONOMICS
 While the debate between the Keynesians and monetarists continues, Keynesian
economics was attacked in the 1980s by another group of economists, called
'radicalists'.
 Their macroeconomic propositions are called new classical macroeconomics. The
new classical macroeconomics is the creation of virtually one economist, Robert E.
Lucus, the Nobel Laureate of 1995.
 In the opinion of Lucas, Keynesian orthodoxy has turned redundant not only from
economic policy point of view but also from theoretical and methodological points of
views.

24. CONT..
 The neo-classical school emphasizes the role of individual's rational expectations
about future economic events, especially those on the supply side of the economy
and future government policies.
 The core of the radicalist thought is that people's expectations about government
monetary and fiscal policies determine the behaviour of aggregate supply and
aggregate demand curves.
 The anticipated changes in monetary and fiscal policies cause a shift in aggregate
demand curve, which causes an immediate and equal shift in the aggregate supply
curve. Therefore, shifts in aggregate demand and supply curves do not cause any
change in the real output. The new classical macroeconomics too remains a matter
of debate.

25. SUPPLY-SIDE ECONOMICS
 While the issue of what determines the aggregate demand continued to be debated,
there emerged another school of macroeconomists, called "supply-sider economists”.
 The "supply-side economists", led by Arthur Laffer, emphasized the role of the factors
operating on the supply side of the market.
 Supply-side economics is a macroeconomic theory that postulates economic growth can
be most effectively fostered by lowering taxes, decreasing regulation, and allowing free
trade.

26. CONT…
 According to supply-side economics,
consumers will benefit from greater
supplies of goods and services at lower
prices, and employment will increase.
 Arthur Laffer, widely known for his famous
"Laffer curve ( theoretical relationship
between rates of taxation and government
revenue.)", argued that a cut in tax rate
shifts aggregate supply curve rightward and
leads to a rise in output and employment.

27. THE NEO KEYNESIANISM
 Neo-Keynesian economics is a school of macroeconomic thought that was
developed in the post-war period from the writings of John Maynard Keynes
 The neo Keynesian argue that market does not clear always, in spite of individuals
working for their own interest.
 They give reason that information problem and cost of changing prices leads to some
price rigidities which cause fluctuation in output and employment.

28. DIFFERENCE BETWEEN MICROECONOMICS &
MACROECONOMICS
MICROECONOMICS MACROECONOMICS
The branch of economics that studies the behavior
of an individual consumer, firm, family is known as
microeconomics.
The branch of economics that studies the behavior
of whole economy is known as macroeconomics.
It deals with individual economic variable It deals with aggregate economic variable
Price is the basic parameter of micro economics. Income is the basic parameter of macro economics.
It is important for resource utilization, public
finance, and for taking business decisions.
It is important for formulation of economic policy
of the whole nation.
The concepts of micro-economics are independent
concepts.
The concept of macro economics are
interdependent on one another.
It deals with the pricing of a particular commodity in
an industry.
It deals with the general price level in the economy,
National income accounting, etc.

29. CONT…
MICROECONOMICS MACROECONOMICS
It uses bottom-up approach strategy to analyze the
company
It uses top-down approach strategy to analyze the
economy.
It provides solution to the problem of “what, how
and for whom to produce”.
It provides the solution to the problem of full
utilization of resources in the economy.
It is based on the principle that the market create
equilibrium by itself in a short period.
It assumes that the economy can be in
disequilibrium for a longer period of time i.e. during
the recession or boom period.
Demand and Supply are the main tools. Aggregate demand and Aggregate supply are its
main tools
It has a narrower scope as it is related to a specific
segment of the economy
It has a broader scope as it is related to the whole
economy
Some of its components are: individual income and
savings, price determination of a commodity,
individual firm’s output and consumer’s equilibrium.
Some of its components are: National income,
General price level, aggregate demand, aggregate
supply etc.

30. Thank you!