introduction to macro economics

1. By: VIKRAM.G.B
Lecturer, P.G dept. of Commerce
Bangalore-55

2. Meaning of Economics:
 Economics:- It is the study of the allocation of SCARCE
resources to meet unlimited human wants.
 In other words, economics is the study of human behavior
as it pertains to the material well-being of people (as
either individuals or societies).
 Robert Heilbroner describes economics as a "Worldly
Philosophy." It is the organized examination of how, why
and for what purposes people conduct their day-today
activities, particularly as relates to the production of
goods and services, the accumulation of wealth, earning
incomes, spending their resources, and saving for future
consumption.

3. STAGES OF DEVELOPING ECONOMICS
AS A SUBJECT
 Wealth concept (Adam Smith, J.B. Say and Walkar)
 Welfare concept (Marshal)
 Scarcity concept (Lionel Robbins’.)
 Development concept (Professor Samuelson)

4.  Economics can be classified into two general
categories; these are
(1)microeconomics and
(2) macroeconomics.

5.  Microeconomics:- It is concerned with decision-
making by individual economic agents such as firms
and consumers.
In other words, microeconomics is concerned with the
behavior of individuals or groups organized into firms,
industries, unions, and other identifiable agents.
 Macroeconomics:- It is concerned with the aggregate
performance of the entire economic system.
Unemployment, inflation, growth, balance of trade,
and business cycles are the topics that are discussed
under macroeconomics.

6. Scope/Field of Macroeconomics:
 Theory of Income, Output and Employment with its
two constituents, namely the theory of consumption
function and the theory of investment function. The
theory of business cycles is also a part and parcel of the
theory of income, output and employment.
 Theory of Prices with its constituents of the theories of
inflation, deflation and reflation.
 Theory of Economic growth dealing with the long-run
growth of income, output and employment as applied
to developed and underdeveloped countries.

7. Importance of Macro-economics
 The study of macroeconomics becomes indispensable
for the formulation and successful execution of govt.
economic policies.
 The study of macroeconomics is indispensable for
understanding the working of the economy of a
country.
 No science can study its entire field without
attempting some sort of aggregative approach.

8.  The study of macroeconomics is indispensable even
for the purpose of building and developing
microeconomics.
 The study of microeconomics can be defended on the
ground that it is indispensable for the proper and
accurate knowledge of the behavior-patterns of the
aggregate variables.
 Macro economics has afforded an inconsiderable help
to govt. all over the world in formulating and
implementing appropriate economic policies.

9.  The study of macro economics is very important for
evaluating the overall performance of the economy in
terms of national income.
 The popularity of macroeconomics has greatly
increased in recent years on account of the fact that it
deals with most of the controversial and challenging
issues of the day, namely, Unemployment, inflation,
growth, balance of trade, and business cycles.

10. Why one should study Macroeconomics in
the light of Business Decision??
 It is concerned with the whole economy and studies
the level and the growth of national income, the levels
of employment, the level of private and government
spending, the balance of payments, the consumption
& the investment, saving functions and oscillations in
business cycles. The objective of macroeconomics is to
maintain macro equilibrium of the economy.
 koutsoyiannis says, ‘the aggregate econometric models
are relevant for the study and prediction of aggregate
magnitudes, such as total output of any economy, total
employment, consumption, investment etc.’

11.  Managers face difficulty in decision making,
understanding of macroeconomics helps CEO's in
running the business.
 Overall economic activity, economic policies
(industrial policy, trade policy, monetary policy, fiscal
policy), inflation affects the business. Decisions of
CEO's or managers are affected by this aggregate
which makes up the overall environment of business.
Future demand and investment depends upon the
growth and the state of the economy.

12. The role of macro economics in business policy
formulation:
 Macro economic policy
 Economic planning
 Solving macro paradoxes
 Tracing effect of government policy on business
 Help in solving problem of general unemployment

13.  Analysis of trade cycles
 Macro analysis helps in development of micro analysis
 Inability of micro economics to study some areas
 Macro economic models

15. Limitations of Macro economics:
 Fallacy of Composition:- Aggregate economic
behavior is the sum total of the economy of individual
activities. But what is true of individuals is not
necessarily true to the fiscal entirely.
 To Regard the Aggregates as Homogenous:- The
main defect in macro analysis is that it regards the
aggregates as homogenous without caring about their
internal composition and structure.

16.  Indiscriminate Use of Macro Economics Misleading: An
indiscriminate and uncritical use of macro economics in
analyzing the complexities of the real world can frequently
be misleading. For Example, measures aimed at controlling
general prices cannot be applied with much advantage for
controlling prices of individual products.
 Statistical and Conceptual Difficulties: The
measurement of macro economics concepts involves a
number of statistical and conceptual complexities. These
problems relate to the aggregation of micro economic
variables. If individual units are almost similar, aggregation
does not present much difficulty. But if micro economic
variables relate to dissimilar individual units, their
aggregation into one aggregation into one macro economic
variable may be incorrect and hazardous.

17.  Aggregate Variables may not be Important
Necessarily:- The aggregate variables which form the
economic system may not be of much significance. For
instance, the national income of a country is the total of
all individual income. A hike in national income does not
mean that individual incomes have risen. The increase in
national income might be the result of the increase in the
incomes of a few rich people in the nation. Thus a rise in
the national income of this type has little significance
from the point of view of the community.

18. To conclude that macro economics enriches our knowledge
of the functioning of an economy by studying the behavior
of national income, productivity, investment, savings and
consumption. Further more, it throws much light in solving
the problems of redundancy, inflation, economic instability
and economic growth. The concept of stock and flow are
mainly used in the macro economics or in the theory of
income, productivity and employment. Lastly, both the
concepts of stock ad flow variables are very significant in
modern theories of income, interest rate, business cycles
etc.