4. CONCEPT OF MACROECONOMICS
The word macro is derived from Greek word makros which means large.
Hence macroeconomics studies about aggregate unit of the economy. It
studies aggregate economic variables like national income, general price
level, level of employment, economic growth, balance of trade, balance of
payment etc. Macroeconomics is also known as income and employment
theory because it explains how level of employment and income is
determined in the economy.
Macroeconomics is sometimes known as Keynesian economics because to
develop macroeconomics J.M. Keynes played very important role.
Macroeconomics developed after the publication of Keynes’s General
Theory of Employment, Interest and Money in 1936.
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Basic Issues of Macroeconomics
1. Employment and Unemployment: Under macroeconomics we study what are
the factor affecting the level of employment in the economy. According to Keynes,
deficiency in effective demand is the main causes of unemployment.
Macroeconomics study causes, affects and remedial measures of unemployment.
2. Inflation: Under macroeconomics we study what are causes of inflation and ways
to control inflation. According to classical economist increase in money supply is the
main causes of inflation. Inflation arises due to various reasons like increase in cost
of production, increase in profit margin, shortage of goods etc. Inflation increase the
gap between rich and poor.
3.Business cycle: It means fluctuation in economic activities. Macro economics
study causes of upswing and downswing in the economy and suggest measures to
control them.
4. Deflation and Stagflation: Macroeconomics study what are the causes of
deflation and stagflation in the economy. Deflation means falling prices of goods and
services whereas stagflation is the situation in which prices as well as
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5. Economic growth:
In economics, economic growth means increase in real per capita income of the
country over the long period of time. In simple sense, increase in production and
productivity is called economic growth. When there is economic growth, many
people can get employment opportunities which helps to increase income after that
people living standard increases.
5. Balance of Payment
It is the systematic records of all economic transaction between one country with the
rest of the world. Every country wants to maintains favourable balance of payment.
Macroeconomic study what are the factors are responsible for making deficit BOP. It
also suggest the measures to correct deficit BOP.
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Scope of Macroeconomics
1. Theory of Income and Employment: Macroeconomics studies the concept of
national income, its different elements, methods of measurement. It also studies how
level of income and employment determined in the economy.
2. Macro theory of distribution: Macroeconomics studies how national income is
distributed in the economy. It studies which group’s share is more and which group’s
share is less in the economy.
3.Theory of Money: Macroeconomics explains nature, causes and effects of
inflationary and deflationary situation of the economy. Level of employment is
affected with the change in demand for money and supply of money. Hence
macroeconomics studies various theories relating to money demand and money
supply.
4. Theory of general price level: Macroeconomics studies the change in general
price level in the economy. Inflation and deflation are also studies under
macroeconomics. It also suggest the measures to control inflation and deflation in
the economy.
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5.Theory of economic growth: Macroeconomics studies economic growth of
developed and developing countries. It also studies fiscal policy and monetary policy.
Appropriate use of monetary and fiscal policy helps to achieve high economic growth
and development.
6. Theory of international trade: Under macroeconomics we study trade structure
of the country. It also study different theories of international trade, tariff, protection
and other aspects of international trade.
9. Types of macroeconomics
1. Macro Statics/ Static Analysis: It explain the final
position of equilibrium of the whole economy at a particular
point of time. It shows the still picture of the economy as a
whole. It also investigates the relation between macro
variables in the final position of equilibrium but it does not tell
the process of adjustment to the final equilibrium.
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10. 2. Comparative Macro Statics:
It is that method of analysis which compares the equilibrium position of the relations
between macro economic variables at different points of time. In other words it is a
comparative study of different equilibriums at different points of time. But comparative
macro statics does not explain how it moves from one position of equilibrium to that of
another.
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3. Macro dynamics:
This method refers to that process whereby we reach from one
position of equilibrium to that of another. Macro dynamics not only
compare old and new equilibriums, it explains how it reaches to new
equilibrium point from old equilibrium point. It explain the process of
change from one equilibrium to another.
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Macroeconomics and Business Environment:
Macroeconomics studies the behavior of aggregate economy. It is concerned with
the economy-wide phenomena like national income, total investment, aggregate
consumption, aggregate saving, etc. macroeconomics examines how resources are
allocated at level of economic system as a whole and how the general price is
determined for the entire economy.
The study of macroeconomics is very much important in order to deal with the issues
faced in the business environment. The macroeconomic trends are largely cyclical,
but they are often difficult to predict accurately.
So, business firms need to make an in-depth study of the macroeconomic variables,
and analyze the market forces and national/international policy decisions that
determine the market fluctuations.
The importance of the study and knowledge of macroeconomics for the smooth
functioning of the business environment is highlighted by the following points:
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1. Study of the business environment
Macroeconomic variables like total income, general price level, employment, total
output, etc. are not consistent. Changes in these variables determine the prospects
of private business firms and also affects the functioning of individual firms.
Business decisions like resource allocation, size and number of plant, amount of
input and output, investments, etc. are all dependent on the macroeconomic
variables. Business firms must be up-to-date with the recent changes and
fluctuations that occur in the economy.
2. Study of the trends in international business
Macroeconomic models and tools study about the fluctuations in the international
market, inflow and outflow of capital, exchange rates, balance of payment that occur
in an open economy. The fluctuations in these phenomena affect business
decisions. Therefore, the study of macroeconomics provides business managers
and decision makers with the insight on the past and current trends occurring
worldwide.
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3. Examine the nature and extent of externalities of business
environment
Macroeconomic policies formulated by the government to control and regulate the
economic activities also affect the functioning of the private business firms.
Externalities refers to the beneficial and detrimental effect of an economic unit on
others for which there is no provision of compensation. Negative externalities
creates negative effect in the society and brings environmental pollution and other
hazards.
Such social costs not only create conflict of interest between the firm and the
society. The government policies and its various regulatory measures are designed
to minimize such conflicts. To study these macroeconomic policies, knowledge of
macroeconomics is essential.
3. Examine the role of government policies
Government can formulate various types of policies to achieve national objectives.
For this government may change prevailing fiscal policy, monetary policy and other
polices which affects business environment. In businessmen takes decision without
considering these thing then businessmen can not get profit.
Thus, as business managers, it is important to keep track of macroeconomic trends
in order to keep the business afloat, since business decisions cannot be taken in
