Concept of Macroeconomics
- Modern economics analysis has been classified into microeconomics and macroeconomics. The term was propounded by Prof. Ragnar frish of Oslo University in 1933. Thereafter it became very popular and was accepted by other economists.
- The Greek term ‘macro’ means larger. Macroeconomics is concerned with the study of the relationship between broad economics aggregate. Macroeconomics deals with the economic affairs in large. In the words of Meyers, macroeconomics is a study of the relationship, nature and behaviour of aggregates and averages of economics quality.
- Macroeconomics is the branch of economics that deals with the structure, performance, behavior, and decision-making of the whole, or aggregate, economy.
- The two main areas of macroeconomic research are long-term economic growth and shorter-term business cycles.
The Birth of Macroeconomics
- In 1936, well-known British economist J. M. Keynes introduced his own theory and wrote his famous book The General Theory of Employment, Interest and Money, which birthed the Keynesian revolution, the second primary school of economic thought.
- Keynes criticised the Classical assumption of full employment and developed modern macroeconomics: economic theory that attempts to connect money supply, employment, business cycles, and government policy.
- The incentive for development of modern macroeconomics came from the Great Depression of the early 1930s.
- Macroeconomics addresses
- The desire to control business cycles in advancing economies and
- The need to develop backward economies.
Definition of Macroeconomics
- In the words of Gardner Ackley, Macroeconomics deals with economic affairs in large.
- According to the opinion of G.D Allan, Macroeconomics applies to study of relations between broad economics aggregates.
- E. Culberston, states that, Macroeconomics theory of income, employment, prices and money.
- According to opinion of Mcconnel, level of macroeconomics is related either with entire economy or else with its subdivisions like households, firms or government which constitutes the economy.
- Boulding defines that macroeconomics is that opinion is that portion of economics which scrutinises or analyses overall average as well as aggregate of the system.
Nature of Macroeconomics
Macroeconomics is basically known as theory of income. It is concerned with the problems of economic fluctuations, unemployment, inflation or deflation and economic growth. It deals with the aggregates of all quantities not with individual price levels or outputs but with national output.
As per G. Ackley, Macroeconomics concerns itself with such variables −
- Aggregate volume of the output of an economy
- Extent to which resources are employed
- Size of the national income
- General price level
Scope of Macroeconomics
- Macroeconomics is an essential field of study for economists. Government, financial bodies, and researchers analyse a nation’s general national issues and economic well-being. It mainly covers the measure fundamentals of macroeconomic theories and macroeconomic policies.
- The Macroeconomics theories involve economic growth and development, national income, money, international trade, employment, and general price level. In contrast, macroeconomic policies cover fiscal and monetary policies.
- The study of problems like unemployment in India, the general price level, or the problem of balance of payment (BOP) is a part of the macroeconomic study because it relates to the economy.
Importance of Macroeconomics
- It helps us understand the functioning of a complicated modern economic system. It describes how the economy as a whole functions and how the level of national income and employment is determined on the basis of aggregate demand and aggregate supply.
- It helps to achieve the goal of economic growth, a higher GDP level, and higher level of employment. It analyses the forces which determine economic growth of a country and explains how to reach the highest state of economic growth and sustain it.
- It helps to bring stability in price level and analyses fluctuations in business activities. It suggests policy measures to control inflation and deflation.
- It explains factors which determine balance of payments. At the same time, it identifies causes of deficit in balance of payments and suggests remedial measures.
- It helps to solve economic problems like poverty, unemployment, inflation, deflation etc., whose solution is possible at macro level only (in other words, at the level of the whole economy).
- With a detailed knowledge of the functioning of an economy at macro level, it has been possible to formulate correct economic policies and also coordinate international economic policies.
- Last but not least, macroeconomic theory has saved us from the dangers of application of microeconomic theory to the problems that require us to look at the economy as a whole.
History of Macroeconomics
- While the term “macroeconomics” is not all that old (going back to the 1940s), many of the core concepts in macroeconomics have been the focus of study for much longer. Topics like unemployment, prices, growth, and trade have concerned economists almost from the very beginning of the discipline, though their study has become much more focused and specialized through the 20th and 21st centuries. Elements of earlier work from the likes of Adam Smith andJohn Stuart Mill clearly addressed issues that would now be recognized as the domain of macroeconomics.
- Macroeconomics, as it is in its modern form, is often defined as starting withJohn Maynard Keynes and the publication of his book The General Theory of Employment, Interest, and Money in 1936. Keynes offered an explanation for the fallout from the Great Depression, when goods remained unsold and workers unemployed. Keynes’s theory attempted to explain why markets may not clear.
- Prior to the popularization of Keynes’ theories, economists did not generally differentiate between micro- and macroeconomics. The same microeconomic laws of supply and demand that operate in individual goods markets were understood to interact between individuals markets to bring the economy into ageneral equilibrium, as described by Leon Walras. The link between goods markets and large-scale financial variables such as price levels and interest rates was explained through the unique role that money plays in the economy as a medium of exchange by economists such as Knut Wicksell, Irving Fisher, and Ludwig von Mises.
- Throughout the 20th century, Keynesian economics, as Keynes’ theories became known, diverged into several other schools of thought.