INTRODUCTION TO MACROECONOMICS

Learning Contents:                                                           

•    Understanding  the Meaning of  Macroeconomics
•     Scope or Vital Components of Macroeconomics
•     Features of Macroeconomics

 Economics is a broad field of study which can be divided into two subparts

 a. Microeconomics b. Macroeconomics. A brief description of macroeconomics  

 is mentioned below.

Macroeconomics:  

In simple words, the term macro means large and economics is the study of making choices or making rational decisions in situations of scarcity. The basic economic problem i.e. the problem of rational management of scarce resources also continues to exist in macroeconomics as in microeconomics, so macroeconomics refers to economic issues at the level of the economy as a whole. It attempts to measure how well an economy is performing i.e. current situation of the economy, how different sectors of the economy relate to one another to understand how it works aggregately, to understand what forces drive it, and to project how performance can improve. It studies macroeconomic variables, such as aggregate demand, aggregate supply, aggregate output, general price level, inflation, deflation etc. 

 Scope or Vital Components of Macroeconomics

1. Theory of Equilibrium level of output and Employment

The theory of Equilibrium level of output and employment studies how much amount of goods and services to be produced in an economy so that equilibrium can strike. Further, Different goods and services produced when sold in an economy would generate national income and employment. Economists usually measure national income or output by gross domestic product or GDP. By measuring GDP, economists can understand the market swings and changes. They can identify what measures should be taken to improve the GDP of the country. 

 2. Theory of Inflation and Deflation:

The study of inflation and deflation is another important aspect of macroeconomics. The term inflation refers to an increase in the prices of goods and services across the country. Inflation reduces the purchasing power of the consumers which means consumers purchase less due to increase in the prices of goods and services. The term deflation refers to a decrease in the prices of goods and services. Deflation, on the other hand, occurs when an economy declines over a period of time. By studying the inflation and deflation trends, economists can help curb inflation rates by taking appropriate measures. Too much inflation can lead to negative consequences and continuous deflation can cause low economic output.

3. Theory of money supply, credit creation, and monetary policy

Every economy needs appropriate funds to work smoothly. This theory studies the different components of money supply and how commercial banks can add to money supply through credit creation. If there is too much money in the economy, however, people spend more money, and demand increases at a faster rate than supply can match. Prices rise too quickly because of the shortage of products, and inflation results. If there is too little money in the economy, people don't have excess spending money, and there is little economic growth. Economists watch economic indicators closely to determine in which direction the economy is going. By forecasting increases in inflation or slow-downs in the economy, appropriate action is taken whether to increase or decrease the supply of money.

4. Theory of Fiscal Policy

The theory of fiscal policy refers to the use of government spending and taxation to influence the economy. Governments use fiscal policy to influence the level of aggregate demand in the economy in an effort to achieve the economic objectives of price stability, full employment, and economic growth. In times of recession or when the economy is not performing well, economics suggests that increasing government spending and decreasing tax rates is the best way to stimulate aggregate demand and vice versa.

5. Theory of International Trade or Balance of Payment:

This theory of international trade analyses about exchange rate determination and how the balance of payments impacts the level of economic activity in the domestic economy.

Features of Macroeconomics

1.      Macroeconomics studies the economic problem at the level of the economy as a whole.

2.      It aims to determine the aggregate level of output, employment, and general price level in the economy as a whole.

3.      The study of macroeconomics is used to solve many problems of an economy like monetary problems, economic fluctuations, general unemployment, inflation, disequilibrium in the balance of payment position.

4.      It assumes that all the micro variables, like decisions of households and firms, prices of individual products, etc. are constant when we are studying the overall economic decisions like aggregate consumption, aggregate savings, aggregate investment, aggregate output, aggregate price, aggregate employment, etc.

Multiple Choice Questions:

      1. Macroeconomics studies the economic problem

      a. At the level of an individual.

      b. At the level of the economy as a whole.

      c. Both a. and b.

      2.  Which of the following does not suggest a macro approach for               any country?

       a. Determining the national income of a country

       b. Finding the cause of failure of company A

       c. Identifying the cause of inflation in a country

       d. Analyzing the cause of failure of industry in providing the large              scale employment

     3. Macroeconomics deals with:

       a. National Income

       b. General Price Level

       c. National Savings and Investment

       d. All of the above

Answers

1. b    2. b    3. d