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Macro-Economics. Meaning of Microeconomic. Term Macro is derived from Greek language which means large. Macroeconomics studies the problem from the point of view of entire economy like Aggregate Demand, Aggregate Employment, National Income. Definition.
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Meaning of Microeconomic • Term Macro is derived from Greek language which means large. Macroeconomics studies the problem from the point of view of entire economy like Aggregate Demand, Aggregate Employment, National Income.
Definition • According to M.H. Spencer, ”Macro economics is concerned with the economy as a whole or large segments of it. In macro economics , attentions is focussed on such problems as the level of unemployment , the rate of inflation , the nation’s total output and other matters of economy-wide significance.”
10. ROLE OF NATIONAL INCOME: Macro economics has given great importance to the study of national income. It study makes available to us necessary statistical data pertaining to consumption, saving, employment, investment etc.
Features of Macro Economics • SHORT-RUN NATURE OF MACRO ECONOMICS: Short-run nature of macro economics can b e expressed as below: i) In the short period, the quantity and quantity of labour, the amount of capital , the existing techniques, the extent of competition, the degree of monopoly, tastes of the people ,broad social structure ,etc., remain constant and there is no significant change in them
(ii) Although employment can be increased by increasing both consumption and investment, yet in macroeconomic in order to increase employment more stress has been laid on increase in investment as against increase in consumption. (iii) National output or aggregate supply is assumed to be constant in the shortrun.
2. STUDY OF THE WHOLE ECONOMY : Macro economic analysis is a study of the economy as a whole. It deals mainly with national income or national output, aggregate consumption, aggregate investment, effective demand, price level, full empolyment, less than full employment.
3. MACRO ECONOMICS-SYSTEMATISE AND COMPRESSIVE BODY OF THPOUGHT: Macro economics is a comprehensive study of all conditions. It studies all conditions of inflacation and deflacation.Boom and depression, full employmeny and under employment.
4.MACRO ECONOMICS – REFORMED CAPITALISM OR NEO LIBERALISM : Macro economics aims at reforming and not destroying capitalism. It asserts that capitalism as existed prior to world war I has no place in the changed conditions of the present-day world. Different law s of macro economics are based on different features of capitalism, like, private property , freedom of choice, profit motive and price mechanism
5. MACRO ECONOMICS – A MONETARY ECONOMICS: Classical economics laid more stress on real, rather than monetary factors in their economics analysis ,because to them the main function of money was medium of exchange. 6. MACRO ECONOMICS- MAINLY INSTITUTIONAL: Another feature of macro economics is that it is institutional in nature, saving, investment, supply of money and psychological and institutional factors influencing propensity to consume.
7. IMPORTANCE OF STATE INTERVENTION: Micro economics has laid great stress on the role of state intervention in economic . In order to make up the shortfall in private investment, public investment is regarded most desirable. 8. THE CRLUCIAL ROLE OF INVESTMENT: In macro economics, a very important role is assigned to investment. Investment means addition to the stock of goods and creation of new capital assets.
9. ROLE OF CONSUMPTION: Consumption expenditure and psychological law of consumption are of great importance in macro economics. In determining the level of employment the role of consumption is no less important than that of production. More production implies more employment.
ASSUMPTIONS SHORT PERIOD : macro economics theories are applicable in the short period. The time is too short to increase production by installing new plants or new machines. Thus, in the short period, production capacity,technique,number of laborers, tastes of the consumers, their habits and fashion remain constant. Lord Keynes assumed that the problem of unemployment in developed countries was a short term problem because “in the long run we are all dead”. Aggregate supply remains constant in the short period. It is only by increasing demand ,that the volume of employment can be increased and unemployment can be removed. PERFEC T COMPETITION : macro economics is based on the assumption of perfect competition under the conditions of perfect competition ,there is no external interference in the determination of prices . Prices may rise or fall in accordance with changes in demand and supply position .
3. CLOSED ECONOMY : it is assumed under macro economics , that a developed capitalist economy is a closed economy . A closed economy is one which is free from the influence of foreign trade on income and employment level . In other words , aggregate demand will not be influenced by the difference between imports and exports . 4. IGNORES THE ROLE OF THE GOVERNMENT AS A SPENDER OR TAXER: Macro economics overlooks the role of the government as a taxer or a spender . It implies that macro economics is based on AD =C+I. Keynes has ignored the influence of government
5. DIMINISHING MARGINAL PRODUCTIVITY: Another assumption of macro economics is that as more and more units of labour are employed , their marginal productivity goes on diminishing . It means production is subject to the operation of the law of diminishing returns. Keynes also assumed that under perfect competition, wages of the labourer were equal to his marginal productivity (W= MRP). It implies that more labourers will be employed only when their real wages are low. • 6.LABOUR IS THE ONLY VARIABLE FACTOR OF PRODUCTION : Macro economics assumes that labour alone is a variable factor of production in the short period. It means production increases when the number of labourers are increased, that is, P= f(N) it reads : production (P) is a function (f) of labour (N). 7. LABOUR HAS MONEY ILLUSION : labourers entertain the wrong notion that value of money which their money wages increase in the same proportion in which their money wages increase . Similarly , their real wages will decrease in the same proportion in which their money wages decrease . Labourer thus , ignores the effect of change in the price - level .
8. MONEY ALSO ACTS AS A STORE OF VALUE: Another assumption of macro economics is that money is not only a medium of exchange but also a store of value. It is not necessary therefore, that people must spend all their monetary income as soon as they get it. • 9. NO TIME TAG: Macro economics assumes that adjustment among different economic variables take place without any time lag. For e.g.: consumption expenditure of Monday depends upon the income of Monday ;or ,that present consumption is a function of present income. It is thus, taken for granted that the period in which income changes is also the period in which consumption and investment changes
10. UNDEREMPLOYMENT EQUILIBRIUM: Macro economics assumes that position of equilibrium is also possible in case of underemployment. Equilibrium position is that position in which there is no tendency to change, that is aggregate demand is equal to aggregate supply. This equality is possible both under the condition of full employment and underemployment.
11. SAVING AND INVESTMENT FUNCTION: Macro economics is based on the assumption that saving depend upon income ,that is, S=f(Y) On the other hand, investment depends on the rate of interest ,that is I=f(r) 12. INTEREST IS THE MONETARY PHENOMENON: Macro economics also assumes that determination of interest depends upon monetary factors , that is : Demand for and supply of money demand for money refers to liquidity preference. People prefer liquidity on account of transaction , precautionary and speculative motives 13. OPTIMUM UTILISATION OF RESOURCES : Macro economics also assumes that there is optimum utilization of resources.
RELATION BETWEEN MICRO AND MACRO ECONOMICS 1.MICRO ECONOMICS ANALYSIS DEPENDS UPON MACRO ECONOMICS ANALYSIS: micro economics aeconomics . For example : 1). The rate of wages paid by a firm to its workers depend on the rate of wages being nalysis is based on the assumption of “other things being equal”. This underlines the influence of macro economics on micro paid by the other firms in the economy .
2). The price fixed for a commodity is governed not by its demand and supply alone but by the demand and supply of other goods as well. 3).The amount of a goods that a firm is able to sell depends not only on the prices of the goods produced by that firm but also on the total supply of money in the society.
2. STUDY OF MICRO ECONOMICS ANALYSIS IS NECESSARY FOR MACRO ECONOMICS ANALYSIS • Study of macro- economics call foe the study of micro. In fact, society is the aggregate of individuals. Just as society is composed of individuals, similarly, an industry is composed of several firms producing homogeneous products. Many industry constitute an economy. Need of micro economics for macro economics analysis is evident from the following :
1). Economy as whole consists of the aggregate of several economic units. To understand the functioning of the whole economy, it is essential to know the economic behavior of different. • 2). Study of national income necessitates the study of per capita income. It is so because per capita real income influences consumption and investment of consumer. Consumption and investment decisions of individuals influence the determination of national income. • 3). Collection of all firms constitutes industry and several industries form an economy.
