MACRO ECONOMICS

Chapter 1 Introduction

v    Difference between Micro Economics and Macro Economics

·       Micro means small and macro means large.

·       Micro Economics deals with individual prices, demand of a firm etc where as macro economics deals with national income, economic growth etc.

·      Micro Economics is concerned with individual economic agents while macro economics is concerned with aggregates like GNP, total employment , total investment etc.

·   In Micro economics we study various aspects of individual household or firm while in macro economics we study the aggregate behaviors of the economy as a whole.

·       Micro economics is otherwise called as price theory while macro economics is otherwise called as income theory or employment theory.

·       Micro economics is a partial equilibrium analysis while macro economics is a general equilibrium analysis.

·       Micro economics is compared to the study of trees while macro economics is compared to the study of forests.

·  Micro economics gives a worm’s eye view of the economy while macro economics gives a bird’s eye view of the economy.

·     Scope of Macro Economics

The scope of economics consists of :

Theory of national income

Theory of Employment

Theory of inflation

Theory of trade cycles

Theory of monetary and fiscal policies

Theory of economic growth

Theory of international trade

·     Importance of  Macro Economics

The study of macro economics is important as it is:

Helpful to understand the functioning of the economy

Helpful in comparison of various economies

Useful in planning and forecasting

Helpful in studying growth and development

Helpful in studying fluctuations in the economy

Helpful in the formulation of economic policies and programmes.

v   Define Economic Unit/Agent

v Economic agents or units means those individuals or institutions which take economic decisions.

v    Father of Modern Economics

v Adam smith

v    Macro Economics

Macro economics became a separate branch of economics after the publication of the book “The General Theory of Employment, Interest and Money” in 1936 by John Maynard Keynes .

v Keynes revolutionized macro economics and hence his approach is referred as Keynesian Revolution

v   Classical tradition

v The school of thought in economics which believe that all the laborers who are ready to work will find employment and all the factors will be working at their full capacity is known as classical tradition.

v Classical economists believed in and argued for laissez faire which means least government intervention.

v Classical ideas of full employment and automatic functioning of economy proved wrong by the Great Depression of 1930’s.

v   Great Depression of 1929

v During the great depression output and employment levels in the countries of Europe and North America fall by huge amounts.

v It affected other countries of the world also.

v Demand in the market was low, many factories were idle, workers were thrown out of jobs.

v In USA great depression period was from 1929 to 1933. Unemployment rate rose from 3% to 25%, aggregate output fell by about 33%. 

v Macro Economics in a Capitalist Economy

Capitalist economies are based on:

     Private property

 Markets

 Private initiative and enterprise

 Competition

 Profit motive

·       Four major sectors in an economy

1. Household sector

·       Household means a single individual who takes decisions relating to her/his own consumption or a group of individuals for whom decision relating to consumption are jointly determined.

·       Household also saves and pay taxes.

2.Business sector/firms

·       In capitalist economies bulk of the goods and services are produced by private entrepreneurs or firms.

·       The production units are called as firms.

·       Production takes place for selling the output in the market.

·       There is sale and purchase of labour services at a price called as wage rate.

·       The labour which is sold and purchased against wages is referred as wage  labour.

  

3.Government Sector

·       In a capitalist economy state does not actively involve in economic activities, but plays a regulatory role.

·       The role of the state includes framing laws, enforcing them and delivering justice.   State also  impose taxes.

·       Government also undertakes production-spending money on building public infrastructure, running schools, colleges, providing health services etc.

4.External sector /Rest of the world 

·       All modern economies are open economies.Open economies engage in trade.

·       Open economies have economic relations with the rest of the world. 

·       Open economy means an economy which has economic relations with other countries of the world.

·  Closed economy means economy has no economic relations with other countries of the world.

Trade with the external sector can be of two kinds.

·       When the domestic country sells goods to the rest of the world, it is called exports.

·       When the domestic economy buys goods from rest of the world, it is called imports.

A Apart from goods and services, capital may also flow into the domestic country or it may be exported to foreign countries.

Reference :Introductory Macro Economics  textbook for class XII, SCERT, Kerala.

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