"Introduction to Macroeconomics: Understanding the Big Picture of the Economy"

"Introduction to Macroeconomics: Understanding the Big Picture of the Economy"

Let's respond to the following before talking about macroeconomics:

• Which factors determine how many goods and services a country can produce?

•  What determines the number of jobs available in an economy?

•  What determines a country’s standard of living?

•  What factors cause the economy to speed up or slow down?

• What causes organizations to hire or fire more labor on a national scale?

•   What causes the economy to grow over the long term?

• What the state of the nation’s economic health is, based on improvement in the standard of living, low unemployment, and low inflation(Inflation is the decline of purchasing power of a given currency over time)?

Macroeconomics is that branch of economics that deals with national aggregates as opposed to individual units. It concerns itself with an overall view of economic life. More specifically, it deals with the general price level rather than the prices of individual goods, national income rather than the income of an individual or a firm, and aggregate employment rather than employment in an individual firm. In another sense, macroeconomics is the study of governmental actions intended to regulate and stabilize the economy over time. The study of monetary policy, fiscal policy, and supply-side economics is also a part of macroeconomics.

The study of macroeconomics focuses on how economies function. It takes a broad view and seeks to understand the factors that influence economic growth, inflation, unemployment, and interest rates. It's a wide-ranging topic that includes everything from international trade to consumer spending patterns. Since these issues impact everyone, whether we are wealthy or poor, employed or unemployed, economists are interested in them.

Macroeconomics: the study of large economic groups and aggregates. Macroeconomics is also known as aggregative economics. A single production unit is a firm is the subject matter of microeconomics. The industry is a collection of businesses that make comparable or related products. It is the subject matter of macroeconomics.

In 1933, Ragnar Frisch used the Greek word "MACROS," which means enormous. The father of current macroeconomics is Professor J.M. Keynes. Following the Great Depression of 1929–1933, macroeconomics gained popularity.

The general theory of employment, interest, and money was written by professor J.M. Keynes in 1936. It addresses the aggregates, including the general price level, employment, national income, and output, Consequently, it is known as aggregate economics. Macroeconomics "deals with the functioning of the economy as a whole," claims Shapiro.

 The overall size and shape are examined. functioning of the economic experience's elephant rather than articulation or the size of the component pieces. It investigates the characteristics of the forest without reference to the trees that make up it. It is the big picture of production, consumption, distribution, investment, saving, interest, inflation, etc. 

In the words of K.E. Boulding, 'Macroeconomics deals not with individual quantities but with the aggregate of these quantities, not with individual incomes but with national income, not with individual prices but with price level, not with individual output but with national output'.

Objectives of Macroeconomics

• To explain principles, problems, and policies related to full employment and growth of resources.
• Macroeconomics seeks to explain how economic activity helps countries achieve their goals by offering a theory of the economy's components and the economy as a whole. 
• The interactions between various sectors of an economy must also be covered in the study. 
• Explaining changes in overall activity or output over time, including changes in pricing, income distribution (including tax revenue), and changing levels or rates of production or consumption, is the focus of macroeconomics.
•  It also explores the relationships between these elements and other elements including population growth rates, technological advancements, and governmental regulations.

Importance of Macroeconomics

To understand the working of the economy: Macroeconomics studies the economy in its aggregate form. It studies how macroeconomic variables are determined, how they are interrelated, and how the change in one macroeconomic variable influences other variables and aspects of the whole economy. Hence, it helps in knowing the functioning of the economy.

Helps in devising suitable policies: The problem of inflation, unemployment, and economic growth are the major reasons for headaches for both developed and underdeveloped countries. These problems carry so much weight that keeping them under a certain level can keep a government stable and failure to address such problems can collapse the whole government. The knowledge of the working of the economy and the interrelationship between economic variables helps the government to devise appropriate policies to solve these serious problems.

Helps in comparison: The macroeconomic indicators like GDP, Inflation, and Unemployment percentage act as the standard against which relative developments of countries over time can be compared. A country's relative development in the present can be known compared to the past.

To know the effectiveness of policies: Macroeconomics gives various tools and techniques to know the effectiveness of using various policies under given situations. Basically, the IS-LM model helps to know the policy effectiveness of using various policies. It also sheds light on the fact that sometimes a single policy cannot help to achieve the stated objectives and hence the judicious mix of both policies is necessary. Moreover, it helps to throw light on the fact that microeconomic laws do not apply under macro situations.

Scope of Macroeconomics

The scope of macroeconomics has been explained under Macroeconomic theories:-

👉Economic Growth and Development: As discussed in the macroeconomics discipline, the state of a nation's economy can be assessed in terms of the real per capita income. It explains various issues relating to privatization, liberalization, globalization, balanced development, poverty, inequality, etc.

👉Theory of National Income:-

Macroeconomics studies the concept of national income, its different elements, methods of its measurement, and social accounting.

👉Theory of Money: - 

Changes in the demand and supply of money affect the level of employment. Therefore, under macroeconomics functions of money and theories relating to money are studied.

👉Theory of International Trade:-

It also studies principles determining trade among different countries. Tariff protection and free-trade policies fall under foreign trade.

👉Theory of Employment:-

It studies the problems of employment and unemployment. Different factors determine employment. They are effective demand, aggregate demand, aggregate supply, total consumption savings, total investment, etc.

👉Theory of General Price Level:-

A continuous rise in the price level is called inflation. It distorts production. It increases inequalities in the distribution of income and wealth. The common man is injured by inflation. Deflation is the opposite of inflation. The general price level falls continuously. Output and employment levels fall. Macroeconomics provides an explanation for the occurrence of inflation and deflation.

👉 Theory of distribution:-

There are macroeconomic theories of distribution. These theories try to explain how the national output is distributed among the factors of production.

👉Theory of Business Fluctuations:-

It also deals with the fluctuations in the level of employment, total expenditure, income, output, and general price level.

👉Macroeconomic Policies:- 

For the welfare and development of the country, the government and central bank work together to decide on macroeconomic policies. Macroeconomics studies two types of macroeconomic policies. They are Monetary policies and fiscal policies.

Fiscal Policy: Fiscal policy is a type of budgetary choice that aims to address the income over-expenditure deficit. Fiscal policy deals with government revenue, government expenditure, government borrowing, and government budget.

Fiscal policy refers to the use of government spending and taxation to influence therall economic activity and achieve certain objectives. It involves decisions related to government revenue and expenditure to stabilize the economy and promote economic growth.

Types of Fiscal Policy:

Expansionary Fiscal Policy: This involves increasing government spending or reducing taxes to stimulate economic activity during times of recession or low growth.

Contractionary Fiscal Policy: This entails reducing government spending or increasing taxes to slow down economic activity and control inflation during periods of high growth.

Objectives of Fiscal Policy:

The main objectives of fiscal policy are:

Economic Stability: Fiscal policy aims to stabilize the economy by managing aggregate demand and maintaining price stability.

Economic Growth: Fiscal policy can be used to stimulate economic growth through increased government spending on infrastructure and investment.

Redistribution of Income: Fiscal policy can help reduce income inequality by implementing progressive tax systems and social welfare programs.

Full Employment: Fiscal policy can be employed to achieve full employment by increasing government spending and stimulating job creation.

Instruments of Fiscal Policy:

The key instruments of fiscal policy include:

Government Spending: Governments can increase spending on infrastructure, education, healthcare, and other sectors to stimulate economic activity.

Taxation: Governments can adjust tax rates and policies to influence disposable income and consumption patterns.

Transfer Payments: Governments can provide social welfare benefits and subsidies to individuals and businesses to support specific economic sectors.

Monetary Policy:

Monetary policy refers to the management of the money supply, interest rates, and credit conditions by a central bank to influence economic activity and stabilize the economy. Monetary Policy: Monetary policy deals with money supply, interest rate, foreign exchange rate, banking system, credit creation and control, price stability, and many other aggregate variables related to money and banking of an economy. The central bank and the government work together to create monetary policy. By controlling the various interest rates, these policies aim to sustain the nation's economic growth and stability. 

Types of Monetary Policy:

Expansionary Monetary Policy: This involves increasing the money supply, lowering interest rates, and providing easy credit to stimulate economic growth.

Contractionary Monetary Policy: This entails reducing the money supply, increasing interest rates, and tightening credit conditions to control inflation and cool down an overheating economy.

Objectives of Monetary Policy:

The main objectives of monetary policy are:

Price Stability: Monetary policy aims to maintain stable prices and control inflation within a target range.

Full Employment: Monetary policy seeks to achieve maximum employment levels by supporting a conducive economic environment.

Economic Growth: Monetary policy can stimulate economic growth by providing favorable borrowing conditions and supporting investment.

Instruments of Monetary Policy:

The key instruments of monetary policy include:

Open Market Operations: Central banks buy or sell government securities to influence the money supply and interest rates.

Reserve Requirements: Central banks set the minimum reserve ratio that commercial banks must hold, impacting their lending capacity.

Interest Rates: Central banks adjust the benchmark interest rates to influence borrowing costs and credit availability.

There is another policy in macroeconomics, called income policy. This policy directly controls prices and wages.

Types of Macroeconomics 

Macro static

Macro static studies the relationships between various macroeconomic variables such as aggregate consumption, aggregate income, and aggregate investment in the steady state representing a particular point in time. It does not explain the process through which the equilibrium is attained.

Key features include:

Equilibrium is static in nature and ignores the passage of time, so it cannot explain the process of the model change.

Macro statics assume that the equilibrium position of the economy is undisturbed, stable, or stationary.

It does not show the process that shows how the economy got there.

It only views an economy's final state of equilibrium and displays a static image of the economic system.

View a static picture of the economic system, looking only at the final equilibrium at point E.  45 degrees line(red line) represents the aggregate supply function whereas C+I represents the aggregate demand function. Mathematically, Y = C + I. This equilibrium shows that the equilibrium of national income is OY with aggregate demand EY.

Comparable Macro Static

Analysis of the shift in equilibrium from one position to another is known as comparative macro static. Therefore, it compares the macro variables' equilibrium positions at various moments in time. Macroeconomic factors are liable to change throughout time, and these changes can destabilize an economy's equilibrium state. A new balance is once again formed after a specific amount of time. Therefore, comparative macro statics focuses on comparing such equilibrium studies between the old equilibrium and the new equilibrium. It does not, however, examine the entire process of adjustment by which the economy moves from one equilibrium state to another.

Comparative macro statics studies two equilibrium position E1 and E2 and draw a conclusion.

Macro Dynamics

A dynamic system of motion is never in equilibrium. The macrodynamic analysis looks at how long it takes and what path it takes to establish a new equilibrium following its collapse because of a change in various

 macroeconomic variables. After a change in an independent economic variable, a new equilibrium is created. 

The following is a list of the main components of macrodynamic analysis.

 It explains how long it takes for macroeconomic variables to shift and their trajectory between the previous and new equilibrium positions

The study of economic phenomena about earlier and later occurrences is known as economic dynamics. It exemplifies the causes of the disruption and restoration of macroeconomic equilibrium.

Macro dynamics enable us to see a motion picture of the functioning of the economy as a progressive whole. It provides the cause and effect of how equilibrium E1 reached E2. 

Interdependence Between Microeconomics and Macroeconomics

The methods used in microeconomics and macroeconomics are distinct. When compared to macroeconomics, which focuses on the aggregates and sub-aggregates of the entire economy, microeconomics investigates the individual units of the entire economy.

However, micro and macroeconomics are intertwined because the parts have an impact on the whole and the whole has an impact on the parts. A  tree also has an impact on the forest.

Dependence of Microeconomics on Macroeconomics

Microeconomics examines the issues and actions of little economic entities. Each and every microeconomic variable is a subset of a macroeconomic variable. Microeconomics, for instance, examines the price of a specific commodity produced by a company, individual consumption, labor pay, etc. The study of these microeconomics topics includes a significant amount of macroeconomics. We are aware that a commodity's price is influenced by the forces of supply and demand. But the investigation is not over yet. The commodities produced by other companies,  the quantities of commodities, the types of commodities, the cost of production, etc. all have an impact on how much a certain commodity will cost. Similar to how a product's price and sales volume are influenced by factors like total employment, effective demand, national income, etc. Microeconomics also examines how a certain company chooses to set its employee's wages. However, the company must research the rates offered by other businesses in the economy to set their own salary rate. Similarly to this, the study of other factors of income like rent, interests,  and profits is the focus of microeconomics, but it is difficult to research these factors' incomes without also studying national income. Rent, for instance, is equal to national income minus (interest, profits, and wages). This factor of income is also determined by other aggregates, like total investment and saving, aggregate demand, employment levels, etc.

Macroeconomic Fundamental

Macroeconomic fundamentals are subjects that have an overall impact on an economy,

 such as statistics on unemployment, supply and demand, growth, and inflation, as 

well as monetary or fiscal policy issues and global commerce. These categories can

 be used to analyze a whole large-scale economy or to link to specific business activities 

to make adjustments depending on macroeconomic forces.

Macroeconomic Public Goals

By examining economic data and offering suggestions, a macroeconomist aims to address the economic issues that face nations. The three main goals of macroeconomics are to foster growth, reduce inflation, and preserve price stability. Let's discuss goals one by one.

Full Employment: Keynes highlighted the need for full employment, which is what macroeconomic policy aims to achieve. Employment alleviates the social and economic suffering that leads to suicide, family member murder, and the psychological harm endured by the unemployed.

Economic Growth: In the current global climate, every country's main problem is its growth rate. Major investments, human capital development, education, export promotion, and import substitution policies are the main variables determining the growth rate. Other approaches to increasing growth rates include minimizing taxes and increasing government effectiveness. The finest business practices are shared among countries through regular meetings between leaders and finance ministers, which supports the expansion of their economy.

Fair distribution of income: Economic equity is one of the goals of macroeconomic policy. It creates conditions for a high rise in revenue of low-income groups or to transfer the income from rich to poor.

Balance of Payments:  The difference between the payments a nation has made and received is its balance of payments. It encompasses all trade-related transactions, including imports and exports. For determining a country's economic health, the balance of payments is a crucial metric.

The aim of macroeconomics is to understand the factors that influence inflation, unemployment, and economic growth. Studying the balance of payments is crucial to accomplishing this goal. The balance of payments (BOP) measures a nation's import and export values about its overall output or revenue. The BOP also reveals whether a nation has more things than it can export or if it exports too many commodities relative to its domestic output.

The macroeconomic public goals are the objectives that a government seeks to achieve through its economic policies. These goals generally include:

Price stability - maintaining a low and stable rate of inflation.

Full employment - achieving maximum sustainable employment.

Economic growth - increasing the long-term capacity of the economy to produce goods and services.

Balance of payments stability - ensuring a sustainable balance of payments position, including a stable exchange rate.

Distributional equity - reducing income and wealth inequality.

Stable financial system - maintaining stability in the financial system and avoiding financial crises.

It is noted that these goals may sometimes conflict with each other, and trade-offs may need to be made.

Macroeconomic Problems

Overgeneralization:

 A situation when macroeconomics generalizes the conduct of all people in a specific category is known as an overgeneralization problem. For instance, one can draw the conclusion that everyone unemployed in a recession must be unemployed if they observe that the majority of individuals are unemployed during recessions. Because it disregards individual variances, this would be an oversimplification (e.g., some people may have lost their jobs due to poor management).

 Unemployment: Unemployment is the term used to describe the unwilling inactivity of resources, including labor. Because less output is created when there is unemployment, the economy is less able to deal with the scarcity issue. The income of unemployed resource owners is lower, and as a result, their standard of living is worse. Therefore, ensuring full employment, or the absence of involuntary unemployment, is one of the government's goals.

Debt and deficit in the public sector: Public sector debt and deficits are a concern because they have an impact on the national economy. For businesses and individuals to be able to borrow money at cheap interest rates, the government must pay off its debt. People will pay higher interest rates on loans they obtain from banks or other institutions if the government fails not to repay its debt. As a result, the cost of consumer loans will rise, pushing up the cost of goods and services. The forced layoffs brought on by rising production costs and declining sales profits, this will have an impact on employment numbers.

Extraordinary inequality: A situation of wealth and income distribution known as extraordinary inequality is incompatible with the operation of market forces. It is a result of government policies, or a lack thereof, that serve to safeguard particular interests at the expense of others who are employed.

Tax cuts for corporations and high-income individuals have contributed to the most prevalent type of extreme inequality in the United States, particularly in recent decades. Devastating consequences include stagnant wages, deteriorating public services, rising economic insecurity, and widening wealth disparities. Additionally, inequality is a result of monopolistic corporations and excessive executive salaries.

Low Economic Growth: Macroeconomics is the study of an economy's general health and individual economic indicators like GDP, the rate of inflation, the unemployment rate, etc. Lower economic growth will result if there are issues in any of these sectors.

Limitations of Macro Economics

👉The danger of excessive thinking in terms of aggregates: There is a danger of executive thinking in terms of aggregates that are not homogeneous. For example, 2 apples +3apples=5 apples mean full aggregate, similarly 2 apples +3 oranges are meaningful to some extent.

👉Aggregate tendency may not affect all sectors equally: For example, the general increase in price affects different sections of the community or the different sectors of the economy differently. The increase in the general level of price benefits the producers but hurts the consumers.

👉Indicates no change has occurred: The study of aggregates makes us believe that no change has occurred even if there is a change. It indicates that there is no need for a new policy. For example, a 5 percent fall in agricultural prices and a 5 percent rise in industrial prices do not affect the price level.

👉Difficulty in the measurement of aggregates: There are at times, difficulties in the measurement of aggregates. It is difficult to measure the big aggregates. This problem has now been more or less erased by the use of calculators and things that are not homogeneous.

👉 The fallacy of composition: The aggregate economic behavior is the sum of individual behavior. This is called fallacies of composition. What is true in the case of an individual may not be true in the case of the economy as a whole. For example, individual saving is a virtue, whereas public saving is a vice. 

👉It ignores the contribution of Individual Units: Macroeconomic analysis only throws light on the aggregates' functioning. However, in real life, the economic activities and decision taken by individual units on a private- level have their effects on the economy as a whole. 

👉Limited Application: Another limitation of macroeconomics is that most of the models relating to it have only theoretical significance. They have very little use in practical life. 

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