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Meaning:
The word macro is derived from the Greek word ‘makros’ means large. It is the
study of economy as a whole. It is concerned with study of aggregate economic
variable like national product, general level of price, aggregate consumption and
investment, etc..
It deals with
Role of government policy regarding expenditure and taxation and money supply?
Scope of Macroeconomics
The study areas of macroeconomics includes
Importance of Macroeconomics
7. Last but not the least, is that macroeconomic theory has saved us from the
dangers of application of microeconomic theory to the problems of the
economy as a whole.
Limitation of Macroeconomics
1. Most macroeconomic conclusion is based on aggregates of individual
behavior. But, what is true for individual might not be true for economy as a
whole.
2. The aggregates of macroeconomic variables are heterogeneous in nature and it
is very difficult to sum such variables in reality. And result based on aggregate
is not accurate.
3. Aggregate doesn’t tell about internal composition of the economy.
4. Due to heterogeneous nature of variables it is statistically difficult to measure
such variables in aggregate.
5. Variables of macroeconomics are calculated within specific time period but
due to randomness of behavior of individual in reality there may arise error in
aggregation.
6. The aggregate variables which form the economic system may not be of much
significance. For instance, the national income of a country is the total of all
individual incomes. A rise in national income does not mean that individual
incomes have risen.
Difference between Macroeconomics and Microeconomics
Microeconomics Macroeconomics
It deals with individual
It deals with aggregates or averages
decision making.
of entire economy.
Takes into account of small
components of whole Takes into consideration of economy
economy. as a whole.
Areas of study of
Areas of study of macroeconomics
microeconomics include
include theory of income and
consumer behavior, price
employment, theory of economic
theory, and theory of
growth, theory of price level and
production.
inflation.
Stock variables:
A stock is measured at one specific time, and represents a quantity
existing at that point in time. For example, total amount of wealth of an
individual on 2075 B.S. such variable are accumulated in past.
A flow variable is measured over an interval of time. Its value is
represented in per unit of time per week, per hour, per day, etc.
For example rate of speed, GDP per year, consumption, saving, etc.
Variables like stock of capital goods, money supply, price level, are
stock variables and investment, GDP, inflation, and consumption are
flow variables.
Sometimes change in value of stock over different time period is a flow
variables like change in stock of capital goods is investment of a period.
Similarly, change in flow variables causes accumulation of value of
stock variable.
Macro static
Macro-statics analysis explains the static equilibrium position of the
economy. Value of macro static analysis relates to particular point of
time. Economic statics refers to a timeless economy. It neither develops
nor decays. It is like a snapshot photo from a ‘still’ camera which would
be the same whether the previous and subsequent positions of the
economy were subject to change or not. For example the two sector
Keynesian model equation is given by
Y=C+I
Here the value of income(Y), consumption(c), and investment(I)
resembles same particular point of time and equilibrium level of income
is determined at that time. This macro-static model is illustrated in
Figure 1.
Here aggregate demand (C+I) is interacted with 45 degree of income
line at ‘E’. And OY is equilibrium level of income. It is timeless
adjustment of equilibrium position.
Comparative Statics:
Comparative statics is the method of analysis in which different
equilibrium situations are compared. In economics, comparative statics
is the comparison of two different economic outcomes, before and after
a change in some underlying exogenous parameter. In static equilibrium
relates to particular determining factor which is often called data in
economics are held constant. But in comparative static comparison of
different equilibrium that relates to different set of data is compared.
It’s like taking two snap shots of moving car at different time and then
compared.
Here in above figure, aggregate demand and aggregate supply model,
initially equilibrium position is at e1 now due to certain exogenous
change aggregate demand shifts upward and new equilibrium is formed
at e2. Now comparative static compare price change and quantity
change at two different equilibrium.
Macro Dynamics
Dynamic analysis traces the path from one equilibrium position to
another equilibrium position. One variable relation of a particular time
period depends on value of another variable of different time period it is
called dynamic relationship between the variables or time lag relation. It
is also a state of disequilibrium.
In the figure E0 is initial equilibrium where C+I is equal to 45 degree
line. If investment(I) increases c+I shifts upward and intersect at En.
Macro dynamic studies how this new equilibrium position is obtained.
It traces the time path of all disequilibrium within two equilibrium.