MACRO-ECONOMICS

Macroeconomics is the branch of economics that studies

the behaviour and performance of an economy as a whole.
It focuses on the aggregate changes in the economy such as
unemployment, growth rate, gross domestic product and
inflation.

Macroeconomics analyzes all aggregate indicators and the

microeconomic factors that influence the economy.
Government and corporations use macroeconomic models to
help in formulating of economic policies and strategies.

Macroeconomists look for ways to meet economic policy goals

and create economic stability. In doing so, they often attempt to
predict future levels of employment, inflation, and other key
economic indicators. These predictions affect decisions made
today by governments, individuals, and companies.

Macroeconomics confers considerable importance to the role

expectations play in an economy. It studies the effects of
anticipated and unanticipated changes, as well as the impact
caused when the changes are expected to be temporary versus
when they are expected to be permanent.

It is important to note the distinction between macroeconomics

and microeconomics. Whereas Macroeconomics looks at the
"big picture," microeconomics delves into the study of supply
and demand and factors that impact individual consumer
decisions. However, the two are inherently interrelated, as
small decisions at the microeconomic level will ultimately have
an impact on larger economic factors that influence the entire
economy.
IMPORTANCE OF MACRO-ECONOMICS
1.Functioning of an Economy:

Macroeconomic analysis is of paramount importance in getting us

an idea of the functioning of an economic system.

2. Formulation of Economic Policies

Macroeconomics is of great help in the formulation of economic
policies.

3. Understanding Macroeconomics:

The study of macroeconomics is essential for the proper

understanding of microeconomics. No Microeconomic law could
be framed without a prior study of the aggregates ; for example,
the theory of individual firm could not have been formulated
with reference to the behaviour pattern of one single firm.

4. Understanding and Controlling Economic Fluctuations:

Economic fluctuations are a characteristic feature of the capitalist
form of society.

6. Study of National Income:

It is the study of macroeconomics which has brought forward the
immense importance of the study of national income and social
accounts.

7. Study of Economic Development:

As a result of advanced study in macroeconomics, it has become
possible to give more attention to the problem of development of
underdeveloped countries.
 MICROECONOMICS
Macroeconomics is the branch of economics that studies an
economics decision making unit and considers in details the
behavior of that particular unit. It deals with the analysis of the
behavior and the economic actions of small individual units of the
economy.

IMPORTANCE OF MICRO-ECONOMICS
1. Microeconomics occupies a vital place in economics and it has
both theoretical and practical importance. It is highly helpful in
the formulation of economic policies that will promote the
welfare of the masses

2. Microeconomic theory facilitates the understanding of what

would be a hopelessly complicated confusion of billions of facts
by construction simplified models of Behaviour which are
sufficiently similar to the actual phenomena to be of help in
understanding the

3. Microeconomic theory shows that welfare optimum of economic

efficiency is achieved when there prevails perfect competition in
the product and factor markets. Perfect competition is said to
exist when there are so many sellers and buyers in the market
that no individual seller or buyer is in a position to influence the
price of product or factor.

4. It also makes important and useful policy recommendations to

regulate monopoly so as to attain economic efficiency or maximum
welfare.

5. Microeconomic analysis is also useful applied to the various

applied branches of economics such as Public Finance,
International Economics.
MACRO-ECONOMIC VARIABLES
1.GROSS DOMESTIC PRODUCT:
Gross domestic product (GDP) is the monetary value of all the
finished goods and services produced within a country's
borders in a specific time period. Though GDP is usually
calculated on an annual basis, it can be calculated on quarterly
basis as well (in the United States, for example, the government
releases an annualized GDP estimate for each quarter and also
for an entire year).

GDP includes all private and public consumption, government

outlays, investments, private inventories, paid-in construction
costs and the foreign balance of trade,exports are added,
imports are subtracted. Put simply, GDP is a broad
measurement of nations overall economic activity It may be
contrasted with gross national product (GNP), which measures
a the overall production of an economy's citizens, including
those living abroad, while domestic production by foreigners is
excluded.

2.UNEMPLOYMENT RATE:
The unemployment rate is the share of the labour force that is
jobless, expressed as a percentage. It is a lagging indicator, meaning
that it generally rises or falls in the wake of changing economic
conditions, rather than anticipating them. When the economy is in
poor shape and jobs are scarce, the unemployment rate can be
expected to rise. When the economy is growing at a healthy rate and
jobs are relatively plentiful, it can be expected to fall.

Unemployment occurs when a person who is actively searching for

employment is unable to find work. Unemployment is often used as
a measure of the health of the economy. The most frequent measure
of unemployment is the unemployment rate, which is the number of
unemployed people divided by the number of people in the labour
force.
3.INFLATION:
Inflation is a quantitative measure of the rate at which the
average price level of a basket of selected goods and services in
an economy increases over a period of time. Often expressed as
a percentage, inflation indicates a decrease in the purchasing
power of a nation’s currency. As prices rise, they start to impact
the general cost of living for the common public and the
appropriate monetary authority of the country, like the central
bank, then takes the necessary measures to keep inflation
within permissible limits and keep the economy running
smoothly. Inflation is measured in a variety of ways depending
upon the types of goods and services considered, and is the
opposite of deflation which indicates a general decline
occurring in prices for goods and services when the inflation
rate falls below 0 percent.

4.INTREST RATE:
Interest rate is the amount charged, expressed as a percentage
of principal, by a lender to a borrower for the use of assets.
Interest rates are typically noted on an annual basis, known as
the annual percentage rate (APR). The assets borrowed could
include cash, consumer goods, and large assets such as a vehicle
or building.
Interest is essentially a rental, or leasing charge to the
borrower, for the use of an asset. In the case of a large asset,
like a vehicle or building, the interest rate is sometimes known
as the lease rate. When the borrower is a low-risk party, s/he
will usually be charged a low interest rate; if the borrower is
considered high risk, the interest rate that they are charged will
be higher.
5.CONSUMER PRICE INDEX:
The Consumer Price Index (CPI) is a measure that examines the
weighted average of prices of a basket of consumer goods and
services, such as transportation, food and medical care. It is
calculated by taking price changes for each item in the
predetermined basket of goods and averaging them.

Changes in the CPI are used to assess price changes associated

with the cost of living; the CPI is one of the most frequently
used statistics for identifying periods of inflation or deflation.

CPI is widely used as an economic indicator. It is the most

widely used measure of inflation and, by proxy, of the
effectiveness of the government’s economic policy.

The CPI gives the government, businesses and citizens an idea

about prices changes in the economy, and can act as a guide in
order to make informed decisions about the economy.

The CPI and the components that make it up can also be used
as a deflator for other economic factors, including retail sales,
hourly/weekly earnings and the value of a consumer’s dollar to
find its purchasing power. In this case, the dollar’s purchasing
power declines when prices increase.

6.EXPORT:
An export is a function of international trade whereby goods
produced in one country are shipped to another country for
future sale or trade.

Exports are a crucial component of a country’s economy, as the

sale of such goods adds to the producing nation's gross output.

One of the oldest forms of economic transfer, exports occur on

a large scale between nations that have fewer restrictions on
trade, such as tarrifs or subsidies.
7.IMPORT:
An import is a good or service brought into one country from
another. The word "import" derives from the word "port" since
goods are often shipped via boat to foreign countries. Along
with exports, imports form the backbone of international trade.

If the value of a country's imports exceeds the value of its

exports, the country has a negative balance of trade (BOT), also
known as a trade deficit.

Free-trade agreements and a reliance on imports from

countries with cheaper labor often seem responsible for a large
portion of the decline in manufacturing jobs in the importing
nation. Free trade opens the ability to import goods and
materials from cheaper production zones and reduces reliance
on domestic goods.

The impact on manufacturing jobs was evident between 2000

and 2007, and it was further exacerbated by the Great
Recession and the slow recovery afterward.

8.SAVINGS:
Savings, according to Keynesian economics, are what a
person has left over when the cost of his or her consumer
expenditure is subtracted from the amount of disposable
income earned in a given period of time.

For those who are financially prudent, the amount of money

left over after personal expenses have been met can be positive;
for those who tend to rely on credit and loans to make ends
meet, there is no money left for savings.

Savings can be used to increase income through investing in

different investment vehicles.
9.Investment Function:
It refers to any expenditure made by people ,or government,or
any organisation to earn profit in future is called investment
function.

In consumption,no income generation for future is done.

TYPES OF INVVESTMENTS

1.GROSS INVESTMENT - The total lumpsum investment made

during any particular time interval is called gross investment.

2.NET INVESTMENT-Total gross investment minus

replacement investment is called net investment.

REPLACEMENT INVESTMENT:

The cost of replacementof any commodity after its useful life is

over is called replacement investment.

I=Ir +Io

Ir=induced investment

Io=autonomous investment

10.FISCAL DEFECIT:
A fiscal deficit occurs when a government's total expenditures
exceed the revenue that it generates, excluding money from
borrowings. Deficit differs from debt, which is an accumulation of
yearly deficits.

A fiscal deficit is regarded by some as a positive economic event. For

example, economist John Maynard Keynes believed that deficits
help countries climb out of economic recession. On the other hand,
fiscal conservatives feel that governments should avoid deficits in
favour of a balanced budget policy.
11.DEFECIT FINANCING:
It is the type of financing done to to overcome the defecit of the
budget of the government.

There are basically ways to do this type of financing:

1.LOAN FROM OTHER COUNTRIES:

This is one of the method of defecit financing in which the

government borrows money from other countries.This method
is very expensive as the intrest at which other countries provide
loan are very high and so this method is not so popular.

2.BORROWING LOAN FROM DOMESTIC MARKET:

In this method government borrows money from domestic

market to finance its defecit,as the intrest charged is still very
high in this method also,it is not so popular.

3.BORROWING LOAN FROM CENTRAL BANK:

This is the most popular method of defecit financing in which

the government demands money from the central banks (RBI in
case of india)as they do not have to return the money back to
the central bank.therefore this is the most used method.RBI
does this by printing more currecy recklessly which increases
the flow of money in the market.
LIMITATIONS OF MACRO-ECONOMICS.

1. Excessive Generalisation:
Despite the immense importance of macroeconomics, there is the
danger of excessive generalisation from individual experience to the
system as a whole.

If an individual withdraws his deposits from the bank, there is no-

harm in it, but if all the persons rushed to withdraw deposits, the
bank would perhaps collapse.

2. Excessive Thinking in terms of

Aggregates:
Again, macroeconomics suffers from excessive thinking in
terms of aggregates, as it may not be always possible to have the
homogeneous constituents. Prof. Boulding has pointed out that
2 apples + 3 apples = 5 apples is a meaningful aggregate ; 2
apples + 3 oranges = 5 fruits may be described as a fairly
meaningful aggregate ; but 2 apples + 3 sky scrapers constitute
a meaningless aggregate ; it is the last aggregate which brings
forth the fallacy of excessive aggregative thinking.

3.Heterogeneous Elements:
It may, however, be remembered that macroeconomics deals
with such aggregates as aggregate consumption, saving,
investment and income, all composed of heterogeneous
quantities. Money is the only measuring rod. But the value of
money itself keeps on changing, rendering economic aggregates
immeasurable and incomparable in real terms. As such, the
sum or average of heterogeneous individual quantities loses
their significance for accurate economic analysis and economic
policy.
4. Differences within Aggregates:

Under this approach one is likely to overlook the differences

within aggregates. For example, during the first decade of
planning in India (from 1951-1961) the national income
increased by 42% ; this, however, doesn’t mean that the income
of all the constituents, i.e., the wage earners or salaried persons
increased by as much as that of entrepreneurs or businessmen.
Hence, it takes no account of differences within aggregates.

5. Aggregates must be functionally

related:

The aggregates forming the main body of macroeconomic

theory must be significant and mutually consistent. In other
words, these should be functionally related. For example,
aggregate consumption and investment expenditures—which
form part of the macroeconomic theory (Y = C + I) would have
no importance, if they were not functionally related to the levels
of income, interest and employment. If these composing
aggregates are mutually inconsistent or are not functionally
related, the study of macroeconomic theory will be of little use.

6. Limited Application:

Macroeconomics deals with positive economics in the sense of

an analysis or how the aggregate theoretical models work—
these are far removed from policy applications. These models
explain the functioning of an economy and working of things in
abstract and precise terms. Their abstraction and precision
make such models unsuitable for use due to changes in
significant variables from time to time and from one situation
to another. But these limitations may be taken more in the
nature of practical difficulties in formulating meaningful
aggregates rather than factors invalidating the immense
importance of macroeconomic analysis