Chapter 1- Introduction to Macroeconomics

Very Short Question Answer

1. What is Macroeconomics?

Macroeconomics is the branch of economics which deals with economy as a whole. In other words, it is the study very large economy-wide aggregate variables like national income, money, price level, unemployment, economic growth rates etc.

2. Point out the scope of microeconomics.

The scope of macroeconomics can be pointed out as follows:
i. Theory of national income
ii. Theory of employment
iii. Theory of money
iv. Theory of general price level
v. Theory of economic growth
vi. Theory of international trade

3. Why macroeconomics is also called theory of income and employment?

Macroeconomics is also called theory of income and employment because it basically focuses on the study of determination of level of equilibrium income and employment in the economy.

4. Why macroeconomics is called lumping method?

Macroeconomics is called lumping method because its splits up the economy into big lumps for the purpose of the study.

5. Make a list of uses of macroeconomics.

Uses of macroeconomics are as follows:
i. Helpful to understand the working of the economy.
ii. Helpful in formulating economic policies.
iii. Helpful in controlling economic fluctuations.
iv. Helpful in international comparisons.
v. Helpful to evaluate performance of the economy.

Short Question Answer

1. Define macroeconomics. Explain its scope.

Macroeconomics is defined as the branch of economics which deals with the economy as a whole. In other words, macroeconomics is the study of very large, economy-wide aggregate variables like national income, money, price level, unemployment, economic growth rate, etc. Thus, macroeconomics deals with the phenomena related to the level and growth of national income and employment and various factors governing their trends. Therefore, macroeconomics is also known as the “Theory of Income and Employment”.
SCOPE OF MACROECONOMICS:
The area covered by macroeconomics is called scope of macroeconomics. The scope of macro economics includes the aggregate or total economic activities of an economy. The scope of macroeconomics can be explained as follows:

i. Theory of national income: Macroeconomics studies the concept of national income, its different elements, methods of measurement and social accounting. It also deals with difficulties and importance of national income accounting.

ii. Theory of employment: Macroeconomics also studies problems relating to employment and unemployment. It studies different factors determining the level of employment such as effective demand, aggregate demand, aggregate supply, aggregate consumption, aggregate investment, aggregate saving, multiplier etc.

iii. Theory of money: Changes in demand for and supply of money have considerable effect on the level of income and employment. Macroeconomics, therefore, studies functions of money and theories relating to it. Banks and other financial institutions are also part of its study.

iv. Theory of general price level: Determination of and changes in general price level are also studied under macroeconomics. Problems concerning inflation or general rise in prices and deflation or general fall in prices are also studied under macroeconomics.

v. Theory of economic growth: Study of problems relating to economic grow or increase in real per capita income forms a part of macroeconomics. It studies the economic growth of both developed and underdeveloped economies. Monetary and fiscal policies of the government are also studios therein.

vi. Theory of international trade: Macroeconomics also studies trade among different countries. Theories of international trade, tariff and protection, etc. are subjects of great significance to macroeconomics.

2. Define macroeconomics. Explain the uses or importance of macroeconomics.

DEFINITION OF MACROECONOMICS
Please refer to Q. No. 1

The major uses or importance of macroeconomics are as follows:

i. Helpful to understand the functioning of the economy: Macroeconomics helps to understand how the macroeconomic variables behave in aggregate. Macroeconomic variables such as national income, aggregate output, gross saving and investment, national expenditure, etc. are very essential to understand the functioning of the economy.

ii. Helpful in formulating economic policies: Macro economic analysis provides a sound basis for the formulation of government’s economic policies. Such economic policies for the removal of poverty, unemployment and inflation must be based upon reliable statistics of the aggregate variables. And such aggregate variables are studied in the macroeconomics.

iii. Helpful in controlling economic fluctuations: Economic fluctuations like trade cycle, inflation, deflation, etc. need to be handled appropriately in appropriate period to correct them. To provide a finite direction to the economy knowledge of macroeconomics is essential.

iv. Helpful in international comparisons: Only macroeconomic variables like national income, total output, aggregate demand, consumption behaviour and investment patterns of different countries can be easily compared. Thus, macroeconomics provides the necessary information for the international comparison.

v. Evaluate performance of the economy: Macroeconomics is very useful to evaluate performance of the economy. National income which is prime macroeconomic variable is the barometer that scales the growth of a country. It analyses the overall performance of the economy within a given period of time.

vi. To develop and expand the microeconomics: Study of macroeconomics is essential for the development and expansion of microeconomics. For example, the theories of, microeconomics such as law of demand, law of diminishing marginal utility, consumer’s surplus etc. are based on collection of experience of mass consumers.

vii. Helpful to understand international trade: The entire world is engaged in international trade and macroeconomics helps to understand international trade structure of a country. Besides, macroeconomics also helps to analyze benefit of international trade as well as designing an appropriate trade policy.

viii. Useful in business decisions making: Macroeconomics is very useful in business decision making. The overall economic activity such as national income and employment, aggregate demand and supply conditions, fiscal and monetary policies of the government, rate of inflation etc. affect business firms. These aggregates of the economy make up overall business environment, which affects business decision making.

3. Define macroeconomics. Explain its limitations.

DEFINITION OF MACROECONOMICS
Please refer to Q. No. 1

The limitations of macroeconomics are as follows:

i. Dependence on individual units: Several conclusions of macroeconomics are based on the sum total of individual units. In fact, it is not correct, because what is true for individuals may not necessarily be true for the whole economy. For example, an individual saving may be good for his future but if everybody start saving, the aggregate demand will fall causing reduction in national income.

ii. Heterogeneous units: Under macroeconomics, heterogeneous units are studied. These units are measured in different ways. It is not possible to express these units in uniform numbers or homogeneous measure. Such units are measured in terms of money in macroeconomics. However, money value is not the true measure of their value-in-use.

iii. The composition of structure of the aggregate is more important than the aggregate itself: Macroeconomics studies aggregate but as matter of fact, it is the composition of the structure of the aggregate which influences an economy more than the aggregate itself. Supposing, price-level in 2014 and 2015 may remain constant but it does not imply that no change in prices took place in 2015. It is possible that prices of food grains might have fallen in 2015 and that of industrial goods might have risen correspondingly, keeping the general price-level constant

iv. Different effects of aggregates: Another difficulty in the study of macroeconomics is that it does not study the different effects of an aggregate on different sectors of an economy. In other words, macroeconomic tendency has not a uniform effect on all sectors of an economy. For example, rise in price-level benefits the traders and the industrialists but the wage-earners are the losers.

v. 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. Moreover, it is very difficult to measure various aggregates of macroeconomics.

vi. It ignores the contribution of individual units: Macroeconomic analysis throws light only on the functioning of the aggregates. However, in real life, the economic activities and decisions taken by individual units on private-level have their effects on the economy as a whole. Such effects are not known by the study of macroeconomics alone.

4. Explain the interdependence of microeconomics and macroeconomics.

Or, Explain how microeconomics and macroeconomics are interdependent with each other.
Or, Show the relationship between micro and macroeconomics.

Microeconomics is the study of individual parts of an economy whereas macroeconomics is the study of an economy as a whole. But, it is quite wrong to think that the two approaches are separate, different and unconnected to each other. In fact, neither approach is complete without the other, though economists might emphasis one or the other of the analysis according to their convenience. The two approaches are not competitive but complementary to each other. The dependence between micro and macroeconomics can be explained as follows:

i. Dependence of microeconomics on macroeconomics: Economic activities related to individuals such as output of a firm, price of commodity, individual demand or consumption, determination of wages etc. are studied under microeconomics but these microeconomic activities are dependent on macroeconomics. For example, consumption is the subject matter of microeconomic analysis but it depends upon the consumption of goods and services by the whole society. The consumption of goods and services by the society is studied under macroeconomics. Similarly, the determination of price of a commodity depends upon general price level in the economy. The determination of general price level is the subject matter of macroeconomics where determination individual price is the subject matter of as microeconomics. Hence, microeconomic is dependent upon macroeconomic.

ii. Dependence of macroeconomics on microeconomics: Economic activities related to aggregates such as national income, total output, general price level etc. are studied under macroeconomics but these macroeconomic variables are the total sum of microeconomic variables. For example, national income is the subject matter of macroeconomics but it is calculated by the total sum of individual incomes. The study of individual income is the subject matter of microeconomics. Similarly, determination of price level is the subject matter of macroeconomics but it is the average of all prices of individual goods and services. Thus, macroeconomics is dependent upon the microeconomics.

Thus, we cannot understand economic system completely unless we integrate the two approaches in a wise manner. Ignoring one and concentrating attention on the other alone may often lead not only to inadequate or wrong explanation but also to inappropriate or even disastrous remedial measures.