Nature and Scope of Macro Economics

Economics

Economics is the science that deals with production, exchange and consumption of various commodities in economic systems.

It shows how scarce resources can be used to increase wealth and human welfare.

The central focus of economics is on scarcity of resources and choices among their alternative uses.

The word ‘Economics’ was derived from two Greek words,

oikos (a house) and nemein (to manage)

which would mean ‘managing an household’ using the limited funds available, in the most satisfactory manner possible

Economics

i) the existence of unlimited human wants andii) the scarcity of available resources.

The prefix 'macro' is derived from the Greek word

'makros' meaning, 'large'.

Macro economics is the study of the economy as a

whole.

Macro economics " deals with the functioning of the

economy as a whole.”

Macro Economics

"Macro economics deals not with individual quantities as such but with aggregate of these quantities; not with individual incomes but with national income; not with individual prices but with the price level; not with individual outputs but with the national output."

- Prof. Boulding

Theory of income &

employment

Macro E study forest whereas in micro it is tree

• So Macro Economics studies economic problemsfrom the point of view of entire economy.

• Boulding says, “Macro economic theory is thatpart of economics which studies the over allaverages and aggregates of the system.”

• According to Shapiro, “ Macro economics dealswith the functioning of the economy as a whole.”

Macro Economics

Scope/Subject-Matter of Macro Economics

Theory of National Income

Theory of Output and Employment

Theory of General Price Level

Theory of Economic Growth

Theory of International Trade

Theory of Money

Importance of Macro economics

Understanding the

working of the

economy

Understanding the

major issues

facing the economy

Study of national income

Insight into micro economics

Useful in formulatin

g governme

nt's economic policies

International

comparison

Economic planningInter relation among different sectors

MicroeconomicsIt deals with an individual's economic

behavior.

It deals with the pricing of a particular commodity in an industry.

Price is the basic parameter of micro economics.

It is important for resource utilization, public finance, and for

taking business decisions.

It deals with aggregate economic behavior of the people in general.

It deals with the general price level in the economy, National income

accounting, etc.

Income is the basic parameter of macro economics.

It is important for formulation of economic policy of the whole nation.

Macroeconomics

Price Determination Income determination

The concepts of micro-economics are independent concepts.

The concepts were popularized by the famous Alfred Marshall.

These concepts have more theoretical value.

Bottom up view of the economy

The concept of macro economics are interdependent

on one another.

The concepts were popularized by the famous Lord J.M. Keynes.

These concepts have more practical value.

Top down view of the economy

Microeconomics Macroeconomics

markets soon create equilibrium

economy may be in a state of disequilibrium (boom or

recession)

Objective- Profit Motive Objective- Economic, price stability, fullemployment…

Limitations of Macro Economics

• Fallacy of composition (savings are a private virtue but a public vice)

• Dependence on individual units• Heterogeneous units (average wage in a nation)• Aggregate variables may not importantly necessary.

(A hike in national income does not mean that individual incomes have risen)

• Different effects of aggregates (Different units Ap)• Limited application• It ignores the contribution of individual units• Danger of excessive generalisation from individual

experience (Ex. Bank cash withdrawal)• Statistical and conceptual difficulties