Macroeconomics is composed of two words, the Greek word – ‘makro’ meaning large, and economics meaning the branch of study that describes the factors determining the production, distribution, and consumption of goods and commodities.
Macroeconomics can thus be defined as the branch of economics that deals with the economy-wide phenomena such as national income, aggregate saving, aggregate consumption, unemployment, national income, etc. rather than individual phenomena.
According to K.E. Boulding, “Macroeconomics deals not with individual quantities but with an aggregate of these quantities, not with individual incomes but with national income, not with individual prices but with the price level, not with individual output but with the national output.”
Macroeconomics is more focused on the performance, structure, and behavior of the overall economy. It examines how general price level is determined and how resources are allocated at the level of the economic system as a whole.
Macroeconomics has become the major focus of economics and the basis for understanding the investment process and financial markets that exist in the economy.
Assumptions of Macroeconomics
The macroeconomic study depends on three major assumptions that are mentioned below:
- Prices are rigid or inflexible in the sense that, producers have a long-term contract with resource suppliers that specify resource prices.
- The consumption expenditures are based on the disposable income (i.e. the income that they actually possess) of the household sectors rather than the income that is available at full employment.
- Saving and investment are influenced by factors other than the interest rate. These factors can prevent equality between savings and investments or lead to equilibrium only at a negative interest rate.
Features of Macroeconomics
Analysis of aggregate demand and supply
Macroeconomics analyses the aggregate demand and supply model that explains the overall economic phenomena such as the GDP of a nation.
Study of aggregate economy
Macroeconomics studies the economic behavior of the entire economy rather than individual units.
Formulation of rules and regulations
The study of macroeconomic variables assists in the formulation and implementation of policies that develop an economy in the best interest of all the participants.
Assist in overall economic growth
The study of macroeconomic components like GDP, GNP, inflation rate, and unemployment rate helps to determine the overall economic growth of a given economy.
Limitations of Macroeconomics
In spite the growing importance, macroeconomics is not free from limitations. Some of its limitations are:
Problem in averaging
In order to determine the total national income, the general price level is found with the help of wholesale price index numbers. However, these index numbers cannot provide accurate data because they involve problems of weighing, averaging, etc.
Problems in measuring heterogeneous aggregates
One of the major defects in the macro analysis is that it considers aggregates as homogeneous with no concerns about their structure and composition. The volume of aggregate employment depends on the relative wage structure rather than the average wage. For instance, in a given economy, even when the wage of teachers increases, but decreases for nurses, the average may remain unaffected. But if employment for teachers decrease and there is an increasing job opportunity for nurses, aggregate employment would increase.
Unreliable estimates of aggregates
The aggregates used to estimate the overall economic growth may not be accurate because of the imperfect knowledge of the statistical tools. For instance, the increase in national income may be the cause of rise in income of only a few rich people in the economy. But this does not necessarily determine the increase in the income level of the rest of the individuals. Thus, the rise in national income has no significance.
Variations in degree of fluctuations
An aggregative change may not have the same influence in all sectors of the economy. For instance, a general rise in prices does not mean that the prices for all the commodities have risen. The price for some commodities may have decreased as well. Further, this aggregative change in price level may have a positive impact on certain parts of the economy, while negatively affecting others.