The term ‘Macro’ language has its origin in the Greek language term `Makros’ which means ‘large’. Therefore macroeconomic studies economic problems of the entire economy.
Macro-economics involves the study of aggregates or averages which cover the entire economy, such as total employment, national income. Alternatively, it is cumulative economics that examines the inter-relations among the various aggregates, their determination, and causes of fluctuations in them. The theory of income and employment is another name of macro-economics or simply income analysis.
According to Boulding, “Macro-economics theory is that part of economics which studies the overall averages and aggregates of the system”.
According to Ackley Gardner, “Macro-economics concerns with such variables as the aggregate volume of the output of an economy, with the extent to which its resources are employed, with the size of national income and with the general price-level”.
- 1 Importance of Macro Economics
- 1.1 1) Helpful in Understanding the Functioning of an Economy:
- 1.2 2) Study of National Income:
- 1.3 3) Formulation of Economic Policy:
- 1.4 4) Study of Trade Cycles:
- 1.5 5) Change in the General Price Level:
- 1.6 6) Economic Growth:
- 1.7 7) Helpful in the Study of Micro Economics:
- 1.8 8) Estimate of Material Welfare:
- 1.9 9) International Comparisons:
- 1.10 10) Economic Planning:
- 1.11 11) Inter-Relationship among Different Sectors:
- 1.12 12) Helpful in Understanding Macro Economic Paradox:
- 2 Limitations of Macro Economics
Importance of Macro Economics
The main importance of the study of macro-economics is as follows:
1) Helpful in Understanding the Functioning of an Economy:
The modern economy has become very complex due to its diversification. Therefore, to understand the interdependence and influences of various components of the economy, it has become necessary to understand the working of an economy.
2) Study of National Income:
The overall comprehension of the economy as a whole is imperative to formulate the policies targeting an optimum level of national income and welfare programs to have an effective impact. Macro-economics facilitates in understanding these.
3) Formulation of Economic Policy:
In modem days before making the economic policies, the government takes into consideration the national income, total employment, investment deficiencies and scope, general price level and saving rates. This makes the study of macro-economics desirable for formulating such policies.
4) Study of Trade Cycles:
Macro Economics is helpful in understanding the causes of slow-down and accelerations in the economy and the ways to keep these under desirable limits. Therefore, how the trade cycle is influenced by the aggregate demand, consumption, employment levels are necessary to be understood. For this, the study of macroeconomics is quite helpful.
5) Change in the General Price Level:
The purchasing power of money undergoes changes continuously impacting the general price level. The study of macro-economics facilitates decision-makers in minimizing their impact, reversing the adverse effects causing avoidable harms and to ensure economic stability.
6) Economic Growth:
The study of macroeconomics helps in formulating the policies to achieve and sustain the desired optimum level of economic growth.
7) Helpful in the Study of Micro Economics:
The individual unit’s function within the overall environment is created by the macroeconomic factors. Therefore, the functioning and regulation of micro-units are facilitated by the study of macroeconomics.
8) Estimate of Material Welfare:
The accurate measurement of the rise or fall in material welfare cannot be possible without understanding the aggregates of income, consumption, and level of employment.
9) International Comparisons:
Comparison of rate of per capita income, investment-rate, consumption and saving levels of different economies is done through the study of macro-economics. Determination of exchange-rates of different countries is possible through macro-economic analysis alone.
10) Economic Planning:
In the modern world, economic planning has gained importance. For a suitable economic plan, it is desirable to have an insight into the interdependence and interaction among the various segments. The compositions of the GDP, its structure, nature of poverty which is the part of macroeconomics help us in planning.
11) Inter-Relationship among Different Sectors:
It is most important to acknowledge that various segments of the economy influence each other. No segment functions in isolation. Therefore, the study of macro-economics is of great help to understand the inter-segmental influences of the level of investment and that of employment.
12) Helpful in Understanding Macro Economic Paradox:
These contradictory trends refer to the principles which may hold good in the economy as a whole but may not be working for individual units and vice-versa.
In short, macro-economics is of great importance to understand various factors such as aggregate demand, aggregate investments and the level of employment in the national economy. It also helps us to accede to the fact that all these factors are inter-related.
Limitations of Macro Economics
The main limitations of macroeconomics are as under
1) Dependence on Individual Units: Several conclusions of macroeconomics are based on the sum total of individual units.
2) Heterogeneous Units: Macroeconomics studies are based on the aggregates of heterogeneous units. Whereas, in the real world these are measured in different manners and may not have the exact level of accuracy. We do not have homogeneous units in the real economy.
3) Composition of Structure of the Aggregate is more Important than the Aggregate itself: Macro-economics is based on the aggregates and not on the different structures of the aggregates. The same aggregates with a different composition may be in the conclusions itself. Therefore, the components and their share in the aggregates are sometimes more important than the aggregates looked in isolation.
4) Different Effects of Aggregates: The macro-economics studies the effect of aggregates in the economy as a whole. But, the aggregates in different segments behave differently. It limits the applications of conclusions to that extent.
5) Limited Application: Though the theories of macro-economics appear quite logical in the practical world, these do not apply in exactly similar fashions. There are variations in theory and practice. The difficulty in measuring the aggregates imposes a big limitation on its application.
6) Ignores the Contribution of Individual Units: In the real world, the decisions are taken for individual units and their aggregates may not lead us to identical conclusions. Macro-economics takes into account only the aggregates and ignores the variations of individual units.