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BASIC CONCEPT OF
MACRO ECONOMICS
Definition of Macro economics
• Macro economics deals with total or aggregate
level of output, aggregate level of consumption,
aggregate level of investment, aggregate level of
employment and general price level in economy.
– Unemployment
– Inflation
– Output growth
1. Unemployment
Unemployment refers to the situation where the population of a
country do not find work to earn their livelihood.
• Unemployment represents that ratio of labor force which fails to get
employment.
• The currently 40% of Afghanistan population is unemployed.
• The unemployment rate is a key indicator of the economy’s health.
• The existence of unemployment seems to imply that the aggregate
labor market is not in equilibrium.
Problem of Unemployment:
Classical economist believed in full employment i.e. all recourses of
economy are fully employed and there is no possibility of
unemployment. But
Great depression of 1930 brought a lot of miseries in form of slump
and vast unemployment. So Keynes wrote a book in 1936 “General
theory” in which he rejected the philosophy of full employment .
2. Inflation
• Inflation is an increase in the overall price level.
• Hyperinflation is a period of very rapid increases in the
overall price level. Hyperinflations is a rare phenomenon.
• Deflation is a decrease in the overall price level. Prolonged
periods of deflation can be just as damaging for the
economy as sustained inflation.
Problem of Unemployment:
• During 1930 the phenomena of unemployment got a lot of
attractions. Policy makers presented their ideas to remove
unemployment .
• So Government tried to provide better social and economic
service due to which Government expenditures went on
increasing.
3. Output and Growth
• Growth refers to change in the level of economic
activity from one year to another year.
• Growth means that poor and developing countries
wish to attain a rise in their national income and per
capita income.
• Aggregate output is the total quantity of goods and
services produced in an economy in a given period.
• The aggregate output is the main measure to see
how well an economy is doing.
3. Problem of growth
• It is of a great concern for economists that what should
be the level of rise in investment that the economy can
achieve its desired level of income and employment
without inflation and deflation. Such a situation will
result the full utilization of resources.
• Full employment means the maximization of output &
employment in presence of existing recourses while
growth is attach with increase in output & employment
NATURE & SCOPE OF
MACROECONOMICS
• Macroeconomics is the study of aggregates or averages
covering the entire economy, such as total employment,
national income, national output, total investment, total
consumption, total savings, aggregate supply, aggregate
demand, and general price level, wage level, and cost
structure.
• Macroeconomics is also known as the theory of income and
employment, or simply income analysis. It is concerned
with the problems of unemployment, economic
fluctuations, inflation or deflation, international trade and
economic growth. It is the study of the causes of
unemployment, and the various determinants of
Scope of macroeconomics
As a method of economic analysis
macroeconomics is of much theoretical and
practical importance.
– governs the terms on which international trade
and investment take place
– nominal exchange rate is the rate at which
monies of different countries can be exchanged
for one another
– real exchange rate is the rate at which the goods
and services produced in different countries can
be exchanged for one another
Importance of Macroeconomics
• It helps us understand the functioning of a complicated
modern economic system. It describes how the
economy as a whole functions and how the level of
national income and employment is determined on the
basis of aggregate demand and aggregate supply.
• It helps to achieve the goal of economic growth, a
higher GDP level, and higher level of employment. It
analyses the forces which determine economic growth
of a country and explains how to reach the highest
state of economic growth and sustain it.
• It helps to bring stability in price level and analyses
fluctuations in business activities. It suggests policy
measures to control inflation and deflation.
Contd….
• It explains factors which determine balance of payments. At
the same time, it identifies causes of deficit in balance of
payments and suggests remedial measures.
• With a detailed knowledge of the functioning of an economy
at macro level, it has been possible to formulate correct
economic policies and also coordinate international
economic policies.
• Last but not least, macroeconomic theory has saved us from
the dangers of application of microeconomic theory to the
problems that require us to look at the economy as a whole.
Limitation of Macroeconomics
• 1. Excessive Generalization:
• As hinted above, generalization of individual observation to the system as
a whole may lead to erratic inferences about the system as a whole. For
instance, a loss incurred by one firm in an industry does not necessarily
imply losses to all other firms in it. Likewise, hospitality shown by one
Indian does not imply that each and every Indian will show the gesture.
• 2. Obsession of Aggregative Approaches:
• Excessive thinking in terms of lumping the individual units together may
lead to erratic inferences. Individual units possess individualistic traits.
They are non-homogeneous in character. One can’t add up two apples
and three oranges to make any meaningful aggregate.
• 3. Fallacy of Deductive Inferences:
• Inferences deduced about individual units from the aggregative tendency
may not always be true in respect of individual units as well. For instance,
a general rise in prices may not affect all the sections of the community in
the same manner. A consumer suffers from rising price level while a
producer benefits from it.
4. Inconsistency between Overall and Individual Changes:
A hike in prices of industrial output and a fall in prices of the
agricultural products may offset each other to lead to no rise in
the general price level. On the basis of stability of the general
price level, one who believes that no policy change is called for
in the circumstances would certainly jeopardize the cultivators’
interests.