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PART 1- INTRODUCTION

Dr.Purushottam

CHAPTER 1

Introduction to Macroeconomics

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What is Economics?
Economics is the science of wealth.

Adam Smith
Economics is the study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment, and with the use of the material requisites of well being. Alfred Marshall Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. John Robbins
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Why do people economise?

Human wants, desires and aspirations are endless. Resources are limited and scarce. People are of optimising nature.

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The Subject Matter of Economics

Consumers Producers Resource owners Working mechanism of the market system Behaviour of the market forcesdemand and supply Price determination in the market Input-output relationship Cost-output relationship Factor price determination Microeconomics Macroeconomics

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What is Macroeconomics?
Macroeconomics is the study of the behaviour of the economy as a whole. It examines the overall level of a nations output, employment, prices, and foreign trade. P. A. Samuelson Macroeconomics is essentially the study of the behaviour and performance of the economy as a whole. More importantly, it studies the relationship and interaction between the factors or forces that determine the level and growth of national output and employment, general price level, and the balance of payments positions of an economy.
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Macroeconomics as a Theoretical Science

Explains the behaviour of macroeconomic variables and specifies the nature of relationship between them;

Provides framework and analytical tools to analyse the macroeconomic phenomena;

Provides an insight into, the working of the economy; and Is a necessary condition for the formulation of appropriate macroeconomic policies to achieve predetermined goals.
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Macroeconomics as a Policy Science

Provides a sound theoretical framework for investigating the causes and effects of economic problems; Provides guidelines for finding appropriate policy measures to solve the problem, and Analyses the working and effectiveness of macroeconomic policies, especially the monetary and fiscal policies, on the economy.

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Microeconomics Vs. Macroeconomics

Units of Study Basic Assumptions of Micro and Macro Economics Machlups View on Micro-Macro Distinction

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Micro-Macro Paradoxes
Cash holding Saving and investment Profit and wages

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The Classical Microeconomics

According to classical school of thought, if market forces of demand and supply are allowed to work freely, then
i. there will always be full employment in the long run, and unemployment, if any, will be a short-run phenomenon; ii. there will be neither over-production nor under-production at the aggregate level; and iii. the economy will always be in equilibrium in the long run.

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The Keynesian Revolution

The level of output and employment in an economy is determined by the aggregate demand given the resources. The unemployment in any country is caused by lack of aggregate demand and economic fluctuations are caused by demand deficiency. The demand deficiency can be removed through compensatory government spending.

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Post-Keynesian Developments in Macroeconomics

Monetarism: A Counter Revolution, Neo-classical macroeconomics, Supply-side economics, and Neo-Keynesianism.

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Importance of Macroeconomics
Growing importance of macroeconomic issues Persistence of macroeconomic problems Growing complexity of economic system Need for government intervention with the market system Use of macroeconomics in business management

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Basis of Assessment of a Countrys Business Environment

The current and future trend in GDP/GNP The trend in the aggregate demand for consumer and capital goods Trend in the rate of savings and investment The general price level and expected future trends The level of employment and the likely trend International aspects of the economy Governments macroeconomic policy

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Limitations of Macroeconomics
Ignores the structural changes Aggregates are not a reality but a picture or approximation of reality Some economists consider macroeconomics only as an intellectual attraction without much practical use

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