MACROECONOMICS

Dr M Manjunath Shettigar
MA (Econ), MBA, MPhil, PhD

Professor,
Department of Professional Studies,
Christ University,
Bangalore - 560029

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 Microeconomics & Macroeconomics

Microeconomics: the study of how

individuals and firms make decisions and
how they interact in markets

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 Microeconomics & Macroeconomics

Macroeconomics:
the study of economy-wide phenomena,
including inflation, unemployment, and
economic growth
Study of aggregate economic environment

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 Microeconomics &
Macroeconomics
The Norwegian economist Ragnar Frisch, (1895-1973) introduced
the terms

Microeconomics and
Macroeconomics

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 Microeconomics

The term mircro is derived from the Greek word

mikros meaning small or a millionth part

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 Microeconomics
Microeconomics deals with the behavior and working of
individual economic units such as a household, a firm, an
industry and so on.

Subject matter of microeconomics includes:

Theory of Consumption
Theory of Production
Theory of Factor Pricing
Theory of Economic Welfare
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 Macroeconomics

The term macro is derived from the Greek word makros

meaning large

Macroeconomics is that part of economic analysis which deals

with the study of the economy as a whole and its major
aggregates.

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 Macroeconomics

Thus in Macroeconomics we study topics such as:

national output and income,

level of employment,
aggregate demand and supply,
the volume of savings and investment,
demand for and supply of money and other financial assets,
the price level and changes in it
Economic growth and business cycles

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 Macroeconomics

Focus is on four aspects of Macroeconomy

i) Measurement National Income/output/price changes/Employment/
Unemployment
ii) Output, employment & Income determination at macro level
iii) Growth Output/Income/Employment
iv) Stability Output/Employment/Price/Inflation

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 Macroeconomics

The major areas of study under Macroeconomics can be categorized

as follows:

a. Determination of national output, employment and income (covering

theory of employment and income)
b. Determination of price level in the economy (covering theory of money
and prices)
c. Determination of factor income shares (covering macro theory of
distribution)
d. Economic stability and growth (covering theories of business cycles and
economic growth)

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 Macroeconomics

Macroeconomics

Theory of Theory of Theory of

Macro theory
income and money and business cycles
of distribution
employment prices and growth

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 Fallacy of composition
Fallacy of composition wrong thinking that what is applicable at micro-level (individual units)
is applicable at macro (group) level too.
Money as a resource
Savings for an individual household
Good crop for a farmer
Price of a product
Tax

Fallacy of division
Fallacy of division wrong thinking that what is applicable at macro (group) level is applicable
at micro-level (individual units) too.
Free trade
Savings
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 Importance of Macroeconomics
1. Understanding the nature and functioning of an Economy,
2. Studying the methodology used in measurement of macro variable such as
National Income, price level changes, underemployment, inequality and so
on
3. Understanding and Controlling Economic Fluctuations,
4. Studying Inflation and Deflation,
5. Study of issues related to Economic growth & Development,
6. Formulation of Economic Policies for macroeconomic management

Copyright 2014 by Nelson Education Ltd. 5-14

 Why do Macroeconomists Disagree?

Areas of agreement:
Most macroeconomists agree on a wide set of issues.
There is wide agreement on growth theory.

Areas of/Reasons for disagreement:

There is less agreement on business cycle theory.
Assumptions they make about the basic nature of the economy are
different this gives rise to difference of approaches/analysis/diagnosis of
problems and prescription of remedies
Are economists ideologically biased? Yes all / most of them are !

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 Limitations of Macroeconomics
Multiplicity of explanations
Influence of ideologies and beliefs
Failure to anticipate events
Dominance of mathematical/ econometric models

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 Objectives of Macroeconomic policies

To achieve sustained economic growth

To maintain price stability
To achieve/maintain full employment
To promote distributive justice
To maintain Exchange rate stability & balance of payments equilibrium
 Stock & Flow variables
Stock variables have only quantity dimension measured in quantity at a
given point of time

Flow variables have both quantity and time dimensions measured in

quantity per unit of time

Examples of Stock variables wealth, property, population, capital, etc.,

Examples of Flow variable income, (rate of) investment, (rate of) savings,
population growth rate, etc.,