Page 16 - DECO402_Macro Economics

Unit-1: Introduction of Macroeconomics

Notes

Task Express your views on main problems of macroeconomics.

Limitations

Like other subjects macroeconomics is too limit. Regarding this following notes are of pay
attention.
1. The Fallacy of Composition: Macroeconomics may conclusion based on simple combinations of
individual units. But those facts are logical and right for an individual, it is not necessarily that
those are right and logical for whole economy. Undoubtfully, saving is virtue for an individual,
but if all persons will have been saving then total demand will be less, so that no initiative
for investment and decrease in national income. Finally, as a result of this national savings
will decreased also, rather will increased. Prof. Samulson called it the Fallacy of composition.
According to him, excessive generalization tendency of macroeconomics, due to this personal
experiences are applied to whole economy is not appropriate.
2. Heterogeneous Units: In the study field of aggregates may hetergeneus units are included. These
units are measured by different types. These units express in uniform numbers or homogeneous
measures are not possible. Prof. Boulding has explained it by following example).
6 apples + 7 apples = 13 apples (This is a meaningful aggregate.
6 apples + 7 oranges = 13 fruits (This is also on meaningful aggregates.)
6 apples + 7 houses = (This is a meaningless aggregates.)
It is clear from above example that generally heterogeneous units aggregates are vague. For
heterogeneous units rather we use money as common denominator, but money value is not the true
measures of its value in use.
3. The Composition of Structure of the Aggregate is more Important than Aggregate itself: In
macroeconomics studies aggregates, but in fact any system is effected by more composition of
the aggregates or its structure than aggregates itself. Suppose that in 2006 and 2007 A.D. Price
level is constant, but its mean not completely that in 2007 there was no changing in prices. It
is possible that in 2007 may be decrease in price and incre in industrial goods cost. As a result,
general price level will be fixed. Therefore, to understand problems properly, study of structure
of the aggregate is as necessary as aggregate itself. But in macroeconomics structural analysis
of parameters are given importance seldom.
4. Diverse effects of Aggregates: Macroeconomics an another limit is that on various sectors of
economies do not study the various effects of an aggregate. Macro Parameters do not uniform
effects on all sector of economy. For example increment of price level has beneficial effects on
businessmen and industrialist, but wage-earners suffer loss. In macroeconomics such a cross
section studies are mentioned in very pre use.
In short, doing concentrated at collective analysis, macroeconomics generally, ignores such a micro
Parameters importance which is the basic factor of contents.
Therefore, at the time of people’s poverty or standard of living assessment we assume his per capital
income and consumption as Parameters and ignore this fact that rather in course of time average
parameter is continually increasing, since total number of people also increased that live below
poverty line. Does macroeconomist that hue and cry over increment in per capita income in India,
will pay attention to distribution of income? Will they think people died of starvation, particularly
when supply of foods are more than its demand? yes, but only few.

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