Page 17 - DECO402_Macro Economics

Macroeconomic Theory

Notes Key Points
y Macroeconomics - It studies at whole economic level economic problems or issues, as a
unemployment, rate of inflation, business cycle etc.
y Principal Points of Difference between Micro and Macro Economics – (i) Microeconomics
studies an individual economic unit as a single family or one firm related economic problems/
issue. Macro economics studies economy related economic problems/issues. (ii) Microeconomics
is centred on optimum allocation of resources, whereas macroeconomic is centred on production
and employment level. (iii) In the contents of microeconomics “price” is the main parameter,
whether in macroeconomics it is “National Incom”. (iv) Microeconomics based on “partial
equilibrium” analysis whether macroeconomics on “quasi general equilibrium” analysis.

y Areas of Macroeconomic study – (i) Theory of national income, (ii) Theory of employment,
(iii) Theory of money, (iv) Theory of general price level (v) Theory of economic development
(vi) Theory of international trade.
y Major Macroeconomic Issues – (i) Growth and development (ii) Employment (iii) Business
cycle (iv) Inflation (v) Budgetary deficit and fiscal policy (vi) Interest rates and monetary policy.
Growth and development, issues of the employment and business cycles are considered to be
target of macroeconomics.
y Limitations of Macroeconomics – (i) The fallacy of the composition: Many conclusion of macro
economics simply based on individual units’ simple composition. (ii) Heterogeneous units :
The aggregates of heterogenous units generally gives false conclusion. (iii) The composition
or structure of the aggregate is more important than aggregates itself, whereas study of
macroeconomics generally ignores this aspect. (iv) On population’s various classes, different
effect of aggregates are given generally no impotance.

1.5 Summary

In macroeconomics studies aggregates, but in fact to any system, composition of aggregates or its
structure effects more than aggregates itself. Suppose that in 2006 and 2007 A.D. price level is constant,
but its meant not completly that in 2007 there was no changing in Prices. It is possible that in 2007 may
be deereas in Price and increment in the price of industrial goods. As a result general price level may
constant. Therefore to understand problem properly, study of structure of aggregate is as necessary
as aggregate itself. But in macroeconomics, structural analysis of parameters are given seldom equal
importance.

1.6 Keywords

y Macro - Big
y Micro - Small
y Aggregate Demand - Demanded by all sector
y National Income - Income of the nation.

1.7 Review Questions

1. What is macroeconomics? Explained.
2. Explained main problems of the macroeconomics.
3. Write main points of macroeconomics.

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