macroeconomics

1. INTRODUCTION TO
MACROECONOMICS
Macroeconomics is a branch of economics that studies how an overall economy—the
markets, businesses, consumers, and governments—behave. Macroeconomics
examines economy-wide phenomena such as inflation, price levels, rate of economic
growth, national income, gross domestic product (GDP), and changes in
unemployment.

2. • Macroeconomics is the branch of economics that deals with the structure, performance, behavior, and
decision-making of the whole, or aggregate, economy.
• The two main areas of macroeconomic research are long-term economic growth and shorter-term business
cycles.
• Macroeconomics in its modern form is often defined as starting with John Maynard Keynes and his theories
about market behavior and governmental policies in the 1930s; several schools of thought have developed
since.
• In contrast to macroeconomics, microeconomics is more focused on the influences on and choices made by
individual actors in the economy (people, companies, industries, etc.).

3. FEATURES OF MACROECONOMICS
The main features of Macro Economics are:
• It gives an overall view of the economy
• It explains the causes of fluctuations in the national income
• It helps us to study the progress of an economy in investment, total production, total employment, growth
etc.
• It involved the study of the concept of national income, its different elements, methods of measuring and
social accounting.
• It deals with the aggregate demand and aggregate supply that determines the equilibrium level of income,
output employment in the economy.

4. HISTORY OF MACROECONOMICS
While the term "macroeconomics" is not all that old (going back to the 1940s), many of
macroeconomics's core concepts have been the study focus for much longer. Topics like
unemployment, prices, growth, and trade have concerned economists since the beginning of the
discipline in the 1700s. Elements of earlier work from Adam Smith and John Stuart Mill addressed
issues that would now be recognized as the domain of macroeconomics.
In its modern form, macroeconomics is often defined as starting with John Maynard Keynes and his
book The General Theory of Employment, Interest, and Money in 1936. Keynes explained the fallout
from the Great Depression when goods remained unsold, and workers were unemployed.
Before the popularization of Keynes' theories, economists did not generally differentiate between
micro- and macroeconomics. The same microeconomic laws of supply and demand that operate in
individual goods markets were understood to interact between individual markets to bring the
economy into a general equilibrium, as described by Leon Walras.

5. MACROECONOMICS ISSUES
• The main macroeconomic issues are:
• Employment and unemployment
• Inflation
• Stagflation and deflation
• Business cycles
• Economic growth
• The balance of payments and exchange rate
• The main macroeconomic issues are discussed below:

6. • 1. Employment and Unemployment
• The major issue in macroeconomics is to explain what determines the level of employment and national income
in an economy. Unemployment refers to the involuntary idleness of resources including labor. If this problem
exists society’s actual output (GNP) will be less than its potential output. So one of the objectives of the
government is to ensure full employment, which implies an absence of involuntary unemployment. Thus, the
macroeconomic issue is what causes involuntary unemployment.
• Keynes explained that the level of employment and national income is determined by aggregate demand and
aggregate supply. According to him, with the aggregate supply remaining unchanged in the short run, it is the
deficiency in aggregate demand that causes unemployment in the economy.
2. Inflation or Rising General Price Level
• Another issue of macroeconomic issues is to explain and analyze the problem of inflation faced by both
developed and developing countries. It refers to a phenomenon of persistent rise in the price level. During
inflation, some people gain but most people lose. Therefore, one of the objectives of the government is to ensure
stability at the price level.

7. 3. Business Cycles
Throughout the history of economics, market economies have experienced what are called business
cycles. Business cycles refer to the fluctuations in output and employment with alternating periods of
prosperity and depression. The causes of these business cycles in the market economies are an
important market economic issue. So in macroeconomics, we study the causes of business cycles and
suggest remedial measures.
4. Stagflation and Deflation
Stagflation refers to a situation when a high rate of inflation occurs simultaneously with a high rate of
unemployment. The existence of a high rate of unemployment means a reduced level of GNP. The term
stagflation was coined in the 70s when several developed countries of the world, received a supply
shock in terms of capsid hikes in oil prices. It is one of the important macroeconomic issues of the day
perhaps the most complex. This problem could not explain with the Keynesian theory of effective
demand (demand-side analysis). Therefore, a new economic thought emerged which is called supply-
side economies. Every country in the world is struggling hard to fight this issue.

8. 5. Economic Growth
Another important issue of macroeconomic issues is to explain what determines economic growth in a country.
The problem of growth is a long-run problem, which Keynes did not take into consideration.
The expansionary trend in the country’s total output over a long period is known as economic growth. Growth is
measured by the annual rate of increase of per capita income. It refers to a situation when the rate of increase
in per capita income exceeds the rate of population growth. There are many theories and models on economic
growth that explain how the steady growth of the economy can be achieved.
These theories also explain the causes of underemployment and poverty in less developed countries and they
suggest the policies and strategies for accelerating growth in them.
6. Balance of Payments and Exchange Rate
Balance of Payments (BOP) is the systematic record of all economic transactions of the residents of a country
with the rest of the world during the period. There may be a deficit or surplus in a BOP. Both create problems
in the economy. The transactions in the BOP are influenced by the rate of exchange.
The exchange rate is the rate at which a country’s currency is exchanged for foreign currencies. The instability in
the foreign exchange rate is a major problem, which creates serious BOP problems. Economists are always
eager to discover the cause and effect of changes in a BOP. Thus, the equilibrium in BOP position and stability
in the exchange rate are important macroeconomic issues.

9. OBJECTIVES OF MACROECONOMICS
• Broadly, the objective of macroeconomic policies is to maximize the level of national income,
providing economic growth to raise the utility and standard of living of participants in the
economy. There are also a number of secondary objectives which are held to lead to the
maximization of income over the long run. While there are variations between the objectives of
different national and international entities, most follow the ones detailed below:
• Sustainability - a rate of growth which allows an increase in living standards without undue
structural and environmental difficulties. 'Economic growth' will be studied later on in this book.
• Full employment - where those who are able and willing to have a job can get one, given that
there will be a certain amount of frictional, seasonal and structural unemployment (referred to as
the natural rate of unemployment).
• Price stability - when prices remain largely stable, and there is not rapid inflation or deflation.
Price stability is not necessarily the same as zero inflation, but instead steady levels of low-
moderate inflation is often regarded as ideal. It is worth noting that prices of some goods and
services often fall as a result of productivity improvements during periods of inflation, as inflation
is only a measure of general price levels. However, inflation is a good measure of 'price stability'.
Zero inflation is often undesirable in an economy. ("Internal Balance" is used to describe a level of
economic activity that results in full employment with no inflation.)

10. • External Balance - equilibrium in the Balance of payments without the use of artificial constraints.
That is, the value of exports being roughly equal to the value of imports over the long run.
• Equitable distribution of income and wealth - a fair share of the national 'cake', more equitable
than would be in the case of an entirely free market. Like the other economic objectives, the
distribution of income is a partly subjective or normative issue
• Increasing Productivity - more output per unit of labour per hour. Also, since labor is but one of
many inputs to produce goods and services, it could also be described as output per unit of factor
inputs per hour.
• Trade Equilibrium - equilibrium in the Balance of payments without the use of artificial
constraints. That is, exports roughly equal to imports over the long run.

11. DIFFERENCE BETWEEN MACROECONOMICS
AND MICROECONOMICS
Economics is divided into two categories: microeconomics and macroeconomics. Microeconomics is
the study of individuals and business decisions, while macroeconomics looks at the decisions of
countries and governments.
Though these two branches of economics appear different, they are actually interdependent and
complement one another. Many overlapping issues exist between the two fields.
KEY TAKEAWAYS
• Microeconomics studies individuals and business decisions, while macroeconomics analyzes the
decisions made by countries and governments.
• Microeconomics focuses on supply and demand, and other forces that determine price levels,
making it a bottom-up approach.
• Macroeconomics takes a top-down approach and looks at the economy as a whole, trying to
determine its course and nature.
• Investors can use microeconomics in their investment decisions, while macroeconomics is an
analytical tool mainly used to craft economic and fiscal policy.

12. MACROECONOMIC STABILITY
Macroeconomic stability exists when key economic relationships are in balance—for example,
between domestic demand and output, the balance of payments, fiscal revenues and expenditure,
and savings and investment. These relationships, however, need not necessarily be in exact
balance. Imbalances such as fiscal and current account deficits or surpluses are perfectly
compatible with economic stability provided that they can be financed in a sustainable manner.
There is no unique set of thresholds for each macroeconomic variable between stability and
instability. Rather, there is a continuum of various combinations of levels of key macroeconomic
variables (e.g., growth, inflation, fiscal deficit, current account deficit, international reserves) that
could indicate macroeconomic instability.

13. While it may be relatively easy to identify a country in a state of macroeconomic instability (e.g., large current
account deficits financed by short-term borrowing, high and rising levels of public debt, double-digit
inflation rates, and stagnant or declining GDP) or stability (e.g., current account and fiscal
balances consistent with low and declining debt levels, inflation in the low single digits, and rising per capita
GDP), there is a substantial “gray area” in between where countries enjoy a degree of stability, but
where macroeconomic performance could clearly be improved.
Finally, macroeconomic stability depends not only on the macroeconomic management of an economy, but
also on the structure of key markets and sectors. To enhance macroeconomic stability, countries need to
support macroeconomic policy with structural reforms that strengthen and improve the functioning of these
markets and sectors.