Meaning, Scope, Importance and Limitations of Macro Economics

 

Meaning, Scope, Importance and Limitations 

of Macro  Economics

Macro Economics: The term ‘Macro’ is also derived from the Greek word ’Macros’ which means large. Macroeconomics deals with the gross aggregates of the economic system rather than with the individual part of it, that’s why it is called “aggregative economics.”

According to Kenneth. E. Boulding, “Macroeconomics deals not with individual quantities as such, but with aggregates of these quantities, not with individual income, but with national income, not with individual prices but with price levels, not with individual outputs but with national output.”

Macroeconomics was largely the result of the book, “The General Theory of Employment, Interest, and Money” written by John Maynard Keynes. This book has analytically studied what causes large and prolonged fluctuations in the level of employment.

Macroeconomics deals also with how an economy grows. It analyses the chief determinants of economic development and the various stages and process of economic growth. 

According to Shapiro, “ Macroeconomics deals with the functioning of the economy as a whole.” 

Macro Economics studies economic problems from the point of view of the entire economy.

Scope of macroeconomics: scope of macroeconomics is divided into two parts-

1 - Macroeconomics theories:

• Theory of economic growth, and development- It can be evaluated in terms of per capita real income and can be understood only through macro analysis.
• The theory of national income – It evaluates the measurement of national income and its composition by sectors that shows the long-term path of economic growth. This measurement involves aggregate saving, aggregate consumption, and aggregate investment.
• The theory of employment- It helps to figure out the level of unemployment and suggests the remedies for it.
• The general theory of price level- It analyses the general price level and price fluctuations because of inflation and deflation.
• Theory of money- It evaluates the role of the central bank (Reserve bank of India) and the inflow and outflow of money in the economy.
• Theory of international trade and balance of payments- It explains the import and export of the goods and services and also evaluates the determinants of the exchange rate and balance of payments.

2- Macroeconomics policies:

• Fiscal policy- It is made by the government to stabilize the economy by controlling the flow of tax revenues and public expenditure.
• Monetary policy- It is made by the Reserve bank of India to manage the growth rate of the money supply in an economy.

In general, as a part of macroeconomics, we study aggregate demand, aggregate supply, aggregate saving and investment, aggregate income and expenditure, etc.


Importance of Macro-analysis:

• It is helpful in understanding the functioning of complicated economic growth. It deals with the aggregates [income, consumption, output, etc..] which help in measuring the economic development of the country. The macro analysis also plays an important role in economic theory for the solution of urgent economic problems related to aggregate output, employment, and national income. It analyses the causes of fluctuations in the level of income, output, and employment and gives the solution to control them.
• It provides a solid basis for the working of a micro-unit. It explains the causes of deficiency in aggregate demand and its concepts, principles, and policies greatly influence the decision-making process of a firm.
• Macro analysis is of the utmost significance for the formulation of useful economic policies for the nation. Government has to make many policies related to production, price level, and employment, etc. The detailed study of macroeconomics helps in the formulation of these economic policies.
• It is helpful to study Trade cycles. Trade cycles indicate the economic fluctuations in the economy. It is important to study the aggregate demand, aggregate consumption, and aggregate production which are studied through macroeconomics for the proper understanding of trade cycles. It helps to analyze the changes in price and the rate of inflation and deflation. These changes in prices are measured with price indexes. A general price increase across the entire economy is called inflation. When prices decrease, there is deflation. Reserve Bank of India manages a country's money supply and makes the monetary policy so that the changes in the price level can be avoided.

Limitations of macro-analysis:

• Macroeconomics gives importance to aggregate rather than individual units. For example, if the national income in the country is high, it is not necessary that all the individuals in the country are prosperous. It may be that the rise in national income is due to the increase in the incomes of a few rich in the country.
• Indiscriminate use of macro economics can be misleading. For instance, the general price level may be stable but the steep rise in manufactured articles may conceal the fall in agricultural prices, and farmers may be ruined.
• It considers aggregates as homogeneous. The individual data may not be similar in composition and structure. For example, aggregate wages are computed with the help of wages in all occupations. If wages of teachers increase and wages of peons decrease, then aggregate wages will remain unchanged due to the homogeneity of aggregates.
• Measurement of macroeconomics variables is very difficult. Macroeconomics variables are computed by statistical methods. Macroeconomics is the aggregate of microeconomic variables. First microeconomic variables are computed statistically, then these are converted into macroeconomic variables through average. This conversion into one macroeconomic variable may be dangerous and faulty.
• Macroeconomics is based on aggregates and aggregates are drawn on the basis of individual units. Individual behavior may not be true for the whole economy. For example, in the case of deposits in a bank, if all the depositors withdraw money simultaneously then it will adversely affect the banking system in the economy.

 Dr. Swati Gupta

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