Scope and Importance of Macroeconomics

1- Scope of Macroeconomics

Macroeconomics is the study of economic behavior and performance of the economy as a whole. It encompasses a wide range of macroeconomic variables and their their interrelationship, trends of change and a change in them with time. So the scope of macroeconomics is not limited to a singe boundary rather it occupies almost all economic territory within a country and outside of it. there is mentioned the scope of macroeconomic below.

1.1- Theory of income and employment

Macroeconomics studies the concept of national income, its different elements, methods and problems of its measurement and social accounting. Likewise, it studies the problem of employment and unemployment, different factors determining income and employment, such as, aggregate demand, aggregate supply, total consumption, total saving, total investment etc.

1.2- Theory of general price level

Macroeconomics studies how general price level is determined. It is also related with the problems, causes and effects of inflation and deflation in economy.

1.3- Theory of economic growth

Macroeconomics is also concerned with different problems relating to economic growth, development or increase in per-capita real income. Similarly it deals with the mass poverty, low per-capita income and income inequality in underdeveloped countries.

3.4- Theory of international trade

Macroeconomics studies about the principles of trade among different countries and also deals with various components of international trade like tariffs, protection, trade policies, balance of payments etc.

3.5- Macroeconomic policy

The study of macroeconomics also encompasses the formulation, implementation and over all influences of monetary and fiscal policies on economies.

3.6- Macro theory of distribution

Macroeconomics studies how the share of national income is determined for different factors of production. In other words, it deals with the problem of how much is to given laborers, how much to landlords and entrepreneurs for the equal distribution of national income.

3.7- Theory of money

Macroeconomics also studies about the causes and consequences of demand for and supply of money. In other words, it deals with the impact on output, employment, general price level etc. as a result of change in demand for and supply of money. Banks and other financial institutions are also part of its study.

2- Importance of Macroeconomics

Macroeconomics analyses and explains most of the macroeconomic problems like unemployment, inflation, economic growth etc. and seeks measures to tackle them. This is why the study of macroeconomics has a big importance since its separate existence in 1936. The main importance/uses of macroeconomics are explained below.

2.1- To understand the functioning of the economy

The popularity of macroeconomics has increased significantly in recent years on account of the fact that it deals with the controversial and challenging issues of the day, such as, unemployment, deficit financing, inflation, taxation, planning and economic development etc. It is helpful in understanding the functioning of complicated economic system. It seeks to explain the fluctuations in the level of national income, output, employment etc.

2.2- Formulating government economic policies

The study of macroeconomics is very important for the formulation and successful execution of government economic policies. Governments are concerned with the regulation of the aggregates of the economic system, such as, the general price level, total production, and general volume of trade and so on. Macroeconomics studies these statistics of the aggregative variables accurately and reliably to formulate the sound government policies.

2.3- Study of national income

In modern times, the study of macroeconomics is indispensable for evaluating the overall performance of the economy in terms of national income. It is because, the size of national income of a country helps to formulate its policies concerning economic plans, welfare of the people, war etc. Similarly it helps to understand the distribution of national income among different group of people in the country.

2.4- Economic growth

The study of macroeconomics has a great significance in economic growth as well. It is macroeconomics which helps to evaluate the sources and capabilities of an economy and finds the causes that slows down the economic growth. Moreover it provides ideas to formulate and implement plans for overall increase in national income, output, employment etc. so as to increase the level of economic development of the economy as a whole.

2.5- Understanding business cycles

Business cycles or the economic fluctuations adversely affect the economy. Therefore, it is essential to check the economic fluctuations (business cycle) immediately. It is macroeconomic study that helps to analyze the causes responsible for economic fluctuations in the economy and also provides measures to check them through fiscal and monetary policies.

2.6- Eliminating general unemployment

The general level of unemployment in an economy basically depends on effective demand. The effective demand itself depends upon the aggregate demand and supply functions. Unemployment in the economy is, thus, caused by deficiency of effective demand. To eliminate unemployment, effective demand should be increased by increasing total investment, total output, total income and total consumption. Thus, macroeconomics plays an important role in studying the causes, effects and remedies of general unemployment.

2.7- Business decision-making

The study of macroeconomics has also a big importance in business decision making. By the knowledge of macroeconomics, the business executives or managers, facing the decision making problems in business, can predict potential business environment, trends of international business etc. in future and make better business decisions accordingly. Forecasts of future demand and investment decisions by managers are specially based on the state of the economy and its growth process. These phenomena are best understood by the study and understanding of macroeconomics.

2.8- Estimating material welfare

The main goal of every economy is to promote the material welfare of the people. Whether the material welfare has increased or not, cannot be ascertained from the study of individual units. It can be made sure by studying the aggregates, such as total income, total employment, aggregate consumption etc. Therefore, the importance of macroeconomics is also big in assessing the material welfare of the people.

2.9- International comparisons

The study of macroeconomics helps in making international comparisons. It can compare per capita income, investment rate, consumption and saving levels of different economies. The determination of exchange rates of different countries is possible through macroeconomic analysis alone.

2.10- Economic planning

The modern age is the age of economic planning. The knowledge, in relation to sectorial dependency, composition of national income, unemployment, poverty and so on is necessary for formulating appropriate economic plan. The knowledge about these aggregates is possible through the study of macroeconomics. Hence, the importance of macroeconomics is also in economic planning.

3- Distinction Between Micro and Macroeconomics

Microeconomics is the study of individual units of an economy where as macroeconomics is the study of all individual units aggregately. However the distinction between these two branches of economics is not obvious and the relevancy of these branches of economics is inter-dependent on both of them. Yet, there are some differences between them which are given as follows.

3.1- In Degree of Aggregation

Microeconomics studies the individual units such as price of a product, income of an individual person, output of a firm, demand and supply of a specific commodity etc.

Macroeconomics studies the economic aggregates like national income and employment, general price level, total output, total saving, total investment, aggregate demand and aggregate supply etc.

3.2- Distinction in objectives of the study

The main objective of microeconomics is to study principles, problems, and policies concerning to the optimum allocation of resources.

The aim of macroeconomics is to study the principles, problems, and policies relating to full employment and growth of the resources of the economy.

3.3- Distinction in subject matter

The scope of microeconomics includes product pricing, factor pricing, and theories of economic welfare and so on.

The scope of macroeconomics covers the theories of income and employment, theories of money and general price level, banking system, economic growth, and favorable balance of payment.

3.4- Distinction in methods of study

The formulation of microeconomic laws are based on the assumptions like rational behavior of an individual, no change in income, taste and preference of an individual consumer, no change in production technology and capacity of a firm, full employment of resources etc. or 'other things remaining the same' (ceteris paribus). For example, in case of law of demand, the relation between demand and price of a commodity is studied assuming other things that influence demand to be constant.

The study of macroeconomics divides economic factors into important aggregates like aggregate demand, aggregate supply, aggregate consumption, aggregate investment, general price level etc. The mutual dependency of these factors and change in one factor, its influence on other factors are all studied and analyzed in general in macroeconomics. This method of study is called general equilibrium analysis.

3.5- Distinction in assumptions

In macroeconomics, it is assumed that there is full employment of resources in the country and total output and expenditure are fixed. On the basis of these assumptions, it is attempted to know how the resources are allocated optimally and how the equilibrium of different economic units establishes.

Macroeconomics assumes that there is optimum allocation of resources in the country. On the basis of this assumption it is sought to know how full employment is provided to all the resources.

3.6- Distinction in relating to change

Many microeconomic units may go on changing from micro point of view only but remain unchanged in aggregate. For example, the production of food grain may increase in some pieces of land and it may decrease in some other pieces of land but the total production of food grain may remain the same.

Many macroeconomic units also go on changing from macro point of view but it may not influence microeconomic units. For example, the increase in national income of a country may not cause an increase in income of some particular families in real sense. It is likely to decrease in their income.

3.7- Distinction in solving current problems

The current problems of an economy like unemployment, inflation decline in national income, output etcetera are less likely to be solved by the study of microeconomics.

Macroeconomics studies the current problems like unemployment, inflation, output, and economic fluctuations etc. of an economy. It analyzes the causes and impacts of these problems and present appropriate measures to solve them.

4- Interdependence Between Micro & Macroeconomics

Micro & macroeconomics are the two branches of economics. They are interrelated & interdependent. The interdependency between these economics can be explained separately as follows.

4.1- Dependency of Microeconomics on Macroeconomics

Micro economics studies small economic units whereas macroeconomics deals with economic aggregates but the study of microeconomics depends on macroeconomics. The dependency of microeconomics on macroeconomics can be explained under the following headings.

a - Product Pricing

The price of a commodity is determined by the interaction between the demand for and supply of the commodity. This price determination, which is microeconomic topic, is affected by the national output of the commodity, national income (sum of individual consumer’s income) etc, which are macroeconomic topics. Hence it is clear that microeconomics interdependent on macroeconomics.

b. Factor Pricing

The determination of price of a factor (wage, rent, interest, profit) is also affected by macroeconomic variables like level of employment, national income, quantity of money supply etc. Without the study of macroeconomic variables, the study of price determination of a factor is incomplete. So this fact clarifies that microeconomics depends on macroeconomics.

4.2- Dependency of Macroeconomics on Microeconomics

The study of macroeconomic variables like total employment, total output, national income, total saving are not possible without the study of microeconomic variables. Therefore macroeconomic study is also interdependent on microeconomics. The dependency of macroeconomics on microeconomics can be clarified under the following headings.

a- National income

The study of national income, it is the topic of macroeconomics, is not possible without the study of income of all individuals, which are the microeconomic variables. Hence macroeconomics depends microeconomics.

b- General Price Level

The general price level is the average price of all variety of commodities. The general price level of macroeconomic variable where as the price of a commodity is microeconomic variable. It also clarifies macroeconomics depends on microeconomics.

c- Total Saving

Total saving is a macroeconomic topic which is the sum of saving of each individual. The saving of each individual is microeconomic topic. So the study of macroeconomic is impossible without the study of microeconomics. Hence macroeconomics is interdependent on microeconomics.

The above facts clarify that micro and macroeconomics are interdependent. The study of only one branch of economics cannot give a clear picture of the functioning of an economy.