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SYBCOM SEM III
Business Economics- Macro
Dr
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Introduction to Macroeconomics
The study of economics is important for us because in our daily lives, we come across many
situations requiring us to make decisions based on principles of economics
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The study of
economics makes us better informed individuals, assists us in making important economic
decisions, and helps understand how the economy functions
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The term Economics originated form two words- óikon‟ and „nomos‟ meaning „laws of
Households‟
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It analyses
long run growth as well as the cyclical movements in various macroecoonmic variables like
output, employment, inflation, money supply, international trade etc
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There are several definitions of Macroeconomics



R
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D
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”
J
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Culbertson- “The theory of income, employment, prices and money constitutes
macroeconomic theory
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”

From the above definitions, the following can be stated
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Macroeocnomics is the study of economic system as a whole
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It also studies the interrelationship among these economic aggregates
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Its focus is on changes in macro variables and growth of economy
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Manisha Pimpalkhare

Nature of Macroeconomic Analysis

1
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2
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In this method, the economic issue or
measure is studied at an aggregate level
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Further, Macroeocnomics analyses
economic issues considering all aspects and issues related to it
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3
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It also studies the relationships among these
variables
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g
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Or Inflation is a result of excessive Money Supply
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In Macroeconomics Income is the link between AD and ASIn Macroeconomics, the equality between Aggregate Demand and Aggregate Supply
is maintained by National Income
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g if AD is greater than AS, it would encourage
producers to produce more until Aggregate Supply has risen to match the Aggregate
Demand
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For this reason, Macro theory is also known as Income
Theory
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Macroeconomics does not make constancy assumptions
As Macroeconomic study is about interrelationships among the macro variables, it
does not need to make unrealistic constancy assumptions* like those made in
Microeconomics
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Some of the

SYBCOM SEM III
Business Economics- Macro
Dr
...

*Recall these assumptions in the form of ceteris paribus or Other things remaining
the same
6
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Macroeconomics studies aggregative variables
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g National income is a
summation of all final goods and services produced in a country
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Such an addition in physical terms
is not possible because of heterogeneous nature of these goods
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7
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Since macro variables are aggregative variables, the equilibrium
involving these variables is called as General equilibrium*
...
)
Scope/ Subject matter of Macroeconomics
Macroeconomics is an extensive branch of Economics that studies some very
important aspects of economy
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Scope of
Macroeconomics

SYBCOM SEM III
Business Economics- Macro
Dr
...
National Income and Per capita Income- Macroeconomics studies the primary
economic problem of utilising the available resources of a country and producing at
the maximum level
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National Income refers to the production of
goods and services in the country while Per Capita Income refers to National Income /
Population of the country
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Economics of Growth and Development- A country is expected to grow over a
period of time
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3
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Performance of these
banking and financial sector is an important subject matter of economics
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Trade/Business Cycles- Economies do not operate on a smooth linear fashion
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There are called as Trade/
Business Cycles
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5
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e
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Causes of inflation, anti- inflationary policies,
nature of price rise are the subject matter of macroeconomics
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Theories of Employment and Unemployment- An economy always aims at full
employment
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7
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Taxes, government expenditure, government borrowing etc have a deep
impact on economy
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8
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It also explores the studies regarding foreign
capital, technology transfers across the globe, and regulatory institutions like WTO as
well as regional alignments like SAARC and EU
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Manisha Pimpalkhare

1
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Almost all the macro variables are inter connected and affect one another
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g
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Understanding these linkages and chain of events is essential
for people in general and policy makers in particular
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2
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This is possible with a sound understanding of macroeconomics
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Helps businesses in decision making- Like individuals, businesses also need to
make their decisions like investments, production etc based on macroeconomic variables like
rate of interest, tax policy etc
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g
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Thus knowledge of
macroeconomics is essential for making good business decisions
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Helps government in policy making- Macroeconomics is a science of policy
making
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A macro perspective is important for framing and
designing policy ,for the economy as well as for the sectors within the economy
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Defining Macro Objectives- Setting of macro objectives like growth rate, employment
creation, inflation control requires sound understanding of macroeconomics
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Further, with changing economy, the priority attached to a
particular objective may change
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6
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E
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in order to promote more job creation, the government has to look
at employment and growth generation from various sectors like agriculture, industry and
services
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Further, it is essential to make
international comparisons across countries and country groups to identify and study
economic indicators like growth rate, poverty, and mapping that data globally
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7
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It is, therefore, a challenging, dynamic and exciting study
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Macroeconomics also deals with economically and
socially relevant issues like poverty and unemployment making it an imperative for
knowledge seeking as well as problem solving
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Manisha Pimpalkhare

Limitations of Macroeconomics

1
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E
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in measuring National Income, we have to sum up all the goods and services
that are produced in an economy
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In order to overcome this problem of heterogeneity,
macroeconomics uses monetary expression of value rather than physical measurement of
goods and services
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Individual decisions are ignored- Macroeconomics studies averages and aggregates
like National Income, Price level
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E
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Even if the General Price level is showing an increase, it does not necessarily mean that
prices of all commodities have increased
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3
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E
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a macro variable of Per Capita Income does not reflect
income of every person
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In real life income of some people
may have fallen and income of others may have increased substantially
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4
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However, this is not an easy task
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Such policy formulation is obviously a
daunting task
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E
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even if the government
announces a tax holiday for industries in a certain region, there is no certainty that the

SYBCOM SEM III
Business Economics- Macro
Dr
...

5
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Sometimes such
generalisations turn out to be misleading or lead to contradictory conclusions
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Paradoxes of Macroeconomics
Apart from the limitations discussed above, macroeconomics also suffers from the fallacy of
Generalisation i
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aggregate behaviour is derived from the summation of individual
behaviour
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Such
situations are called as Paradoxes of Macroeconomics
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So, the rule
that is good for one individual, may not be good for the society if all begin to follow that
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It is considered to be beneficial or good for the
individuals to save; however if all people save, then there is more saving leading to less
spending resulting in low demand for goods and services
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Thus, more savings in the
economy will result in an adverse situation for the economy as a whole
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C
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e
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However, according to Keynes, the wages are income for the workers
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This will lead to low demand, low production and low investment

SYBCOM SEM III
Business Economics- Macro
Dr
...
Thus, a wage cut will actually result in more
unemployment
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Paradox of Plenty- Generally, when a producer produces more, he is expected to earn
more income
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e
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SYBCOM SEM III
Business Economics- Macro
Dr
...
While it is true for each depositor
individually, if all the depositors demand their deposits at the same time, the banks would
collapse
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1
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It is
considered to be beneficial or good for the individuals to save; however if all people
save, then there is less spending resulting in low demand for goods and services
...

Thus, more savings in the economy will result in adverse situation for the economy as
a whole
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Paradox of Wage Cut/ Wage Employment- According to classical economist A
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Pigou, if there is unemployment in the economy, a reduction in the wage rate i
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a
wage cut will create more employment and solve the problem
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So, if wage rate is reduced for the
entire economy, income of the workers will fall, leading to a fall in their spending
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Thus, a wage cut will actually result in more unemployment
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Paradox of Plenty- Generally, when a producer produces more, he is expected to earn
more income
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e
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4
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While it is true for each
depositor individually, if all the depositors demand their deposits at the same time, the
banks would collapse

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