Macroeconomics: Meaning, Scope, Limitations, and Nature
Meaning of Macroeconomics
The term ‘macro’ is derived from the Greek word ‘Makros,’ meaning ‘large’ or ‘aggregative.’ Ragnar Frisch first used this term in 1933. Macroeconomics is the branch of economics that studies the problems of the economy as a whole. It deals with the problems of all the people in the country, all the firms, and all the industries in the economy, total output and consumption of a commodity, and the income of a nation as a whole. Thus, it deals with national income, employment, savings, investment, etc. Macroeconomics studies general economic factors that determine the aggregate level of income, production, employment, saving, investment, and the general price level. It studies economic problems in the context and from the standpoint of the economy as a whole. The basic problem of macroeconomics is the determination of the flow of income, and the theoretical foundation of macroeconomics is the circular flow of income. Similarly, macroeconomics is normative economics. It is based on certain value judgments.
Scope of Macroeconomics
The basis of macroeconomics is deductive reasoning. This means that under the deductive method, we derive an inference from general to particular. Here, we study the economy as a whole. For example, under macroeconomics, we study the effects of savings on investment, employment, and income on the economy as a whole. It is basically of aggregates and averages of economic variables. Macroeconomics studies money, banking and finance, trade cycles, the general price level, monetary and fiscal policies, etc. The scope of a subject means the areas of study covered under that subject. The scope of macroeconomics can be illustrated by the following diagram:
Limitations of Macroeconomics
1. Aggregative Analysis
Macroeconomics provides an aggregative analysis of the economy. If we study microeconomics, then we will never get an idea of the problems at the national level, but the averages in macroeconomics can be misleading. A study of aggregates may lead to the belief that no change has taken place, and as such, no necessary policy is called for. For example, if agricultural prices fall by 50% while industrial prices rise by 50%, the general price level will remain unchanged because the two types of price changes neutralize each other. The aggregative results may be misleading.
2. Micro and Macro Aspects Must Be Studied
Policymakers should not only take broad economic aggregates into account. For example, there might be an overall increase in national income, but if there are growing inequalities of income and wealth, then the number of poor people below the poverty line might be increasing. So, while interpreting macro variables, inequalities and microeconomic studies are essential for planners. For the implementation of government policies, one has to consider the micro implications of those policy measures. Policies can be beneficial for one group but harmful to another group of people. For example, maintaining a floor price or minimum price for food grains assures a minimum price and minimum profits to farmers, but this results in a very high price for consumers.
So, the government has provided cheaper food grains through the public distribution system. Therefore, policymakers must consider both micro and macro aspects.
Nature of Macroeconomics
Macroeconomics is policy-oriented. It studies causes, effects, and suggests measures to overcome the problems of unemployment, inflation, disequilibrium in the balance of payments, etc. This is because macroeconomics is concerned with the behavior of the economy in total. It does not examine individual behavior. Its policies are general. Macroeconomic theories provide an explanation for the interrelationship and causation among different macroeconomic variables and issues relating to aggregate economic behavior and the associated problems.
Significance of Macroeconomics
The behavior of the economic system as a whole or the macroeconomic aggregate is not merely a matter of addition or averaging of what happens in the various individual parts of the whole. In the economic system, what is true of parts is not necessarily true of the whole. Therefore, the application of a macro approach to generalize about the behavior of the economic system as a whole is incorrect and may lead to misleading conclusions. So, we have to study macro analysis carefully. Macroeconomics is a policy-oriented subject. It deals with a number of policies of a macro nature to solve many issues and problems. Macroeconomic theories deal with practical problems like unemployment, trade cycles, etc. Its importance can be seen from the following points: