What is ‘Macroeconomics’/ And its scope
Macro means large. In economics, ‘large’ means the economy as a whole. Macroeconomics deals with economic issues related to the economy as a whole. The basic issues of macroeconomics include: (i) equilibrium in the economy. Here, we study how is equilibrium struck in terms of the balance between aggregate demand (demand for all goods and services in the economy) and aggregate supply (supply of all goods and services in the economy), (ii) disequilibrium in the economy: When AD (aggregate demand) & AS (aggregate supply) are not in a state of balance, and when resources are not fully utilized (or fully employed), and (iii) correction of disequilibrium (or the restoration of balance between AD and AS) along with fuller utilization or resources.
The economics have formulated different theories to study the various issues of macroeconomics. The theory of income and employment is formulated to study how equilibrium is reached in the economy. There are several theorists to study the problem of disequilibrium in the economy. Notable ones are theories related to ‘deflationary gap’ and ‘inflationary gap’.
To address the problem of disequilibrium (inflationary and deflationary gaps), the economists have designed certain theories (or policies) like monetary policy and fiscal policy. This enables us to sum up the vital components of macroeconomics, as under:
Vital Components of Macroeconomics
(1) Theory related of Equilibrium in the Economy: It is populary known as the theory of income and employment. It studies how equilibrium is struck when AS = AD (Aggregate Supply Aggregate Demand) in the economy.
(2) Theory related to Disequilibrium in the Economy: This is the theory of inflation and deflation. It examines the consequences when AD>AS (leading to inflation or inflationary gap), and when AD<AS (leading to deflation or deflationary gap).
(3) Theory related to the Correction of Disequilibrium in the Economy: It relates to (i) Monetary policy (focusing on the supply of money and credit creation by the commercial banks), (ii) Fiscal policy (focusing on government budget and the impact of budgetary deficit in the economy), and (iii) Exchange rate policy (focusing on the management of exchange rate and BoP equilibrium).
Three Vital Components of Macroeconomics
Theory related to Equilibrium in the Economy (AS=AD).
Theory related to Disequilibrium in the Economy: (i) AD>AS leading to inflationary gap, and (ii) AD<AS leading to deflationary gap.
Theory related to the Correction of Disequilibrium in the Economy: (i) Monetary Policy. (ii) Fiscal Policy (Budgetary Policy), and (iii) Exchange Rate Policy.
2. Scope of Macro Economics
Macro Economics gained great prominence after the publication of Keynes’ monumental work ‘The General Theory’. The scope of macro economics continued to get more and more widened in the subsequent decades, it is explained below:
(i) Measurement of national income: The study of national income and social accounting is a very prominent development since the beginning of Keynesian revolution. In the entire post-Keynesian economic literature, national income became the pivotal aggregative variable. The social accounting and the input-output techniques of measuring national income are based respectively on the aggregation of sector accounts and that of in industry variables. It was only under the compulsions of handling the most accurate estimate of the national income aggregate that such techniques could possibly be evolved.
(ii) Inflation and deflation: The problems of inflation and deflation, which have continually plagued the economic life of the people throughout the world, are analyzed on the basis of aggregative variables. Inflation manifests itself in a rise in general level of prices. This phenomenon is contingent upon the aggregative variables like consumption expenditure, investment and the general level of production. The measurement of inflationary of deflationary gaps is also made through the difference in the magnitude of saving and investment in the community. If we ignore these macro economic variables and still try to determine the extent of inflationary or deflationary gap, it will just be an exercise in futility leading only to fallacious conclusions. The aggregative approach again helps in devising such ways and means which may mitigate the inflationary and deflationary strains off the economy in the most decisive way.
(iii) Business cycle theories: The biggest malady associated with the capitalist economics is the business oscillations. Almost all the theories concerning trade cycles formulated even earlier than Great Depression of 1930’s were based on aggregative of sub-aggregative variables. In the recently developed trade cycle models based upon a complex of exogenous. endogenous and structural parameters, the macro approach is all pervading.
(iv) Problems of poverty and growth: The problems of poverty and growth can be investigated in any worthwhile manner only from an aggregative view point. The economic, demographic, technical, social and cultural forces and intricate complexes of the numerous variables conjure before us a realistic picture of the poverty of backwardness of a nation. The entire empirical and operational research, as a matter of fact, has been carried. through aggregative instruments. Various growth models, involving variables like saving and investment co-efficient, are obviously the outcome of aggregative approach. All the measures adopted with the purpose of raising the standard of living of ensuring the optimal level of production must, of necessity be based upon the aggregative thinking otherwise their effectiveness will certainly be out of the question.
(v) Economic policies: The macro analysis is significant in the formulation of economic policies. As a consequence of Keynesian revolution, the laissez-faire philosophy stands thoroughly exploded and the governments have assumed the most crucial and dynamic role of reinforcing, the economic system. The economic policies for the removal of poverty, ur employment and for ensuring stabilization must necessarily be based upon the aggregative requirements. Any economic policy prompted by the consideration of small individual units will be clearly irrational, muddle-headed and short-sighted and will certainly lead to baffling consequences.
