Macroeconomics

Macroeconomics: Meaning, Scope, Nature and Importance

What is Economics?

Economics is defined as the study of production, distribution, and consumption of various goods and services. It studies the decisions made by nations, governments, businesses, and individuals in the allocation of resources to achieve the best return on investment.

Importance of Economics

• It helps in coming up with a proper mechanism to counter the exhaustion of raw in times of shortage.

• Economists have a divided option on the governments level of intervention in an economy. While some economists believe that government intervention can improve access to public goods, free-market economists wish to have limited government for the same.

• One of the main duties of economists is to analyse and understand the reasons for any slump in economic growth, political issues, unemployment and poverty. This can help individuals make a better decision.

Based on the level of focus, economics can be classified into two categories: Macro-Economics and Micro-Economics

Macroeconomics: The study focuses on the behavior of an overall economy.

Microeconomics: The study concentrates on individual-level business behavior.

Macroeconomics:

• The science of macroeconomics is the study of an aggregate economy where its focus can range from the entire world, a continent, a nation, to even a particular region in a country.

• The study includes various topics such as the unemployment levels, prevailing interest rates, inflation levels, monetary policies, government regulations and Gross Domestic Product (GDP) performances, among others.

Microeconomics:

• The study of microeconomics concentrates on individual consumers and businesses behavior of taking decisions. The research focuses on distinct entities such as a government agency, a business firm, a household or a person.

• Microeconomics allows us to understand the reason for the change in price and demand of a particular product at a specific time. This is done primarily by tracking behavior at the individual level, where certain aspects of human behavior are analyzed.

• The study also includes various topics such as the efficiency and cost involved in the production of a particular good, supply and demand, allocation of labour, risk involved, uncertainty, and strategic approach at the individual consumer and business level.

Scope of Macroeconomics

Theory of national income 

• Macroeconomics deals with the various concepts of national income. 
• Those are different elements, methods of measuring national income and difficulties in the measurement of national income. 
• Macroeconomics also studies social accounting, which refers to the systematic record and presentation of national income data. 

Theory of employment 

• Macroeconomics studies problems related to employment and unemployment. 
• It analyses causes, consequences and types of unemployment. 
• It also studies different factors determining the level of employment such as effective demand, aggregate demand, aggregate supply, aggregate consumption, aggregate investment etc. 

Theory of money 

• The theory of money is an important part of macroeconomics. 
• Under the theory of money, we study demand and supply of money. 
• The changes in demand and supply of money have considerable effect on the level of employment. 
• Banks and other financial institutions are also part of its study. 

Theory of general price level 

• The determinations of changes in general price level are studied under macroeconomics. 
• Problems concerning with inflation or rise in general price level and deflation or fall in general price level are studied under macroeconomics. 

Theory of economic growth 

• The study of theories of economic growth or increase in per capita income is the important part of macroeconomics. 
• It studies the economic growth of both developed and developing countries. 
• The monetary and fiscal policies of the government are also studied under it. 

Theory of international trade 

• Macroeconomics also studies trade among different countries. 
• The theories of international trade, gains and losses of international trade, tariffs and protection etc are studied in macroeconomics. 
• A government may close off a specific industry from international competition through the use of quotas, subsidies, and tariffs.

Macroeconomic Variables

Gross Domestic Product : The Gross Domestic Product is the monetary value of final goods and services produced by an economy in a given period of time, usually one year. The Gross Domestic Product is usually used as a measurement of a nation’s economic activity. If the GDP grows, it means that the economy increased its output.

Inflation : Inflation is the proportional variation of the Consumer Price Index over a period of time. Inflation is an important macroeconomic variable because it has a close relationship with other variables. For instance, high economic growth with low unemployment imply a risk to high inflation.

Unemployment : Unemployment Rate is an important macroeconomic variable because it measures the percentage of the labor force currently unemployed and actively seeking employment. A high unemployment rate is an undesirable macroeconomic situation because it means that a lot of people cannot find a job.

Government Spending : Government Spending refers to government consumption, investment and transfer payments. Government Spending provides an indicator of the size of the public sector in an economy. Fiscal policy is used to influence other macroeconomic variables, like unemployment and inflation rate.

Interest Rate : The Interest Rate is the cost of borrowing money. The monetary authority (Central Bank) play a key role in the interest rates, using regulation and intervention in monetary markets.

Exchange Rates : Exchange Rates play an important role in macroeconomics. All economy sectors that produce goods or services that can be exported or imported are heavily influenced by the exchange rate.

Importance of macroeconomics

1. Macroeconomics is a vital concept that considers the whole nation and works for the welfare of the economy.
2. It is helpful for the timing of economic fluctuations to prevent or be equipped for any financial crisis or any long – term negative situations.
3. The system of fiscal and monetary policies depends entirely on the analysis of the widely held macroeconomic conditions in the nation.
4. Macroeconomics mainly aims to help the Government and the financial bodies to prepare economic stability in the country.
5. This stream of economics gives a broader perspective of social or national issues. The ones who want to contribute to the welfare of society need to study macroeconomics.
6. It ensures or keeps a check over the proper functioning of the country’s economy and actual position.
7. The analysis of macroeconomics theories and issues helps the economists to figure out the causes and possible solutions of such macro-level problems.
8. Dealing with various economic conditions through the use of macro-economic data opens the door for growth in the country.

Issues Related to Macroeconomics

An economist needs to analyze the following problems while studying macroeconomics:

1. Business activities also result in societal costs like deforestation and land degradation. To regulate this social expense, the Government carries out clear laws and legislation. These regulations serve as a barrier for business organizations.
2. The economic conditions in a nation have an immense impact on the activities of every firm either directly or indirectly. Different economic patterns or variables impacting industry include the GDP, job rates and conditions, revenue, banking, and pricing policies.
3. Many organizations trade (either export or import of goods) in international markets. They are sensitive to the fluctuations in the economy of other countries, exchange rates, prices, and other varied factors. Hence, such changes may influence the economic conditions of the country. This might also end up affecting business organizations.