It is that part of economic theory which studies the economy in its totality or as a whole.
It studies not individual economic units like a household, a firm or an industry but the whole economic system. Macroeconomics is the study of aggregates and averages of the entire economy.
Such aggregates are national income, total employment, aggregate savings and investment, aggregate demand, aggregate supply general price level, etc.
Here, we study how these aggregates and averages of the economy as a whole are determined and what causes fluctuations in them. Having understood the determinants, the aim is how to ensure the maximum level of income and employment in a country.
In short, macroeconomics is the study of national aggregates or economy-wide aggregates. In a way it is like study of economic forest as distinguished from trees that comprise the forest. Main tools of its analysis are aggregate demand and aggregate supply.
Since the subject matter of macroeconomics revolves around determination of the level of income and employment, therefore, it is also known as ‘Theory of Income
These days when the study of lakhs of individual units has become almost impossible and when government’s participation through monetary and fiscal measures in the economy has increased very much, use of macro analysis has become indispensable.
Correct economic policies formulated at macro level have made it possible to control business cycles (inflation and deflation) and as a result violent booms and depressions have become things of the past.
In a suitably modified form, macroeconomics is the basis of all plans of economic development of underdeveloped economies. Economists are now confidently exploring the possibilities and ways of maintaining economic growth and full employment. More than anything else, macroeconomic thought has enabled us to properly organise, collect and analyse the data about national income and coordinate international economic policies.
Scope of Macroeconomics
Clearly, the study of the problem of unemployment in India or general price level or problem of balance of payment is macroeconomic study because these relate to the economy as a whole.
Importance of Macroeconomics:
- It helps to understand the functioning of a complicated modern economic system. It describes how the economy as a whole functions and how the level of national income and employment is determined on the basis of aggregate demand and aggregate supply.
- It helps to achieve the goal of economic growth, higher level of GDP and higher level of employment. It analyses the forces which determine economic growth of a country and explains how to reach the highest state of economic growth and sustain it.
- It helps to bring stability in price level and analyses fluctuations in business activities. It suggests policy measures to control Inflation and deflation.
- It explains factors which determine balance of payment. At the same time, it identifies causes of deficit in balance of payment and suggests remedial measures.
- It helps to solve economic problems like poverty, unemployment, business cycles, etc., whose solution is possible at macro level only, i.e., at the level of whole economy.
- With detailed knowledge of functioning of an economy at macro level, it has been possible to formulate correct economic policies and also coordinate international economic policies.
- Last but not the least, is that macroeconomic theory has saved us from the dangers of application of microeconomic theory to the problems of the economy as a whole.