Definition, Importance, Limitations of Macro- Economics

Macroeconomics is the branch of economics that studies the behavior and performance of an economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product and inflation.

Macroeconomics analyzes all aggregate indicators and the microeconomic factors that influence the economy. Government and corporations use macroeconomic models to help in formulating of economic policies and strategies.

IMPORTANCE OF MACROECONOMICS

1. 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.
2. 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.
3. It helps to bring stability in price level and analyses fluctuations in business activities. It suggests policy measures to control Inflation and deflation.
4. 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.
5. 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.
6. 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.
7. 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.

LIMITATIONS OF MACRO- ECONOMICS

(i) Fallacy of Composition

In Macro economic analysis the “fallacy of composition” is involved, i.e. aggregate economic behaviour is the sum total of the economy of individual activities. But what is true of individuals is not necessarily true to the fiscal entirely. For instance, savings are a private virtue but a public vice. If total savings in the economy increases, they may initiate a depression unless they are invested. Again, if an individual depositor withdraws his money from the bank, there is no risk. But if all depositors simultaneously do this, there will be a run on the banks and the banking system will be affected adversely.

(ii) To Regard the Aggregates as Homogenous

The main defect in macro analysis is that it regards the aggregates as homogenous without caring about their internal composition and structure. The average wage in a nation is the sum total of wages in all professions, i.e. wages of clerks, typists, teachers, nurses etc. But the volume of aggregate employment depends on the relative structure of wages rather than on the average wage. If, for instance, wages of nurses increase but of typist rises much aggregate employment would increase.

(iii) Aggregate Variables may not be Important Necessarily

The aggregate variables which form the economic system may not be of much significance. For instance, the national income of a country is the total of all individual income. A hike in national income does not mean that individual incomes have risen. The increase in national income might be the result of the increase in the incomes of a few rich people in the nation. Thus a rise in the national income of this type has little significance from the point of view of the community.

(iv) Indiscriminate Use of Macro Economics Misleading

An indiscriminate and uncritical use of macro economics in analyzing the complexities of the real world can frequently be misleading. For instance, if the policy measures needed to achieve and maintain full employment in the economy are applied to structural redundancy in individual firms and industries, they become irrelevant. Likewise, measures aimed at controlling general prices cannot be applied with much advantage for controlling prices of individual products.

(v) Statistical and Conceptual Difficulties

The measurement of macro economics concepts involves a number of statistical and conceptual complexities. These problems relate to the aggregation of micro economic variables. If individual units are almost similar, aggregation does not present much difficulty. But if micro economic variables relate to dissimilar individual units, their aggregation into one aggregation into one macro economic variable may be incorrect and hazardous.

Conclude that macro economics enriches our knowledge of the functioning of an economy by studying the behaviour of national income, productivity, investment, savings and consumption. Further more, it throws much light in solving the problems of redundancy, inflation, economic instability and economic growth. The concept of stock and flow are mainly used in the macro economics or in the theory of income, productivity and employment. Lastly, both the concepts of stock ad flow variables are very significant in modern theories of income, interest rate, business cycles etc.