Meaning of Macroeconomics
Macroeconomics is concerned with the nature, relationship, and behavior of aggregate quantities and averages such as national income, total consumption, saving, investment, total employment, general price level, aggregate expenditure, and the aggregate supply of goods and services.
In other words, it studies economic elements as a whole. The subject matters of macroeconomics constitute the study of current output, long-run economic growth, economic fluctuations, unemployment, inflation, and the effect of increasing globalization on domestic output.
According To McConnel, “Macroeconomics examines the forest, not the trees. It gives us a bird’s eye view of the economy.”
Macroeconomics attempts to explain how the economy’s total output of goods and services and total employment of resources are determined and explains the fluctuations in the level of output and employment.
The subject matter of macroeconomics is to study the process of income and employment determination.
In other words, the subject matter of macroeconomics constitutes the study of current output, long-run economic growth, economic fluctuations, unemployment, inflation, and the effect of increasing globalization on domestic output.
The main objective of macroeconomics is to explain principles, problems, and policies related to full employment and growth of resources. It seeks, not only to understand macroeconomic phenomena but to find policies, and promote maximum output, employment, and price stability over time.
It also establishes an important relationship between movements of income, employment, and the general price level. Therefore, it is also called income and employment theory.
Contributors of Macroeconomics
Here’s a list of six key figures considered founders or significant contributors to the development of macroeconomics:
John Maynard Keynes (1883–1946)
Known as the father of modern macroeconomics, Keynes revolutionized economic thought with his book The General Theory of Employment, Interest, and Money (1936).
He argued that total demand in the economy (aggregate demand) drives economic activity and employment, emphasizing the need for government intervention during recessions. His ideas laid the foundation for fiscal policies, where governments adjust taxes and spending to stabilize the economy.
Adam Smith (1723–1790)
Adam Smith, often referred to as the father of economics, is best known for his book The Wealth of Nations (1776). Although his work is more associated with microeconomics, his ideas on the invisible hand and market self-regulation influenced classical macroeconomic thought.
Smith believed that economies naturally tend toward equilibrium without government intervention, laying the groundwork for classical economics.
David Ricardo (1772–1823)
David Ricardo contributed to macroeconomic thought through his theory of comparative advantage and Ricardian equivalence.
His work in Principles of Political Economy and Taxation (1817) discussed how nations benefit from trade even when one is less efficient. He also explored how government borrowing impacts private sector savings, influencing debates on fiscal policy and long-term debt sustainability.
J.B. Say (1767–1832)
Say is famous for Say’s Law, which states that “supply creates its own demand.” According to this law, production naturally generates enough income to buy all output, implying no persistent unemployment.
His ideas were foundational in classical economics, supporting the notion that government intervention is unnecessary, as markets self-correct in the long run.
J.S. Mill (1806–1873)
John Stuart Mill further developed classical economic ideas, emphasizing the role of individual liberty in economic decision-making.
In his book Principles of Political Economy (1848), Mill addressed issues like economic growth and distribution, emphasizing the self-regulating nature of markets. His insights on market dynamics and labor productivity were essential in shaping long-term economic theories.
Milton Friedman (1912–2006)
Milton Friedman was a leading figure in monetarism, a school of thought that emphasizes the role of money supply in influencing economic activity. He argued that controlling inflation through monetary policy was more effective than fiscal policy.
His work, particularly in A Monetary History of the United States (1963), challenged Keynesianism and shaped modern central banking practices, focusing on steady money supply growth.
Uses of Macroeconomics
The main uses of macroeconomics are explained below:
To Understand the Working of the Economy
The national economy is affected by macroeconomic variables such as total income, output, employment, and general price level which are interdependent and statistically measurable.
Therefore, the study of macroeconomics helps to get a correct and clear picture of the functioning of the economy.
Macroeconomics in Formulation of Economic Policies
Macroeconomics contributes a lot to the determination of government economic policies which affect the level of national income, general price level, and employment.
Further, targets of saving and investment may also be determined with the help of macro quantities. The main objective of any government is to attain maximum social benefit or welfare.
To achieve this goal government must be concerned with the regulation and control of aggregates of the economic system, the general volume of trade, etc. This means that accurate and reliable data of the aggregative variables are the prerequisite for the formulation of sound public policies.
Business Decisions
The study of macroeconomics is very useful in solving environmental issues faced by business firms. The process of applying macroeconomics in making business decisions such as studying the business environment, studying the trends of international business, and examining the nature and extent of externalities of the business environment.
Economic Planning
In recent days, both developed and developing countries have adopted the technique of economic planning as a tool for determining their level of economic growth and development.
Economic planning is concerned with aggregative variables and therefore, it comes under macroeconomic analysis. Several aggregative economic variables are used in determining various components of economic planning such as objectives, targets, priorities, policies, annual growth rate, and so on.
Development of Microeconomic Theories
Macroeconomics also helps in building and developing microeconomic theories. For example, the determination of wages in an industry will be influenced by the general wage rate of the economy. Similarly, the price of a commodity will also be influenced by the prevailing general price level in the economy.
In situations of inflation, generally, the prices will increase, while in years of depression, the prices will go down. Thus, no microeconomic laws can be formulated without a pre-study of macroeconomics.
International Comparisons
Macroeconomics provides necessary information for international comparisons. For example, a comparative study of average national income, consumption, and savings between different countries requires information about macroeconomic variables.
Read More: Mercantilism
Scope of Macroeconomics
The scope of macroeconomics consists of the study of the following subjects:
Theory of Income and Employment
The main objective of macroeconomics is to study employment and the growth of resources. In other studies the concept of national income, its different measurements, and the scope of accounting. Similarly, income and employment determination.
Macro Theory of Distribution
Macroeconomics studies the determinants of the income distribution. It also studies how the comparative share of different classes of people in national income is determined and distributed.
Theory of International Trade and Business Fluctuations
It deals with the nature, causes, impacts, and implications of fluctuations in macroeconomic variables like level of employment, general price level, income, and output.
Similarly, it studies principles related to international trade and other components such as the balance of payments, terms of trade, exchange rate, etc.
Theory of Money and Price Level
Macroeconomics explains the nature, cause, and effect of inflationary and deflationary tendencies in the economy. Changes in demand and supply of money affect the level of employment.
Therefore, under macroeconomics, functions, and theories relating to demand for money and supply of money are studied.
Theory of Economic Growth
Macroeconomics explains various issues relating to economic growth and development like privatization, economic liberalization, balanced development, poverty, inequality, etc. In other words, it studies the theory of economic growth and development.
Macroeconomic Policies
Macroeconomics also studies the nature and extent of the effectiveness of macroeconomic policies on the national economy.
Generally, it studies two types of macroeconomic policies. They are Demand-side policies (i.e., monetary policy, fiscal policy, etc.) and supply-side policies.
Read More: Challenges in Global Business
Limitations of Macroeconomics
Despite the growing popularity, macroeconomics is not free from its limitations. The important limitations are as follows:
Problems in averaging
It is a complicated task to find out the total national income with the help of the estimates of the price of different goods and services.
Wholesale price index numbers are made to find out the general price level. These index numbers involve the problems of weighing, averaging, and a number of other difficulties.
The problem in measuring heterogeneous aggregates
The homogenous aggregates can lead to accurate results. But sometimes we may have to take into account aggregates that are nor-homogenous. Results based on these heterogeneous aggregates are not accurate and we should always avoid such problems.
Unreliable estimate of aggregates
Due to imperfect knowledge of statistical techniques, some persons may predict the aggregates falsely. For example, the agricultural prices decrease by 50 percent while industrial prices increase by 50 percent, the general price level remains the same because the two types of price changes neutralize each other.
In such a situation one may advise the government to make no change in its policy because the general price level remains the same.
But actually, the government needs to implement a policy that helps the farmers who get a loss due to a fall in the price of their product. Thus, sometimes the aggregative results may be misleading. It requires a special ability to predict the results in such a situation.
Variation in the degree of fluctuations
An aggregative change may not influence all the sectors of the economy in the same manner. For instance, a general rise in prices does not mean that the prices of all commodities have increased and have increased in the same proportion.
The prices of a few commodities may rather decrease. Further, due to this aggregative change, some sectors may be affected more adversely than others. On the other hand, some individuals may benefit more than others.
Read Next: Types of Globalization
Sujan Chaudhary holds a BBA degree. He loves to share his business knowledge with the rest of the world.