What Macroeconomics is About
• Macroeconomics is concerned with the analysis of the behaviour of
the economic system in totality.
• Thus macroeconomics studies how the large aggregates such as total
employment, national product or national income of an economy and
the general price level are determined.
• Macroeconomics is therefore a study of aggregates. Besides
macroeconomics explains how the productive capacity and national
income of the country increase over time in the long run.
• Macroeconomics is the study of the structure and performance of
national economies and of the policies that the governments use to
try to affect economic performance. The issues that macroeconomists
address include the following:
• What determines a nation’s long run economic growth?
• 1890 per capita income was smaller in Norway than in
Argentina. But today Norway per capita income is three times
higher than Argentina. Why do some nations economies grow
quickly providing their citizens with rapidly improving living
standards, while other nation’s economies are relatively
stagnant.
 What causes a nation’s economic activity to fluctuate?
 1990 longest period of uninterrupted economic growth in US economic
history. 2000s performance was much weaker. Recession began 2007
worsened by financial crisis in 2008. why do economies sometimes
experience sharp short term fluctuations, between periods of prosperity
to periods of hard times.
• What causes unemployment?
•
During 1930s, one quarter of the work force in US was unemployed, a
decade later during world war II, less than 2% were unemployed. Why
does unemployment sometimes reach very high levels?
• What causes prices to rise?
• Rate of inflation in US in 1970s-10%, 1980s dropping to 4% and
dropping further to less than 2% per year in the late 1990s. Germany
inflation experience has been much more extreme.
Scope of Macroeconomics
• Macroeconomics is concerned with these 8 issues that describe the
scope of economics
1. Unemployment : Keynes explained that level of employment and
national income is determined by the aggregate demand and
aggregate supply. With aggregate supply remaining unchanged
in the short run, it is the deficiency of aggregate demand that
causes underemployment. According to him, it is the changes in
private investment that causes fluctuations in aggregate
demand.
2. Recession and Determination of National Income (GNP) :
• National income is the value of all final goods and services
produced in a country in a year.
•
Level of national income or what is called Gross National
Product shows the performance of the economy in a year
and determines the overall living standards of the people
of a country.
• The higher the per capita national income the greater the
amounts of goods and services available for consumption
per individual on an average.
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3. Inflation :
• Classical economists thought that it was the quantity of
money in the economy that determined the general price
level in the economy and according to them, rate of
inflation depended on the growth of money supply in the
economy.
• Keynes criticised the ‘Quantity Theory of Money’ and
showed that expansion in money supply did not always
lead to inflation or rise in price level. Inflation was due to
excessive aggregate demand.
4. Economic growth :
• Economic growth means sustained increase in national
income (GNP) or per capita income over a sufficiently long
period of time.
• Given the availability of natural resources, economic
growth of a country depends on the growth of physical
capital, human capital and progress in technology.
• The growth of all these factors requires saving and
investment. The growth rate can therefore be stepped up
by raising the rates of saving and investment.
5. Business Cycles :
• Business cycles refer to fluctuations in output and
employment with alternating periods of boom and
recession. In boom periods, both output and employment
are at high levels,
• Whereas in recession periods both output and
employment fall and as a consequence large
unemployment come to exist in the economy. When these
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recessions are extremely severe, they are called
depression.
6. Stagflation : While in business cycles, recession or depression is
accompanied with high unemployment and falling prices, in the
seventies recession or stagnation was accompanied by not only
high unemployment but also rapid inflation.
7. Balance of Payments & Exchange Rate :
• Balance of payments is the record of economic
transactions of the residents of a country with the rest of
the world during a period.
•
The aim to prepare such a record is to present an account
of all receipts on account of goods exported , services
rendered and capital received by the residents of a
country and
•
The payments made of goods imported, services received
and capital transferred to other countries by residents of a
country.
• The balance of payments are influenced by country’s
exchange rate. The exchange rate is the rate at which a
country’s currency is exchanged for foreign currencies.
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