The term ‘macro’ was first used in economics by Ragner Frisch, a Norwegian economist; he was the first who used the term ‘macro’ in economics in 1933; however, its significance as a methodological approach to economic problems gained popularity with Mercantilists in the 16th and 17th centuries. They tried to study the economic system as a whole.
” Macroeconomics is defined as that branch of economics which studies economic activities including economic issues and economic problems at the level of an economy as a whole.”
The term ‘Macro’ is derived from the Greek word ‘Makros,’ which means large. The term macroeconomics is thus used to refer to the economic system as a whole. Basically, it is an analysis of averages or aggregates covering the whole economy, such as total employment, national income, national output, total investment, total consumption, total savings, aggregate demand, general price level, wage level, and cost structure. It is concerned with the problems of unemployment, economic fluctuations, inflation or deflation, international trade, and economic growth. As part of the business cycle, it is concerned with the impact of investments on total output, total income, and employment. International trade is concerned with issues like the balance of payments and foreign aid, which fall under macroeconomics. Monetary economics focuses on how the quantity of money affects the general price level. Above all, Macroeconomic theory discusses how to determine the total income of a country and why it fluctuates. Finally, it studies the factors that hinder economic growth and the ones that encourage it.
Many celebrated economists have defined macroeconomics in their own ways. Some of them are as follows-
According to Boulding
Macroeconomics theory is that part of economics which studies the overall averages and aggregates of the system.”
According to Shapiro
Macroeconomics deals with the functioning of the economy as a whole.”
According to M. H. Spencer
Macroeconomics is concerned with the economy as a whole or large segments of it. In macroeconomics, attention is focussed on such problems as the output and other matters of economy-wide significance.”
Variables of Macroeconomics
Macroeconomics is the study of aggregates of the economic system. The macroeconomic variables, or variables representing the economy as a whole, are called aggregates of the economic system. Some examples of these aggregates are as follows:
This term refers to the total consumption of goods and services in the economy for the period of an accounting year.
During an accounting year, it corresponds to the total expenditures by all market participants on such goods that add to the stock of capital.
During a period of an accounting year, it’s the sum of all the expenditures made in the economy on goods and services.
It is the total production of goods and services in the economy during the accounting year.
It means income generated within the domestic territory of a country during the accounting year.
General Price Level
It means the index of prices of all goods and services at the end of a specified period of time.
Scope and Objectives of Macroeconomics
When it comes to economic analysis, macroeconomics is of much theoretical and practical importance. Let’s discuss some significant scopes and objectives of macroeconomics.
Understanding the Working of Economy
The study of macroeconomic variables is indispensable for understanding the working of the economy. Our main economic problems are concerned with the behavior of total income, output, employment, and the general price level in the economy. These variables are statistically measurable, thereby facilitating the possibility of analyzing the effects on the functioning of the economy.
Macroeconomics is very important for evaluating the overall performance of the economy in terms of national income. After the Great Depression of the 1930s, it became necessary to analyze the causes of general overproduction and general unemployment.
Economic Growth and Development
Macroeconomics involves the study of problems relating to economic growth or increase in per capita income. Specifically, it helps underdeveloped countries understand different economic variables on their path to become a developed country.
Macroeconomics also studies problems related to employment and unemployment. In an economy, employment depends on effective demand, which in turn depends on aggregate demand and aggregate supply functions. Unemployment is thus caused by a deficiency of effective demand. To raise this, effective demand should be raised by increasing total investment, total output, total income, and total consumption. Thus, macroeconomics has special significance in studying the causes, remedies, and effects of general unemployment.
Economic activity always shows ups and downs; it never shows a steady pattern of change all the time. This cyclic movement of an economy is known as the business cycle, and it is a macroeconomic problem. Macroeconomics analyzes the causes of economic fluctuations and provides remedies.
Macroeconomics also studies trade among different countries. In macroeconomics, trade theory and tariff protection play an important role.
Understanding the behavior of Individual Units
To understand the behavior of individual units, the demand of macroeconomics is imperative. Demand for individual products depends upon aggregate demand in the economy.
Formulation of Economic Policies
Macroeconomics is extremely useful for drafting economic policies. Almost all governments resort to aggregate data pertaining to economic factors in formulating economic policies.
General Price Level
Several changes occur in the general value of money or general price level. A fall in the value of money or a rise in prices is called inflation, and a fall in the price is called deflation. Both situations are considered undesirable for the market. So, to keep prices and the value of money in control, economists mostly resort to macroeconomics studies.
Macroeconomics plays a crucial role when it comes to economic planning. Knowledge of mutual dependence of different sectors, the composition of national income, nature of poverty, etc., is very important for governments to formulate comprehensive economic plans.
Rate of Unemployment
The unemployment rate is the percentage of the unemployed labor force at a given time. It is one of the most significant macroeconomic indicators that determine the economic health of a country.
This example of macroeconomic indicators connotes the total expenditure on the purchase of all goods and services in the economy in an accounting year.
Supply of Money
This is the total stock of money circulating in an economy. The circulating money includes the currency, printed notes, money in the deposit accounts, and in the form of other liquid assets.
Rate of Inflation
Inflation connotes a rise in the price level of an economy over a period of time. It is also one of the most significant macroeconomic indicators that helps understand the economic condition of a nation.
Foreign Exchange Rate
It compares the currencies of two countries, and it gives an insight into the relative purchasing power of each currency.