ASSUMPTIONS,IMPORTANCE AND LIMITATION OF MACRO ECONOMICS

v  ASSUMPTIONS,IMPORTANCE AND LIMITATION OF MACRO ECONOMICS

MACRO ECONOMICS

v  ASSUMPTIONS OF MACRO ECONOMICS

1. SHORT PERIOD:APPLICABLE IN SHORT PERIOD, PRODUCTION CAPACITY,TECHNIQUES AND NUMBER OF LABORER,HABITS AND TASTES OF THE CONSUMER REMAINS CONSTANT. AGGREGATE SUPPLY REMAINS CONSTANT. OUTPUT CAN BE INCREASED BY INCREASING THE AGGREGATE DEMAND.
2. PERFECT COMPETITION:-
3. CLOSED ECONOMY: WHICH IS FREE FROM THE INFLUENCE OF FREE TRADE
4. IGNORES THE ROLE OF GOVERNMENT AS SPENDER:-AGGREGATE DEMAND IS ONLY INFLUENCED BY CONSUMPTION AND INVESTMENT AND IGNORED THE ROLE OF GOVT SPENDING
5. LABOUR IS THE ONLY VARIABLE FACTOR OF PRODUCTION: PRODUCTION IS FUNCTION OF LABOUR
6. AS MORE AND MORE UNITS OF THE LABOUR EMPLOYED,THE MARGINAL PRODUCTIVITY GOES ON REDUCING. IT IS SUBJECT TO APPLICATION OF LAW OF DIMINISHING MARGINAL PRODUCTIVITY.
7. LABOUR BELIEVE THAT THE VALUE OF MONEY REMAINS CONSTANT.
8. MONEY IS NOT ONLY A MEDIUM OF EXCHANGE BUT ALSO ACTS AS STORE OF VALUE
9. NO TIME LAGS: ADJUSTMENT AMONG DIFFERENT ECONOMIC VARIABLES TAKES PLACE WITHOUT ANY GAP
10. UNDER EMPLOYMENT EQUILIBRIUM:-POSSIBILITY OF EQUILIBRIUM UNDER EMPLOYMENT EQUILIBRIUM TAKES PLACE WHERE AD=AS
11. SAVING DEPEND ON INCOME AND INVESTMENT DEPENDS UPON THE RATE OF INTEREST.
12. DETERMINATION OF INTEREST DEPENDS ONLY ON MONETARY FACTORS THAT IS DEMAND FOR MONEY AND SUPPLY OF MONEY
13. THERE IS OPTIMUM UTILIZATION OF RESOURCES

v      SIGNIFICANCE/IMPORTANCE

1. AS MACRO ECONOMY IS THE STUDY OF THE ECONOMY AS WHOLE AND IT PROVIDE INSIGHT TO UNDERSTANDING THE WORKING OF THE ECONOMY AND VARIOUS FACTORS WHICH ARE INTERDEPENDENT UPON EACH OTHER
2. MACRO ECONOMIC IS CONCERNED WITH THE STUDY OF NATIONAL INCOME. IT PROVIDE HELP TO THE GOVERNMENT FORMULATING AND IMPLEMENTATION OF VARIOUS POLICIES
3. IT ALSO STUDY THE CAUSES AND REMEDIAL MEASURE TO CONTROL TRADE CYCLES
4. HELPS IN UNDERSTANDING THE CHANGES IN GENERAL PRICE LEVEL
5. STUDY OF MACRO ECONOMICS HAS GREAT ROLE IN CONSTRUCTING THE THEORIES AND PRINCIPLES OF MICRO ECONOMICS
6. SIGNIFICANCE/IMPORTANCE
7. MACRO ECONOMICS HELPS IN MAKING INTERNATIONAL COMPARISONS
8. AS MACRO ECONOMICS PROVIDES THE DETAILS OF DIFFERENT SECTORS( THEIR INTERDEPENDENCE),COMPOSITION OF NATIONAL ,LEVEL OF UNEMPLOYMENT,NATURE OF POVERTY ETC.SO IT HELPS TO MAKE ECONOMIC PLANNING
9. HELPFUL IN UNDERSTANDING THE PARADOXES FOR EXAMPLE IF ONE FARMER MAKE HARD WORK AND HE WILL HAVE GOOD CROP AND GOOD INCOME BUT IF ALL THE FARMERS WORK HARD AND THERE WILL BE GOOD SUPPLY OF CROPS AND PRICES WILL FALL AND THERE WILL BE DECLINE IN AGRICULTURE INCOME.

v      LIMITATIONS

1.       DEPENDENCE ON INDIVIDUAL UNITS:-WHAT IS TRUE FOR INDIVIDUAL MAY NOT BE TRUE FOR THE ECONOMY

2.       IT IS NOT POSSIBLE TO AGGREGATE AND EXPRESS IN PROPER WAY

3.       THE COMPOSITION OF THE STRUCTURE OF THE AGGREGATE IS MORE IMPORTANT THAN THE AGGREGATE ITSELF.

4.       DIFFERENT EFFECTS OF THE AGGREGATES:-NO UNIFORM EFFECT ON ALL SECTORS OF THE ECONOMY

5.       LIMITED APPLICATION

6.       THROWS LIGHT ONLY ON THE FUNCTIONING OF THE AGGREGATES NOT OF THE INDIVIDUAL UNITS