NATURE OF MACRO ECONOMICS

Ø  NATURE OF MACRO ECONOMICSØ  SHASHI AGGARWAL ECONOMICS AND LAW CLASSES

Ø  HINTS FOR WRITING ON NATURE OF ECONOMICS

1. IF THERE IS SHORT QUESTION OF TWO MARKS ON THE NATURE OF MACRO ECONOMICS,WE HAVE TO WRITE THE MEANING AND DEFINITION OF MACRO ECONOMICS
2. IF SHORT QUESTION IS 4 MARKS THEN MEANING PLUS FEATURES WITH BRIEF EXPLANATION
3. BUT IF NATURE OF MACRO ECONOMICS IS LONG QUESTION THEN MEANING,DEFINITION,FEATURES AND ASSUMPTIONS IN DETAIL.

Ø  NATURE OF MACRO ECONOMICS

• IT HAS ITS ORIGIN IN THE GREEK LANGUAGE TERM ‘ MAKROS’ WHICH MEANS LARGE. IT STUDIES ECONOMIC PROBLEMS FROM THE POINT OF VIEW OF ENTIRE ECONOMY,E.G. AGGREGATE EMPLOYMENT, NATIONAL INCOME, GENERAL PRICE LEVEL ETC
• MACRO ECONOMICS IS DEFINED AS THAT BRANCH OF ECONOMICS WHICH STUDIES ECONOMIC ACTIVITIES INCLUDING ECONOMIC ISSUES AND ECONOMIC PROBLEMS AT THE LEVEL OF AN ECONOMY AS WHOLE.
• MACRO ECONOMICS IS ALSO KNOWN AS THEORY OF INCOME AND EMPLOYMENT OR SIMPLY INCOME ANALYSIS. IT IS CONCERNED WITH PROBLEM OF UNEMPLOYMENT,ECONOMIC FLUCTUATION,INFLATION ,DEFLATION,INTERNATIONAL TRADE AND ECONOMIC GROWTH.
• AS A METHOD OF MACRO ECONOMIC ANALYSIS IT IS IMPORTANT TO UNDERSTAND THE WORKING OF THE ECONOMY. AND IT ALSO FACILITATES IN GOVERNMENT IN FRAMING SUITABLE POLICY.
• NATURE OF THE MACRO ECONOMICS
• MACRO ECONOMICS IS THE STUDY OF AGGREGATES OR AVERAGE COVERING THE ENTIRE ECONOMY  SUCH AS :-

1. TOTAL EMPLOYMENT
2. NATIONAL INCOME
3. NATIONAL OUTPUT
4. TOTAL INVESTMENT
5. TOTAL CONSUMPTION,TOTAL SAVING,AGGRAGTE SUPPLY
6. AGGREGATE PRICE LEVEL
7. WAGE LEVEL AND COST STRUCTURE

• DEFINITION OF MACROECONOMICS

1. MACRO ECONOMICS IS THAT BRANCH OF ECONOMICS THAT STUDIES THE BEHAVIOR AND PERFORMANCE OF AN ECONOMY AS WHOLE. IT FOCUSSESS ON THE AGGREGATE CHANGES IN THE ECONOMY SUCH AS UNEMPLOYMENT,GROWTH RATES,GROSS DOMESTIC PRODUCT ETC
2. BOULDING,” MACRO ECONOMIC THEORY IS THAT PART OF ECONOMICS WHICH STUDIES OVER ALL AVERAGES AND AGGREGATES OF THE SYSTEM.
3. ACCORDING TO M.H. SHAPIRO,” MACRO ECONOMICS DEALS WITH THE FUNCTIONING OF ECONOMY AS A WHOLE”

• HISTORICAL BACK GROUND

1. CLASSICAL ECONOMIST LIKE ADAM SMITH,MALTHUS AND JB SAY HAD TRIED TO STUDY THE PROBLEM FROM MACRO POINT OF VIEW. FULL EMPLOYMENT IS NORMAL CONDITION OF A FREE CAPITALIST ECONOMY
2. KEYNESIAN THEORY:-THE GENERAL THEORY OF EMPLOYMENT,INTEREST AND MONEY GIVEN MODERN THEORY OF MACRO ECONOMICS. FULL EMPLOYMENT IS NOT NORMAL FEATURE. UNEMPLOYMENT  EXIST IN EVERY ECONOMY AND IT IS DUE TO DEFICIENCY OF DEMAND.
3. NEO CLASSICAL THEORY:-ATTACHES GREATER IMPORTANCE TO MONETARY POLICY RATHER THAN FISCAL POLICY. LEVEL OF FULL EMPLOYMENT CAN BE ACHIEVED BY CHANGING THE SUPPLY OF MONEY
4. NEW CLASSICAL THEORY OR RATIONAL EXPECTATION THEORY:1960. ORIGIN BY PROF MUTH AND REAL DEVELOPMENT MADE BY LUCAS AND SERGENT.ON THE BASIS OF RATIONAL EXPECTATION PEOPLE MAKE CORRECT ASSESSMENT OF THE EFFECTS OF CHANGES IN THE POLICIES OF THE GOVT AND ADOPT SUCH MEASURES AS RENDER THESE POLICIES INEFFECTIVE.

• FEATURES

1. STUDY OF AGGREGATES: CONCERNED WITH CONCEPTS SUCH AS AGGREGATE DEMAND,AGGREGATE SUPPLY,TOTAL OUTPUT,GENERAL PRICE LEVEL
2. LUMPING METHOD: GENERAL PRICE LEVEL NOT PRICES OF INDIVIDUAL PRODUCT
3. GENERAL EQUILIBRIUM, ANALYSIS:-BEHAVIOR OF AGGREGATES AND THEIR INTERDEPENDENCE. FOR EXAMPLE A CHANGE IN INCOME LEVEL RESULT IN CHANGES IN SAVING AND MAY INFLUENCE INVESTMENT
4. USEFUL TO GOVERNMENT FOR FORMULATION AND IMPLEMENTATION OF VARIOUS POLICIES
5. A MAJOR TASK IS  THE DETERMINATION OF NATIONAL INCOME ALSO STUDIES THE FACTORS WHICH INFLUENCE NATIONAL INCOME AND CAUSE OF TRENDS
6. IN MACRO ECONOMICS A CRUCIAL ROLE IS ASSIGNED TO INVESTMENT.CHANGES IN EMPLOYMENT DEPENDS UPON EFFECTIVE DEMAND. EFFECTIVE DEMAND DEPENDS UPON CONSUMPTION AND INVESTMENT.IN THE SHORT RUN CONSUMPTION IS CONSTANT.  EFFECTIVE DEMAND IS ENHANCED BY INCREASING INVESTMENT.
7. GIVES AN OVERALL VIEW OF THE ECONOMY
8. MONETARY ECONOMICS: GIVEN IMPORTANCE TO MONETARY FACTORS ALSO. CHANGES IN THE DEMAND AND SUPPLY OF MONEY HAVE SIGNIFICANT EFFECT ON THE DETERMINATION OF INCOME AND EMPLOYMENT.
9. SHORT RUN NATURE OF MACRO ECONOMY:NATIONAL OUTPUT OR AGGREGATE SUPPLY IS CONSTANT IN SHORT PERIOD.LABOUR IS THE ONLY VARIABLE FACTOR IN THE SHORT RUN AND OUTPUT CAN BE INCREASED BY INCREASING THE LEVEL OF EMPLOYMENT.
10. MACRO ECONOMICS ONLY INSTITUTIONAL BECAUSE WE COULD UNDERSTAND ITS NATURE BY EXAMINING THE ECONOMIC FACTORS SUCH AS RATE OF INTEREST,SAVING ,INVESTMENT ETC
11. LAID STRESS ON STATE INTERVENTION:IN ORDER TO MAKE UP THE SHORTFALL IN PRIVATE INVESTMENT,PUBLIC INVESTMENT IS REGARDED AS MOST DESIRABLE.
12. GENERAL THEORY BECAUSE IT STUDIES ALL LEVEL OF EMPLOYMENT AND ALSO DISCUSS INFLATION,DEFLATION,UNEMPLOYMENT AND FULL EMPLOYMENT, AND ALSO STUDY TOTAL EMPLOYMENT,TOTAL OUTPUT AND OTHER AGGREGATE VARIABLES
13. BASED ON SOUND PRACTICAL EXPERIENCES

• ASSUMPTIONS

1. SHORT PERIOD:-ARE APPLICABLE IN THE SHORT RUN.LORD KEYNES ASSUMED THAT PROBLEM OF UNEMPLOYMENT IN DEVELOPED NATIONS WAS SHORT TERM AND IN LONG RUN WE ALL ARE DEAD.
2. PERFECT COMPETITIONS:-
3. CLOSED ECONOMY
4. IGNORES THE ROLE OF GOVT AS A SPENDER OR TAXER:-IGNORED THE EFFECT OF GOVERNMENT SECTOR ON AGGREGATE DEMAND. AGGREGATE DEMAND=CONSUMPTION PLUS INVESTMENT
5. DIMINISHING MARGINAL PRODUCTIVITY:-AS MORE AND MORE UNITS ARE EMPLOYED THEIR PRODUCTIVITY GOES ON REDUCING.
6. LABOUR IS THE ONLY VARIABLE FACTOR OF PRODUCTION :- P=f(N)
7. LABOUR HAS MONEY ILLUSION: ASSUME THAT VALUE OF MONEY REMAINS CONSTANT
8. MONEY ALSO ACT AS STORE VALUE

1. MONEY ALSO ACT AS A STORE VALUE

1. NO TIME LAG:- ADJUSTMENT AMONG DIFFERENT ECONOMIC VARIABLE TAKES PLACE WITHOUT ANY TIME LAG.
2. UNDER EMPLOYMENT EQUILIBRIUM
3. SAVING AND INVESTMENT FUNCTION: S=f(Y) AND INVESTMENT DEPENDS UPON RATE OF INTEREST
4. INTEREST IS A MONETARY PHENOMENON:- DEMAND AND SUPPLY OF MONEY
5. OPTIMUM UTILIZATION OF RESOURCES