Fundamentals of Macroeconomics

Macroeconomics is the other side of the coin called economics, microeconomics being one of the two sides. It implements the economic theory by widening its approach, to focus on issues of the economy as a whole unit rather than the individual units. The recent change in tax regime by the Indian government i.e the introduction of GST is one such example of things that fall under macroeconomics. So let us go ahead and understand what macroeconomic theory is about.

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Macroeconomics

Macroeconomics takes the larger aspect of economics on it’s back. It is the study of economics in regard to aggregates of an economy. It is the part of economic theory that conceptualizes the behaviour of aggregates of the economy and considers macrophenomenon triggered by collective units of an economy.

It deals with generalized concepts like national income, GDP, national consumption expenditure etc. One such example is GST, which completely reformed the government budget and altered the consumption expenditures of the economy because of change in prices. We regularly hear terms like GDP when comparing the economic states of countries.

The two main tools of macroeconomics are – aggregate supply and aggregate demand. It is also known as the income theory.

Browse more Topics under Microeconomics And Macroeconomics

• Introduction to Microeconomics

Macroeconomics vs Microeconomics

• Microeconomics deals with individuals whereas macroeconomics deals with the economy as a whole entity consisting of collective individual units.
• Macroeconomics uses aggregate demand and aggregate supply to explain it’s concepts whereas microeconomics employs demand and supply.
• Macroeconomics focuses on the determination of income and employment in the economy, on the other hand, microeconomics aims at the determination of the price of a good or service and factors of production.
• In macroeconomics, the degree of aggregation is highest because while dealing with the general aspects of the economy, factors have to be aggregated completely. On the other side, the degree of aggregation in microeconomics is limited.
• Macroeconomics is known as income theory. Microeconomics is also termed as price theory.

It can be easily observed that micro and macroeconomics differ on the application of economic theory to two different scales. Despite all these differences, both of these are not mutually exclusive of each other. Macroeconomics is the aggregation of economic behaviour by individual units. Microeconomic aspects can change with changes in macroeconomic aspects and vice versa.

The Need of Macroeconomics

It was earlier considered that concepts of microeconomics are sufficient enough to explain economic behaviours. But then it was observed that economic aspects differed when applied to two different scales. The concepts of microeconomics were not able to explain various phenomenon taking place at the highest level of aggregation. In addition to this, there emerged various paradoxes that microeconomics wasn’t able to explain.

For example, microeconomics explains that to earn maximum profit producers should decrease supply when prices are low and increase supply when prices are high, but if all individual suppliers decrease the supply of a commodity, then collectively the overall supply would change, and this will have effects on income, expenditure, taxation policies etc. Thus to overcome the shortcomings of microeconomic theory, the macroeconomic theory came into existence which focuses on aggregates and discusses the welfare of the economy as a whole.

Solved Example for You

Q: Identify the following as Microeconomic and Macroeconomic study :

1. Production of a sugar mill
2. Inflation rate
3. Car industry
4. Supply of money
5. Wage determination in a company
6. Allocation of resources
7. Household expenditure
8.  Aggregate demand
9.  Foreign exchange rate
10.  Market demand for apples

Ans: Microeconomic study : 1,3,5,6,7,10 and macroeconomic study: 2,4,8,9