Macroeconomics: Meaning, scope, limitations

 Q. Define macroeconomics. Explain the scope and limitations of macroeconomics.

Ans. MEANING OF MACROECONOMICS: The term ‘Macro’ is derived from the Greek Word ‘Makros’ which means large. Thus, macroeconomics means economics of large dimension, referring to the economy 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 economy as a whole. It focuses on macroeconomic variables like aggregate demand, aggregate supply, general price level, national income and output etc.

DEFINITION OF MICROECONOMICS:
In the words of Boulding, “Macroeconomics theory is that part of Economics which studies the over all averages and aggregates of the system.”

According to Shapiro, “Macroeconomics deals with the functioning of the economy as a whole.”

SCOPE OF MACROECONOMICS: It refers to the issues, problems and parameters of Economics that are included in macroeconomics. Following are the broad areas of study of macroeconomics and subject matter of macroeconomics.

i) Theory of National Income: Macroeconomics studies the concept of national income, its different elements, methods of measurement and social accounting.

ii) Theory of Employment: Macroeconomics also studies problems relating to employment and unemployment. It studies different factors determining the level of employment, viz. effective demand, aggregate supply aggregate consumption, aggregate investment, aggregate saving, etc.

iii) Theory of Money: Changes in demand for and supply of money have considerable
bearing on the level of employment. Macroeconomics studies functions of money and theories relating to it. The system of barking and other financial institutions is also studied in this context.

iv) Theory of General Price Level: Determination of changes in general price-level are the core issues of macroeconotnics. Problems concerning inflation and deflation are the principal issues involved in this context.

v) Economic Growth and Development: Study of problems relating to economic growth or increase in per capita real income forms a part of macroeconomics. Specifically, it studies the growth problem of underdeveloped economies.

vi) Business Cycles: Economic activity always shows ups and downs, it never shows a steady pattern of change for all time to come. This cyclical movement of the economy is better known as business cycle. It is a major macroeconomic issue and an important area of macroeconomics study.

vii) Theory of International Trade: Macroeconomics also studies trade among different countries. Theory of international trade, tariff protection, etc., are subjects of great significance in macroeconomics.

viii) Budgetary Deficit and Fiscal Policy: In the wake of privatisation and globalisation of the world economies, budgetary deficit and the related fiscal policy has emerged as a issue of macroeconomics.

ix) Interest Rates and Monetary Policy: Monetary policy involves monetary measures by the government in terms of changing interest rate with a view to stimulating economic growth and stability.

LIMITATIONS OF MACROECONOMICS: Main limitations of macroeconomics are as under:

i) Dependence on individual units: Several conclusions of macroeconomics are based on the sum total of individual units. In fact, it is not correct, because what is true for individuals may not necessarily be true for the whole economy. For instance, an individual may save in terms of money but if everybody starts saving, the aggregate demand will fall causing reduction in national income.

ii) Heterogeneous Units: Under macroeconomics, hetergeneous units are studied. These units are measured in different ways. It is not possible to express these units in uniform numbers or homogeneous measure.

iii) The composition (ingredients) of structure (manner) of the Aggregate is more important than the Aggregate itself: Macroeconomics studies aggregate but as a matter of fact, it is the composition of the structure of the aggregates which influences an economy more than the aggregate itself. Supposing, price level in 2012 and 2013 remains constant but it does not imply thar no change prices took place in 2013. It is possible that prices of food grains might have fallen in 2013 and that of industrial goods might have risen correspondingly, keeping the general price level constant. Thus, for a proper study of an economy, knowledge of the composition of structure of the aggregate is much essential as the aggregate itself.

iv) Different effects of Aggregates: Another difficulty in the study of macroeconomics is that it does not study the different effects of an aggregate on different sectors of an economy. Macroeconomic tendency (particular way of behaving) has not uniform effect on all sectors of an economy. For example, rise in price level benefits the traders and the industrialists but the wage-earners are the losers.

v) Limited Application: Another limitation of macroeconomics is that most of the models relating to it have only theoretical significance. They have very little use in practical life. Moreover, it is very difficult to measure various aggregates of macroeconomics.

vi) It ignores the contribution of Individual units: Macroeconomics analysis throws light only on the functioning of the aggregates. However, in real life, the economic activities and decisions taken by individual units on private level have their effects on the economy as a whole. Such effects are not known by the study of macroeconomics alone.