What is Macroeconomics? | Definition, Pros vs Cons

As a branch of knowledge, Economics is concerned with observing, analysing and predicting human behaviour based on the distribution of scarce resources. This discipline aims to ascertain the allocation of resources such that the maximum level of production profit, consumer satisfaction and, ultimately, social welfare is achieved.

To be more precise, this branch of knowledge is about generating and balancing preferences in the face of inadequate resources.

The discipline of Economics is broadly classified into two branches. Macroeconomics is one of them, and the objective of this branch is to examine broader economic concerns.

Key Takeaways

1. Macroeconomics is the study of the economy as a whole, including inflation, economic growth, and unemployment rates.
2. It analyzes the overall performance of an economy and helps policymakers make decisions that impact the country’s financial system.
3. Macroeconomics provides insights into how an economy operates and how its various components, such as government, businesses, and individuals, interact.

Definition of Macroeconomics

In macroeconomics, the term ‘Macro’ has been derived from the Greek word ‘makros,’ meaning large. In economics, this term is used to imply larger economic concerns. To be more specific, the branch of macroeconomics is concerned with the economy, mostly national economy, as a whole.

It studies and handles the economic activities of the aggregate units of an economy. Therefore, some significant examples of macroeconomic variables include aggregate demand, national income, total output, total employment, aggregate supply, general price level, etc.

Features of Macroeconomics

In pursuit of its broader goals of comprehending more general problems of an economy, Macroeconomics assumes the following characteristic features.

1. It examines and studies the economic forces or economic relationships at an aggregate level.
2. As its scope of study deals with the entire economy as one entity, the degree of aggregation is vast. For example, questions of national income and different industries are considered an economy’s aggregate units.
3. The principal problems that fall within the ambit of this branch of economics include:
   • Optimum growth and utilisation of resources.
   • Determination of the employment and income level.
   • Principles and policies related to the above two problems.
4. Macroeconomics employs fundamental instruments or tools to study vital economic problems, including aggregate supply and demand.
5. The methodology that macroeconomics uses to study economics is called general equilibrium analysis. The primary objective of this method is to inquire about and show the interdependence between macroeconomic variables like total output, total income, cumulative savings, total consumption and so on.
6. Unlike in microeconomics, where the price is the principal determinant of economic problems, macroeconomics considers income the central decisive factor affecting economic issues.
7. As determining general price level and aggregate output constitutes one of the fundamental concerns of macroeconomics, the branch is also referred to as the “Theory of income and employment.”

Advantages of Macroeconomics

While illustrating the substantial picture of an economy, macroeconomics exhibits the following advantages.

1. It helps in the planning and formulation of national economic policies.
2. Specific areas like national income, national investment, and international trade can be dealt with only by using macroeconomic models.
3. Using macroeconomic models is essential for comprehending specific paradoxical situations in which the outcomes obtained from individual analysis contradict the entire economy’s perspective. For example, saving money may be considered beneficial for individual economic units. However, from the larger economic point of view, saving money can prove to be detrimental.
4. It helps analyse monetary issues like inflation and deflation and adopt suitable financial policies.

Disadvantages of Macroeconomics

Despite their several utilities, the methods used in macroeconomics are not without limitations. The following are some significant disadvantages of macroeconomics.

1. It assumes the aggregates are homogeneous, which is not always true.
2. Macroeconomics fails to represent the actual situation at the micro or individual level.
3. Stabilisation measures implemented at the macro level do not have the same positive effect on various economic segments.
4. Macroeconomic decisions sometimes prove detrimental to individual economic units’ interests.

References

1. https://ideas.repec.org/b/elg/eebook/450.html