What is Macroeconomics? | Definition, Pros and 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 on 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.

Definition of Macroeconomics

The term ‘Macro’ in macroeconomics has been derived from the Greek word ‘makros,’ meaning large. In the context of 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 of the significant examples of macroeconomics variables include aggregate demand, national income, total output, total employment, aggregate supply, general price level and the like.

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. The fundamental instruments or tools that macroeconomics employ to study vital economic problems include aggregate supply and aggregate demand.
  5. The methodology that macroeconomics uses to study economics is called general equilibrium analysis. The primary objective of this method is to inquire 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 takes income as the central decisive factor affecting economic issues.
  7. As the determination of general price level and aggregate output constitutes one of the fundamental concerns of the 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 exhibit the following advantages.

  1. It helps in the planning and formulation of national economic policies.
  2. Specific areas like national income, national investment, international trade can be dealt with only by using models of macroeconomics.
  3. Using macroeconomic models are essential for comprehending specific paradoxical situations in which the outcomes obtained from individual analysis proves to be in contravention of 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 in analysing monetary issues like inflation and deflation and adopting suitable financial policies for the same.

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 to be homogeneous, which is not always the case.
  2. Macroeconomics often 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 to be detrimental to the interests of individual economic units.

References

  1. http://fred.ifas.ufl.edu/pdf/courses/undergraduate/Fall2019/AEB3281Stair.pdf
  2. https://ideas.repec.org/b/elg/eebook/450.html
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