Author: Shreyashi JajooMacroeconomics
Adam Smith is regarded as the founding father of modern economics. He was a Scotsman and a professor at the University of Glasgow. Macroeconomics, as a separate branch of economics, emerged after the British economist John Maynard Keynes published his celebrated book The General Theory of Employment, Interest, and Money in 1936.
The dominant thinking before Keynes was that all the laborers who are ready to work will find employment and all the factories will be working at their full capacity. This school of thought is known as the classical tradition.
The fact that the economy may have long-lasting unemployment had to be theorized about and explained, Keynes book was an attempt in this direction, hence the subject of macroeconomics was born by examining the working of the economy in its entirety and examine the interdependence of different sectors.
Before going ahead, I will brief you about how macroeconomics differs from the microeconomics that you must have gone through.
Difference between Macro and Micro Economics
Microeconomics studies individuals and business decisions made by countries and governments. While macroeconomics analyzes the decisions made by countries and governments.
Microeconomics focuses on supply and demand, and other forces that determine price levels, making it a bottom-up approach while Macroeconomics takes a top-down approach and looks at the economy as a whole, trying to determine its course and nature.
So from the above points, we are clear why microeconomics differs from macroeconomics.
Broadly macroeconomics deals with the following questions:
- Rise/fall in prices as a whole,
- The employment condition of the country or sectors of the economy as a whole is getting better/worse.
- Indicators that show the position of the economy.
- What steps needed for improving the present status of the economy.
Example-I
We must be well aware of this fact that output levels of all the goods and services of the economy as a whole have a tendency to move together.
Let me illustrate this with an example:
Suppose the output of food grains is experiencing growth. It is generally accompanied by a rise in the output level of industrial goods. The output of different kinds of goods tends to rise or fall simultaneously. So, we can conclude that aggregate output level, price level, or employment level, in the different production units of an economy bear a close relationship with each other. Instead of dealing with the above-mentioned variables at individual levels, we can think of a single good as the representation of all goods and services.
Macroeconomics
Macroeconomics deals with the following attributes like,
- Prices,
- Rate of interest,
- Wage rates,
- Profits, and so on.
And it also talks about their relationship with total production and level of employment by focusing on a single imaginary commodity.
The general directions of the movements of these variables for all the individual commodities are usually of the same kind as are seen for the aggregates for the economy as a whole. It may be convenient for us to focusing on representative goods rather than going through different goods. We may overlook some vital distinctive characteristics of individual goods.
Example-II
Let me illustrate this with an example:
Suppose we treat a single category of labor as a representative of all kinds of laborers. Now, we may be unable to distinguish the labor of the manager of a firm from the labor of the accountant of the firm. So, in many cases instead of a single representative category of goods, we may take a handful of different kinds of goods. Macroeconomics also tries to analyze how the individual output levels, prices, and employment levels of these different goods get determined.
Summary
Macroeconomics deals with the aggregate economic variables of an economy. It also takes into account various relationships that may exist between different sectors of an economy. This is what distinguishes it from microeconomics. It mostly examines the functioning of the particular sectors of the economy, assuming that the rest of the economy remains the same. Macroeconomics see an economy as a combination of four sectors namely household, firms government, and the external sector.
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