Chapter 1. Introductory Macroeconomics

Overview to Macroeconomics
• Macroeconomics deals with aggregates at level of economy as a whole, like aggregate demand and aggregate supply of all goods and services in economy.
• The term ‘Macro’ in English has its origin in Greek word ‘Makros’ which means large. It studies economic activities related to economy as a whole.
• If we observe economy of a country as a whole, it will appear that output levels of all goods and services in economy tend to move together.
• In macroeconomics, we generally simplify analysis of how country’s total production and level of employment are related to attributes (called variables) like price, rate of interest, wage rate, profits & so on.
• Inflation means prices are going up.
• Depression means a fall in employment and production levels.
• While moving away from different goods and focusing on a representative good may be convenient, in process, we may be overlooking some vital distinctive characteristics of individual goods.
• Macroeconomics tries to analyse how individual output levels, prices, & employment levels of these different goods are determined.
• Economic Agent means those individuals or institutions that take economic decisions. They can be consumers who decide what and how much to consume. They may be producers of goods and services who decide what and how much to produce.
• Microeconomics was a study of individual markets of demand and supply and ‘players’, or decision-makers.
• General Equilibrium means equilibrium of supply and demand in each market in economy.
• The nearest that microeconomics gets to macroeconomics is when it is looked at General Equilibrium.
• Macroeconomists have to study effects in markets of taxation and other budgetary policies, and policies for bringing about changes in money supply, rate of interest, wages, employment and output.
• Macroeconomics has deep roots in microeconomics because it has to study aggregate effects of forces of demand and supply in markets.
• Macroeconomics has to deal with policies aimed at modifying forces, if necessary, to follow choices made by society outside markets.
• Macroeconomics shows two simple characteristics that are evident in dealing with situations. They are: decision-makers and purpose of decisionmakers.
• Adam Smith, founding father of modern economics, had suggested that if buyers and sellers in each market take their decisions following only their own self-interest, economists will not need to think of wealth and welfare of country as a whole separately. But economists gradually discovered that they had to look further.
• The decision-makers go beyond economic objectives and try to direct deployment of economic resources for public needs.
• Policies of macroeconomics have pursued welfare of country and its people as a whole.
• Macroeconomics, as a separate branch of economics, emerged after British economist John Maynard Keynes published his celebrated book The General Theory of Employment, Interest & Money in 1936.
• The dominant thinking in economics before Keynes was from school of classical tradition.
• Economists of classical tradition thought that all labourers who are ready to work will find employment and all factories will be working at their full capacity.
• Unemployment rate may be defined as number of people who are not working and are looking for jobs divided by total number of people who are working or looking for jobs.
• The Great Depression of 1929 and subsequent years saw output and employment levels in countries of Europe and North America fall by huge amounts.
• In USA, from 1929 to 1933, unemployment rate rose from 3 per cent to 25 per cent.
• Other countries were affected by Great Depression.
• The Great Depression made economists think about functioning of economy in a new way.
• The fact that economy may have long-lasting unemployment had to be theorised about and explained, and Keynes’ book was an attempt in this direction.
• Unlike his predecessors, Keynes’ approach to examining working of economy in its entirety and examining interdependence of different sectors led to introduction of macroeconomics.

Context of Macroeconomics
• In a capitalist country, production activities are mainly carried out by capitalist enterprises. A typical capitalist enterprise has one or several entrepreneurs.

• Entrepreneurs are people who exercise control over major decisions and bear a large part of risk associated with firm/enterprise.
• Entrepreneurs produce output with help of three factors of production, namely capital, land & labour.
• The entrepreneur sells product in market.
• Labour is a measure of work done by human beings. It is conventionally contrasted with other factors of production, such as land and capital.
• Expenses that raise productive capacity are known as investment expenditure.
• The sale and purchase of labour services at a price are known as wage rate.
• The labour which is sold and purchased against wages is referred to as wage labour.
• Firms are production units. In a firm, entrepreneur (or entrepreneurs) is at helm of affairs.
• In a capitalist country, factors of production earn their incomes through process of production and sale of resultant output in market.
• The economies of Singapore, Australia & New Zealand are some examples of countries with capitalist economies.
• In both developed and developing countries, apart from private capitalist sector, there is institution of State.
• The role of state includes framing laws, enforcing them and delivering justice.
• The state, in many instances, undertakes production – apart from imposing taxes and spending money on building public infrastructure, running schools and colleges, providing health services, etc.
• These economic functions of state have to be taken into account when we want to describe economy of country.
• For convenience, term ‘Government’ is used to denote a state.
• The household sector is another important sector in economy.
• A single individual who takes decisions relating to her consumption, or a group of individuals for whom decisions relating to consumption are jointly determined is known as a household.
• All countries of world are engaged in external trade.
• The external sector is important to economy of a country.
• External trade takes place in form of imports and exports.

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