Macroeconomics as a separate branch of economics. Macroeconomics deals with the aggregate economic variables of an economy. However the great depression of 1929 and the subsequent years saw the output and employment levels in the countries of Europe and North America fall by huge amounts. The fact that the economy may have long lasting unemployment had to be theorised about and explained. The money that is earned is called revenue. It is however true that many developing countries have a significant presence of production units which are organised according to capitalist principles. Macroeconomics tries to address situations facing the economy as a whole. Adam Smith the founding father of modern economics had suggested that if the buyers and sellers in each market take their decisions following only their own self interest economists will not need to think of the wealth and welfare of the country as a whole separately. Macroeconomics emerged as a separate subject in the 1930s due to Keynes.
The difference between microeconomics and macroeconomics are:
| Point of Difference | Microeconomics | Macroeconomics |
|---|---|---|
| Definition | It is a branch of economics that studies the Economic variables at an individual level like the households, the firms, the consumer etc. | It is a branch of economics that studies the economics variables of an economy as a Whole. |
| Deals with | It deals with how consumer or the producers make decisions depending on their given budget and other variables. |
It deals with how different economics sectors like households, industries and other government and foreign sectors make their decisions. |
| Method | The method of partial equilibrium (i.e. equilibrium is one market) is used. | The method of general equilibrium (i.e. equilibrium in all the markets, simultaneously) is used. |
| Variables | The major variables involved are prices, consumers demand, wages, rent, profit, firms, revenue, cost etc. | The major variables involved are aggregate demand, aggregate supply, inflation, unemployment, poverty, etc. |
| Theories |
Various theories studied are: 1. Theory of consumers behaviour and demand |
Various theories studied are 1. Theory of national income 2. Theory of money 3. Theory of general price level 4. Theory of employment 5. Theory of international trade |
| Popularised by | Alfred Marshal | Keynes |
Capitalist economy is an economic system where the means of production are privately owned. These means of production are driven by the motive of profit making. This economic structure is also known as free market economy of laissez faire.
1. Role of the government
The government provides the basic framework for the smooth functioning of an economy. It provides the basic framework and is responsible for maintenance of law and order, justice, growth and stability, defence, etc.
2. Profit motive
The economic agents are driven by the prime motive of profit maximization.
3. Central problems
The central problems of an economy are solved by the market forces of demand and supply, i.e., the law of demand and supply operates here. The producers will supply only those goods and services that are demanded by the economy.
4. Role of private sector
The role of private individuals is more dominant. The main role of undertaking production and organising factors of production are played by the private individuals and capitalists.
5. Laissez-faire
This economy is called laissez faire. It has minimum interference or restriction from the government.
The four major sectors of an economy according to the macroeconomic point of view are:
1. Households
2. Firms
3. Government
4. External Sector
Below are the one by one explanations.
1. Households
Households buy goods and services for consumption and also supply factors of production like land, labour, capital, and entrepreneur. Households provide the market for the output of the firms.
2. Firms
Firms are economic units that carry out the production. They employ and organise factors of production and undertake the production process for the motive of profit making.
3. Government
A state/government provides law and order, maintains growth and stability and provides administrative services. The main motive of a government is to undertake developmental projects such as dams, roads, heavy industries that usually have long gestation periods. The government invests in education, health sector and provides these services at nominal price. The motive of a government is to serve and not to make profits.
4. External Sector
This sector is engaged in export and import (external trade) of goods and services. If domestically produced goods and services are sold to the rest of the world, then it is called export. If the goods and services are purchased from the rest of the world, then it is called import.
The great depression was a severe economic crisis that started in the year 1929. It originated in the United States of America with the crash of the stock market and gradually spread to other countries of the world. The main cause behind this crisis was the fall in aggregate demand due to under consumption and over investment. Due to under consumption and over investment the stock of finished goods started piling up, which resulted in low price level and consequently the low profit level.
The money in the economy was converted into unsold stock of finished goods that led to an acute fall in employment and hence income level fell drastically. The demand for goods in the economy was so low that the production was lowered leading to unemployment. In the USA, the rate of unemployment increased from 3% to 25%.
The great depression has its own implications and importance in economics, as it leads to the failure of the classical approach of economics. Those who believed in the market forces of demand and supply, paved the way for emergence of the Keynesian approach. It was this incident that provides the economists with sufficient evidence to recognise macroeconomics as a separate branch of economics.