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Notes on Macroeconomics
Microeconomics and Macroeconomics
Microeconomics deals with the individual economic units. It studies consumption and demand from the point
of view of an individual household, production of a firm or an industry, profit maximizing behaviour of an
individual producer, etc. Macroeconomics, on the other hand, deals with aggregate entities such as
consumption expenditure of all the consumers taken together, total output of the economy as a whole or the
level of employment in the entire economy. Thus, macroeconomics does not deal with individual economic
behaviour as such but with the aggregate behaviour of economic units, not with individual income but with
national income, not with production of a firm but with Gross Domestic Product (GDP).
Significance of Macroeconomics
Significance of macroeconomics lies in the fact that the total of individual behaviour of all people may not
sum up to the aggregate behaviour. In fact, the aggregate behaviour may turn out to be different from the
individual behaviour. For example, if everyone increases his savings, total savings may not be equal to the sum
off individual savings. This happens because one person’s spending in another person’s income. If one saves
more (spends less) the other earns less and so he also saves less. Total savings in the economy may be
different from the individual behaviour and prescribes suitable policy measures to tackle various
macroeconomic problems and issues.

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Major Macroeconomic Issues
Problems of economic growth, business cycles and economic fluctuations, inflation, unemployment, poverty,
etc., are some of the major macroeconomic issues. While the underdeveloped countries face the problems of
lack of development, low living standards, poverty and chronic unemployment, the advanced capitalist
countries suffer from cyclical fluctuations in output, income and unemployment.
The major macroeconomic issue for the loss developed countries is to speed up the rate of economic
development to ensure better living standard for the people.
Control of business cycles and minimizing the fluctuations in income, output and employment caused by
recurrent booms and recessions is a major macroeconomic issue for the advanced capitalist economies.
Inflation and deflation which affect both the developed as well as the underdeveloped countries also from a
major macroeconomic issue. Inflation is particularly distressing for the poor and the fixed income group.

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Unemployment is a major problem of the underdeveloped countries, but even the advanced countries suffer
from cyclical unemployment. Thus, policies to speed up development in the less developed countries and
maintaining the tempo of growth in the advanced economies are necessary to curb the evil of unemployment.
The fiscal policies are often used for stabilizing economic activity and promoting economic development.
With these objectives in view, the governments often spend much more than their normal revenue receipts.
Excess of expenditure over revenue leads to budgetary deficit, which is largely met through public
borrowings. Over the time, such recurrent budget deficits and borrowings lead to a ‘debt-trap’ where the
government has to borrow even for payment of interest and loan instalments. Such a situation is alarming and
thus must be avoided.
Monetary policy is used to regulate money supply in the market. Interest rate is a major instrument of
regulating money supply. A high interest rate policy or tight money policy reduces the volume of money in the
market while a low rate of interest or soft money policy expands money supply.
The macroeconomic analysis enables the policy makers to choose appropriate economy policy instruments to
achieve the desired economic objectives.
Complementarily of Macroeconomics and Microeconomics.
Both macroeconomics and microeconomics are complementary. They supplement each other. For example
while macroeconomics seeks to maximize welfare by the most efficient use of resources, microeconomics
ensures this objective by optimum allocation of resources. In fact there is only one economics, the macro and
micro approaches are used simultaneously to tackle economic problems that face the economy.

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National Income: Concepts and Measurement
Macroeconomics studies the process of national income determination. It seeks to analyze the various factors
that govern the determination of the equilibrium level of national income or national product. It also explains
what causes departure of national income from the equilibrium position and prescribes policy instruments to
restore the equilibrium.
Various Concepts of National Income
Various concepts like Gross Domestic Product (GDP), Gross National Product (GNP) and Gross National
Income (GNI) are used to describe the value of output produced in the economy during a given year.
However, all these concepts, though often used interchangeably, do not have the same connotation; they
differ in content and coverage.
Gross Domestic Product (GDP)
Gross Domestic product is the sum total of the market values of all the final goods and services produced on
the domestic territory of a country in a given year.
In this definition of GDP, three things, viz.
(i) Market value, (ii) final goods and services and
(iii) Domestic territory, need further explanation.

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