2. What is Macroeconomics?
• Microeconomics examines the behavior of
individual decision-making units—business firms
and households.
• Macroeconomics deals with the economy as a
whole; it examines the behavior of economic
aggregates such as aggregate income,
consumption, investment, and the overall level
of prices.
– Aggregate behavior refers to the behavior of all
households and firms together.
3. What is Macroeconomics?
• When we study the consumption
behaviour or equilibrium of a consumer;
the production pattern & equilibrium of a
firm, the entire analysis is ‘micro’ in
nature……because
we study a UNIT and not the SYSTEM in
which it is operating.
4. Why study Macro economics?
• The economic well being of consumers
rich or poor is affected by movement in
interest rates, exchange rates, inflation
etc.
• Businesses stand to gain or lose
considerable amounts of money when
their economic environment changes,
regardless of how well they are managed.
5. Why study Macro economics?
• Study of Macroeconomics also help
governments avoid the worst economic
crises that have afflicted modern industrial
societies in the past century—depressions
and hyperinflations.
• These extreme situations can tear at a
society’s social fabric, yet can be
prevented when policy-makers apply
sound economic principles.
6. Roots of Macro economics
• Before the publication of Keynes “General
Theory….”, the distinction between Micro
& Macro economic issues did not arise at
all.
• The need for separate study of macro
economics was felt by Keynes while
understanding and analysing the Great
Depression of 1929.
7. The Roots of Macroeconomics
• The Great Depression was a period of
severe economic contraction and high
unemployment that began in 1929 and
continued throughout the 1930s.
8. The Great Depression – What happened ?
• Stock Markets crashed!
• 9000 banks filed for bankruptcy
• Banks that survived stopped giving loans.
• People cut down spending
• Large amounts of inventories started piling up
• Businesses stopped production….layoffs!( 25%
unemployment)
• Purchasing power declined
• Hawley – Smoot tariff imposed on imports in
1930
• Decline in world trade .
9. The Roots of Macroeconomics
• The accepted economic theory of the pre –Keynesian
era, believed that the economy usually remains at full
employment level( full utilization of resources). If there
are any departures from this situation, these are purely
temporary and for a short period of time.
• However, these classical models failed to explain
the prolonged existence of high unemployment
during the Great Depression. This provided the
impetus for the development of macroeconomics.
10. The Roots of Macroeconomics
• In 1936, John Maynard Keynes published The
General Theory of Employment, Interest, and
Money.
• Keynes believed governments could intervene
in
the economy and affect the level of output and
employment.
• During periods of low private demand, the
government can stimulate aggregate demand
to
lift the economy out of recession.
11. Importance of Macro economics
• To understand the working of the
economy:
Macroeconomic variables like Total Income,
Total Output, Employment and General Price
level help us in analyzing the functioning of the
economy.
12. Importance of Macro
economics
In Economic Policies –
Macro economic study helps us to find a solution
to complex economic problems of modern times.
Ex. 1.General Unemployment,
2. National Income data helps in
forecasting
the level of economic activity & to
understand the distribution of income
among different groups of people in the
economy.
13. Importance of Macro
economics
• In Economic Growth –
To plan for economic growth, it is necessary
that the macro economic variables like
income, output and employment are
evaluated.
• In Monetary
Problems –
Frequent changes in the value of money ( ?)
affects the economy adversely!!
14. Importance of Macro economics
• In Business Cycles –
Macro economics began to be studied only
after the Great Depression. Thus, its
importance lies in analyzing the causes of
economic fluctuations and in providing
remedies.
15. Circular Flow of Income Model
• A model to understand the functioning of
a
macro economic system or the economy
as a whole is called the ‘Circular Flow of
Income Model’
16. Significance of Circular Flow Model
• What starts from one variable comes back
to it after one round e.g (money paid by
households for G &S comes back to it in
form of factor incomes.)
• Anybody who strives to stop the flow,
harms itself, after sometimes.
17. The Components of
the Macroeconomy
• Everyone’s
expenditure is
someone
else’s receipt.
Every
transaction
must have two
sides.
23. • Unemployment
Unemployment: the number of people who
are available for work and actively
seeking work but cannot find jobs.
• Business cycles
Business cycle: Short-run contractions and
expansions in economic activity.
Downward phase is called a recession.
What Macroeconomics Is About
25. What Macroeconomics Is About
• The international economy
Open vs. closed economies
Open economy: an economy that has extensive trading and financial
relationships with other national economies
Closed economy: an economy that does not interact economically with
the rest of the world
• Trade imbalances
Trade surplus: exports exceed imports
Trade deficit: imports exceed exports
26. What Macroeconomics Is About
• Aggregation
Aggregation: summing individual economic
variables to obtain economywide totals
Distinguishes microeconomics (disaggregated)
from macroeconomics (aggregated)
27. Why Macroeconomists Disagree
Classicals vs. Keynesians
The classical approach
The economy works well on its own
The “invisible hand”: the idea that if there are free markets
and individuals conduct their economic affairs in their own
best interests, the overall economy will work well
Wages and prices adjust rapidly to get to equilibrium
Equilibrium: a situation in which the quantities demanded
and supplied are equal
Changes in wages and prices are signals that coordinate
people’s actions
Result: Government should have only a limited role in the
economy
28. Why Macroeconomists Disagree
Classicals vs. Keynesians
The Keynesian approach
The Great Depression: Classical theory failed because
high unemployment was persistent
Keynes: Persistent unemployment occurs because
wages and prices adjust slowly, so markets remain out
of equilibrium for long periods
Conclusion: Government should intervene to restore full
employment
29. Why Macroeconomists Disagree
Classicals vs. Keynesians
The evolution of the classical-Keynesian debate
Keynesians dominated from WWII to 1970
Stagflation led to a classical comeback in the 1970s
Last 30 years: excellent research with both approaches
31. What Causes Stagflation?
Economists argue about the root causes of stagflation.
In general, the stage is set for stagflation when a supply
shock occurs. This is an unexpected event, such as a
disruption in the oil supply or a shortage of essential
parts. Such a shock occurred during the COVID-19
pandemic with a disruption of the flow of semiconductors
that slowed the production of everything from laptops to
cars and appliances.
Such a shock can affect all of the factors that make up
stagflation: inflation, employment, and economic growth.
32. Why Is Stagflation Bad?
Stagflation is a combination of three negatives:
slower economic growth, higher unemployment,
and higher prices.
This is a combination that isn't supposed to
occur, in the logic of economics. Prices shouldn't
go up when people have less money to spend.
33. What Is the Cure for Stagflation?
There is no definitive cure for stagflation. The
consensus among economists is that productivity has
to be increased to the point where it will lead to
higher growth without additional inflation. This would
then allow for the tightening of monetary policy to
rein in the inflation component of stagflation.
That is easier said than done, so the key to preventing
stagflation is for economic policymakers to be
extremely proactive in avoiding it.
34. Questions
1. What is Macroeconomics ?
2. Why Macroeconomics is different
from Microeconomics?
3. What is circular flow of income
trend?
4. What is great depression and
when it was arisen?
5. Who introduced Macroeconomics
in which years?
