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Introduction to Macroeconomics

1- Introduction to Macroeconomics

The word economy comes from the Greek word 'Oikonomos' which means one who manages a household. At first, this origin might seem peculiar but in fact, household and economy have many more similarities. There is no mystery what an economy is. It is just a group of people interacting with one another as they go about their lives. The behavior of an economy reflects the behavior of individuals in relation to production, distribution, exchange and consumption of goods and services in a region or a county. In short, it is the aggregate of all transactions of value between groups of individual activities, such as in organizations, and between one nation and another nation.

Economics is the study of how society manages its scarce resources. in most of the countries the resources are allocated not by an all-powerful dictator but through the combined actions of millions households and firms. Therefore, in economics we study how people make decisions, how much they work, how much they earn, save, and spend. We also study how people interact with one another such as how the magnitude buyers and sellers of a good together determine the price at which the good is sold and the quantity that is sold. Finally, we analyze forces and trends that affect the economy as a whole including growth in average income, the fraction of population that remain unemployed and the rate at which prices are rising etc.

The modern economics has been divided into two major branches as microeconomics and macroeconomics. The prefix 'macro' was first coined and used in the word economics by Norwegian economist Ragnar Frisch in 1933, in his paper 'Proposition Problems and Impulse Problems in Dynamic Economics' published in 'Economic Essay in the Honor of Gustav Cassel' (London 1933). However it was originated with the mercantilists in 16th and 17th centuries as a methodological approach to economic problem. They were concerned with the economic system as a whole. In 18th century, the physiocrats adopted in their 'Table Economique' to show the circulation of wealth among farmers, landlords and unproductive class. Similarlu Malthus, Sismondi and Marx dealt with macroeconomic problems in 19th century and Walrus, Wicksell and Fisher had also contributed to the development of macroeconomics. Some other economists like Cassel, Marshall, Pigou, Robertsion, Hayek and Hawtrey developed a theory of money and general prices during the period of First World War. However the subject matter of economic science was still limited to what is called microeconomics until The Great Depression of 1930s.

Macroeconomics emerged as a separate branch of economic science in 1936 with the publication of an eminent British economist John Maynard Keynes' revolutionary book 'The General Theory of Employment, Interest and Money' generally referred as 'The General Theory.' This book is said to be the foundation of  macroeconomics as his theory made a genuine break from the classical and neo-classical economics and produced such a fundamental and powerful thinking that his macroeconomic analysis has earned the names as 'Keynesian Revolution' and 'New Economics.' Keynes, in his analysis made a frontal attack on the classical view which was based on the assumption of full employment and involuntary unemployment could not prevail in a free market economy. In fact, this classical view proven to be unsuccessful to solve the economic problems created by the great depression of 1930s. Keynes showed how the equilibrium level of national income and employment is determined by aggregate demand and aggregate supply and further that, due to lack of aggregate effective demand equilibrium level of income and employment might be well established at far less than full-employment in a free market capitalist economy. This causes an involuntary unemployment of labor one hand and excess productive capacity on the other hand. His macroeconomic model reveals how consumption function, investment function, liquidity preference function conceived in aggregate terms, interact to determine the level of national income and employment.

Since Keynesian revolutionary book was published and came on effect, it brought new ideas to address the economic issues which are constantly debated by the politicians, the press and the public. The question to be debated among the politicians were, how can the economy of a nation be uplifted fast providing the citizens rapidly improving living standard while other nations' economies are relatively stagnant? Why are the fluctuations in economies? Why does unemployment sometimes reach very high levels and sometimes, even during the time of relatively prosperity, there is a significant fraction of the work force unemployed? Why do prices of goods and services rise up and what can be done about it? How to economic links among nations, such as international trade and borrowings, affect the performance of an individual economy and the world's economies as a whole? And how should economic policy be conducted so as to keep the economy as prosperous and stable as possible? Macroeconomics seeks to offer answers to such questions which are of great practical importance.

2- Meaning of Macroeconomics

The word 'Macroeconomics' is the combined form of the two words 'macro' and 'economics'. The word 'macro' used as a prefix, seem to have been derived from Greek word 'makros'. In Greek language, 'makros' means large. Hence, it implies that macroeconomics is the study of economy in aggregates, all units of the economy or the economy as a whole. In other words, it is the study of factors that determine the level of aggregate production, employment and prices in an economy and their rates of change over time. Thus, macroeconomics deals with such overall economic problems as unemployment, inflation, recession, depression, boom, instability and stagnation. its variables are national income, gross national production, national wealth, aggregate employment and unemployment, the general price level and the rate of growth of the economy. The meaning of macroeconomics can be clear from its definitions and the description given below.

'Macroeconomics concerns the overall dimension of economic life. More specially, macroeconomics concerns itself with such variables as aggregate volume of an economy, with the extent to which its resources are employed, with size of national income, with the general price level', - Garden Ackely.

'Macroeconomic theory is the theory of income, employment, prices and money', - J. M. Culbortson.

'Macroeconomics is the study of the nature, relationships, and behavior of aggregates of economic quantities... Macroeconomics deals not with individual quantities as such but with aggregates of these quantities, not with individual incomes but with the national income, not with individual prices but with the price level, not with individual output but with the national output',- K.E. Boulding.

'Macroeconomics is the study of the behavior of the economy as a whole. It examines the overall level of a nation's output, employment, prices and foreign trade', - P. A. Samuelson.

The definitions of macroeconomics given above are fairly comprehensive yet they may not reveal the exact nature of modern macroeconomics nor fully capture its subject matter. However, these definitions do give an idea of the central theme of theoretical macroeconomics. The central theme that emerges from the above definitions can be stated as follows.

Macroeconomics is essentially the study of the behavior and performance of the economy as a whole. More importantly, it studies the relationship and interaction between the factors and forces that determine the level and growth of national output and employment, general price level and the balance of payment, position of an economy etc.


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