An introduction to Macroeconomics

Will the prices as a whole rise or come down? Is the employment condition of the country as a whole, or of some sectors of the economy, getting better or is it worsening? What would be reasonable indicators to show that the economy is better or worse? What steps, if any, can the State take, or the people ask for, in order to improve the state of the economy? These are the kind of questions that make us think about the health of the country’s economy as a whole. These questions are dealt with in macroeconomics at different levels of complexity. In this book you will be introduced to some of the basic principles of macroeconomic analysis. The principles will be stated, as far as possible, in simple language. Sometimes elementary algebra will be used in the treatment for introducing the reader to some rigour.

If we observe the economy of a country as a whole it will appear that the output levels of all the goods and services in the economy have a tendency to move together. For example, if output of food grain is experiencing a growth, it is generally accompanied by a rise in the output level of industrial goods. Within the category of industrial goods also output of different kinds of goods tend to rise or fall simultaneously. Similarly, prices of different goods and services generally have a tendency to rise or fall simultaneously.
We can also observe that the employment level in different production units also goes up or down together.
If aggregate output level, price level, or employment level, in the different production units of an economy, bear close relationship to each other then the task of analysing the entire economy becomes relatively easy. Instead of dealing with the above mentioned variables at individual (disaggregated) levels,
we can think of a single good as the representative of all the goods and services produced within the economy. This representative good will have a level of production which will correspond to the average production level of all the goods and services. Similarly, the price or employment level of this representative good will reflect the general price and employment level of the economy. In macroeconomics we usually simplify the analysis of how the country’s total production and the level of employment are related to attributes (called ‘variables’) like prices, rate of interest, wage rates, profits and so on, by focusing on a single imaginary commodity and what happens to it. We are able to afford this simplification and thus usefully abstain from studying what happens to the many real commodities that actually are bought and sold in the market because we generally see that what happens to the prices, interests, wages and profits etc. for one commodity more or less also happens for the others. Particularly, when these attributes start changing fast, like when prices are going up (in what is called an inflation), or employment and production levels are going down (heading for a depression), the general directions of the movements of these variables for all the individual commodities are usually of the same kind as are seen for the aggregates for the economy as a whole. We will see below why, sometimes, we also depart from this useful simplification when we realise that the country’s economy as a whole may best be seen as composed of distinct sectors. For certain purposes the interdependence of (or even rivalry between) two sectors of the economy (agriculture and industry, for example) or the relationships between sectors (like the household sector, the business sector and government in a democratic setup) help us understand some things happening to the country’s economy much better, than by only looking at the economy as a whole.
While moving away from different goods and focusing on a representative good may be convenient, in the process, we may be overlooking some vital distinctive characteristics of individual goods. For example, production conditions of agricultural and industrial commodities are of a different nature. Or, if we treat a single category of labour as a representative of all kinds of labours, we may be unable to distinguish the labour of the manager of a firm from the labour of the accountant of the firm. So, in many cases, instead of a single representative category of good (or labour, or production technology), we may take a handful of different kinds of goods. For example, three general kinds of commodities may be taken as a representative of all commodities being produced within the economy: agricultural goods, industrial goods and services. These goods may have different production technology and different prices. Macroeconomics also tries to analyse how the individual output levels, prices, and employment levels of these different goods gets determined.

From this discussion here, and your earlier reading of microeconomics, you may have already begun to understand in what way macroeconomics differs from microeconomics. To recapitulate briefly, in microeconomics, you came across individual ‘economic agents’ and the nature of the motivations that drive them. They were ‘micro’ (meaning ‘small’) agents – consumers choosing their respective optimum combinations of goods to buy, given their tastes and incomes; and producers trying to make maximum profit out of producing their goods keeping their costs as low as possible and selling at a price as high as they could get in the markets. In other words, microeconomics was a study of individual markets of demand and supply and the ‘players’, or the decisionmakers were also individuals (buyers or sellers, even companies) who were seen as trying to maximise their profits (as producers or sellers) and their personal satisfaction or welfare levels (as consumers). Even a large company was ‘micro’ in the sense that it had to act in the interest of its own shareholders which was not necessarily the interest of the country as a whole. For microeconomics the ‘macro’ (meaning ‘large’) phenomena affecting the economy as a whole, like inflation or unemployment, were either not mentioned or were taken as given. These were not variables that individual buyers or sellers could change. The nearest that microeconomics got to macroeconomics was when it looked at General Equilibrium, meaning the equilibrium of supply and demand in each market in the economy.


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