Hence, there is no element of uncertainty in it. Even in period analysis, a stock must be specified at a particular moment. It is the rise or fall in the general price level that leads to inflation, and to prosperity and depression. Report a Violation. As a method of economic analysis macroeconomics is of much theoretical and practical importance. Plans for the overall increase in national income, output, and employment are framed and implemented so as to raise the level of economic development of the economy as a whole. They can be counteracted by adopting monetary, fiscal and direct control measures for the economy as a whole. In brief, it points out the effect on the economy through cross-border commerce and customs duty, The most significant of these is the study of commodity prices and how specific price rates fluctuate due to inflation or deflation, The RBI and the Government of India together function to imply the macroeconomic policies, for the nation’s improvement and development. If the economy is working at situation A where it is producing at a constant rate without any change in the variables, it is a static state which is functioning at a point of time. The raison d’etre of all static investigations is the explanation of dynamic change. Keynes, who brought about the transition from micro to macro thinking, discarded the policy of laissez-faire. Microeconomics is based on the laissez-faire policy of a self-adjusting economic system with no government intervention. There are six theories under the scope of macroeconomics: The growth of an economy also comes under the study of macroeconomics. But if all depositors do this simultaneously, there will be a run on the banks and the banking system will be adversely affected. The word micro has been derived from the Greek word mikros which means small. Microeconomics concerns itself with the study of individual household, firm or industry. It lays the basis of a regional decision-making mechanism in a nation. The main aim of microeconomics is maximizing profit and minimizing the costs incurred. The stock of capital can only increase with the increase in the flow of investment, or by the difference between the flow of production of new capital goods and consumption of capital goods. If this increase in demand is due to a reduction in the rate of interest, the demand for ‘ different types of capital goods will go up. as the “theory of income and employment.”, Control over the inflation and deflation cycle was only made possible by choosing the current economic policies. covers the measure fundamentals which are macroeconomic theories and macroeconomic policies. Thus, macroeconomics has special significance in studying the causes, effects and remedies of general unemployment. Its scope is limited for it excludes many important economic problems. But the adoption of such a policy for the economy leads to a reduction in employment. These regulations serve as a barrier for business organizations. In a dynamic economy, data change and the economic system take time to adjust itself accordingly. The general level of employment in an economy depends upon effective demand which in turn depends on aggregate demand and aggregate supply functions. In the field of business cycles, it concerns itself with the effect of investment on total output, total income, and aggregate employment. But the orthodox economists, like Pigou, tried to apply microeconomic analysis to the problems of an economy. This scope of macroeconomics assists in determining the level of unemployment. Thus, Macro Economics is the study and analysis of an economy as a whole. Macroeconomics is the foundation of many economic policies. Similarly, the output of the economy is the sum of the output of all the individual producing units. In period t + I, consumption rises and along with the new investment, it increases income still higher to OY1. But it was Marshall who developed and perfected microeconomics as a method of economic analysis. Prof. Boulding calls these three difficulties as “macroeconomic paradoxes” which are true when applied to a single individual but which are untrue when applied to the economic system as a whole. Likewise, in the words of E.K. It studies the character of the forest, independently of the trees which compose it.”. The lending by a bank is a flow and its outstanding loan is a stock. In fact, it is a ratio between the flow of cash and the flow of goods. In physics, it means a state of rest where there is no movement. On the other hand, the flow of investment itself depends upon the size of capital stock. The government debt is a stock but the government deficit is a flow. Thus, both macro and micro approaches to economic problems are interrelated and interdependent. The former studies movement around the point of equilibrium, but the latter traces the path from one point of equilibrium, to the other, both backward and forward. If the supply of such labour is less elastic, its wage rate will rise. The total level of output, income and employment in the economy also depends upon income distribution. It explains broad aggregates and their interactions “top down.” Macroeconomics has the following characteristics: 1. For example, the per capita income determines the National income. The subject of macroeconomics revolves around the determination of income and employment. (3) Aggregate Variables may not be Important Necessarily: The aggregate variables which form the economic system may not be of much significance. The former deals with the individual units of an economy like the consumer or a household. But the price is neither a stock nor a flow variable because it does not need a time dimension. This subject finds its use at many stances in our lives. They are sensitive to the fluctuations in the economy of other countries, exchange rates, prices, and other varied factors. Lastly, both the concepts of stock and flow variables are very important in modern theories of income, output, employment, interest rate, business cycles, etc.. 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