In recent years, macroeconomics has gained much popularity in the field of economic studies. This is because of the fact that macroeconomics studies are not only necessary, but they are absolutely indispensable for the formulation, implementation and execution of national economic policies. The days of Laissez-faire- where government did not interfere in the economy and thus, individual were free to act in whatever manner they liked- are no more now. All the governments whether they follow capitalist or socialist ideologies, have these days taken upon themselves, the responsibility of promoting social welfare. This has necessitated an active intervention by the government formulates are directed, not towards the few chosen individual, but towards the general masses. Therefore, the government must possess an adequate knowledge of the behavior of economic aggregates such as total national income, total consumption, total savings and investment. Accurate and reliable information of these various aggregates is an essential pre-requisite of any sound economic policy.
Difference between individual Behavior and Aggregative
The study of macroeconomics has revealed that in many of the cases, the behavior of the individual economics units has been widely divergent from the behavior of the aggregate quantities. It is not possible to arrive at any accurate result about behavior of the group as a whole, just studying about the behavior of all individual of the group separately. Lord Keynes was one of those economists who drew pointed attention of the glaring mistakes which one is likely to commit in thinking about the economic problem in the micro way. How absurd certain conclusions would be from the macro angle can be explained by some examples, which have come to be known as paradoxes of microeconomics. These paradoxes refer to those proposition which are true when applied to a single individual, but are not true when applied to economic system as a whole.
The individual employer always thinks that he can make more profits by reducing the wages of his workers. This is true, because wages are an important item in cost and hence a reduction in wages, while product prices in the market remaining the same, would naturally boost up profit. But if wages cuts are made by all the employers simultaneously, it would reduce the purchasing power available to the workers. This would result in the fall in demand for the goods and services in general. The result would be a fall in profits of the employer. Thus, while an individual employer can surely increase his profits by wage cuts, a reduction in wages by all the employers will result in a reduction of profits.
Similarly, every thrifty individual is likely that he is highly virtuous because thrift is not only good for individual, but is also necessary for capital accumulation and economic development. If this phenomena is examined on a macro scale, we are likely to encounter starling results. When a particular individual saves a part of this income, obviously he spend less on the purchase of goods and services. These sellers, who were supplying goods and services to the person, will be able to sell smaller amount now. So, their gross earnings would fall. This would enable them to save less than what they were saving earlier. Thus, more savings by one man are offset by less savings by the others. So, what is good form micro angle is not necessarily correct from the macro angle.
Similarly, a rise in the price of a particular commodity may benefit the producers of that commodity, But if there is a general rise of price leading to inflationary conditions, this would reduces the purchasing power of the given income and hence less would be purchased of almost all the commodities. Therefore, the producer may but not realise the expected gain.
Macroeconomics has thus evolved as a distinct and separate branch of economics to study and analyse the phenomenon that affects the economy as a whole and not merely its individual aspects.SUBMIT ASSIGNMENT NOW!