INTRODUCTION TO MACROECONOMICS
Textual Questions
1) What is the difference between
microeconomics and macroeconomics ?
Ans. The differences between microeconomics and
macroeconomics are enumerated as follows :
1) The word micro comes from a Greek word
'Mikros' which means small/millions of parts whereas the word macro comes from
a Greek word 'Makros' which means large.
2) Microeconomics studies the economic behaviour
of individual units whereas macroeconomics studies the economy as a whole.
3) Microeconomics evolution took place earlier
than macroeconomics,mostly before 18th century whereas macroeconomics evolved
only after the publication of Keynesians book, 'The Theory of Employment ,
Interest and Money'.
4) Microeconomics assumes that while studying
microeconomics,macro variables remain constant whereas macroeconomics assumes
that micro variables remain constant.
5) The major variables involved in microeconomics
are price,consumer's demand , wages ,rent,profit,firm's revenue cost etc
whereas the major variables involved in macroeconomics are aggregate
demand,aggregate supply,inflation,unemployment etc.
6) In the context of microeconomics ,market
mechanism plays an important role but in the context of macroeconomics
,government plays an important role.
7) Microeconomics is popularised by Alfred
Marshal whereas macroeconomics is popularised by John Maynard Keynes.
8) The theories under Microeconomics are Theory
of Consumer's Behaviour and Demand, Theory of Producer's Behaviour and supply,
The theory of Price Determination under different market conditions whereas the
theories under macroeconomics are Theory of National Income,Theory of
Money,Theory of General Price Level, Theory of Employment , Theory of
International Trade.
2) What are the important features of a
Capitalist economy ?
Ans. Capitalist economy is an economic system
governed by capitalist i.e., where the means of production and distribution are
privately or corporately owned. It is primarily run by price mechanism without
any interference of government. Government’s role is just to maintain law and
order. This economy’s main motive is to earn profit. This economic structure is
also known as free market economy or lassiez faire.Examples of Capitalist
economies are Hongkong, Singapore,Canada,UAE ,Ireland etc.
The features of Capitalist economy are as follows
:
1) Role of the government : The
government does not interfere in the day-to-day economic activities . This
means producers are free free to take decisions. The government provides the
basic framework for the smooth functioning of an economy and is responsible for
maintenance of law and order,justice,growth and stability,defence etc.
2) Profit motive : Here, the
maximisation of profit is the main motive of the producer. Profit guides the
production in this type of economy.
3) Price Mechanism : In
capitalist economy, prices are determined by the interaction of demand and
supply without the interference of any kind by the government or any other
external forces.
4) Sovereignty of consumer :
Under this system,consumer plays an important role. The entire production
pattern is based on the desires,wishes and the demand of the consumer.
5) Role of Private Sector : The
role of private individuals is more dominant. The main role of undertaking
production and organizing factors of production are playes by the private
individuals and capitalists.
6) Laissez Faire : This economy
is also called ‘Laissez Faire’. It has minimum interference or restriction from
the government.
7) Central problem / Demand and
Supply : The law of demand and supply operates here. The producers will supply
only those goods and services that are demanded .
3) Describe the
four major sectors in an economy according to the macroecomic point of view.
Ans. The four aggregate macroeconomic sectors
that form the foundation for macroeconomic analysis are the Household
sector,the Business sector,the Government sector and the Foreign
sector/external sector. These are discussed as under :
1) Household sector : Household
means a single individual or a group of individuals who independently take
decisions regarding their economic activities (production and consumption).
Household sector buy goods and services for consumption and also factors of
production like land,labour ,capital. Households provide the market for the
output of the firms. In short, this sector includes everyone,consumers,people
and every member of the society. This sector is responsible for the consumption
expenditures role in GDP.
2) Business sector/firms :
Firms are economic units that carry out the production. They employ and
organize factors of production and undertake production process for the motive
of profit making. This includes sole proprietorship,partnership,corporations
etc. It is responsible for investment expenditure role in GDP.
3) Government sector : It
provides law and order, maintains growth and stability and provides
administrative services. Its main role is to undertake developmental projects
such as dams,roads,heavy industries etc which always have long gestation period
. It invests in education,health sector and provides these services at nominal
price. Its main motive is not to make profits. Transportation department ,
Environmental Protection agencies are its examples. This sector is responsible
for government purchase role in GDP.
4) Foreign sector/external
sector : This sector is engaged in export and import of goods and services.
Apart from export and import ,there can be inflow of goods and outflow of
foreign capital.
5) Describe the Great
Depression of 1929.
Ans. The Great Depression was the worst economic
downturn in the history of the industrialized world. It began after the stock
market crash of October 1929,which sent Wall Street in panic and wiped out
millions of investors. The Great Depression was a severe economic crisis that
started in the year 1929. It was the longest,deepest and most widespread
depression of 20th century. In 21st century ,the Great
Depression is commonly used as an example of how far an economy can decline. It
originated in the United States of America when the stock market crashed which
results in the beginning of a decade of high unemployment.,poverty,low profit
and deflation and it gradually spread to other countries of the world. The worldwide
GDP fell by 15% as compared to less than 1% during the Great Recession in
2008-2009. The main cause behind the crisis was the falling aggregate demand
and due to under consumption and over investment. Aggregate supply was greater
than aggregate demand which resulted into depressing activities. Due to under
consumption and over investment the stock of finished goods started piling
up,which resulted in low price level and consequently the low profit level.The
money in the economy was converted into unsold stock of finished goods that
leads to an acute fall in employment and hence income level fell drastically.
The demand for goods in the economy was so low that the production was lowered
leading to the unemployment. In the USA , the rate of unemployment increased
from 3% to 25% . The Great Depression has its own implications and importance
in economy , as it leads to the failure of the classical approach of economics.
Those who believed in the market forces of demand and supply , paved the way
for emergence of the keynesian approach . It was this ,incident that provide
the economists with sufficient evidence to recognise macroeconomics as a
separate branch of economis.
The cause and effect relationship of the Great
Depression can be summed up in this flow chart :
Low demand à Over investment à Low level of employment -à low level of output -à low income --à low demand.
