Nature and Scope of Macroeconomics- A Complete Guide

Economics is a subject that deals with every situation in the whole world. This subject finds its use in many stances in our lives. The best example of economics in our everyday life is demand and supply. For example, you must have noticed that when a new smartphone arrives in the market, and there is a huge demand for it, the company starts producing more units to maximize its sales volume. Similarly to this, economics has more applications in our day-to-day life.

Economics is a branch of social science that deals with the study of production, distribution, and consumption of goods and services. It is the way of analyzing the process of allocating resources. It can also be defined as the principles of organizing money, business, and industries.

Economics is classified into two broad categories – microeconomics and macroeconomics. Microeconomics deals with individual units like the consumer or a household and macroeconomics deals with an economy as a whole. The understanding of this science is vast and at different lengths.

This article will focus on the nature and scope of macroeconomics. Let us have a look at the two branches of Economics.

Microeconomics

As mentioned above, Microeconomics is a branch of economics that deals with individual economic units. It covers the study of individual units like the consumer or the household. The subject deals with problems associated with determining the price of a particular commodity.

These direct or indirect factors affect a commodity’s demand, supply, and consumer satisfaction. The main aim of microeconomics is to maximize profit and minimize the costs incurred. It ensures that it is available to future generations and there is an equilibrium.

You may also read our article on the Scope of Economics.

Macroeconomics

The term macroeconomics was introduced by Ragnar Frisch in 1933. However, its approach to economic problems came in the 16th and 17th centuries. As a result, this originated with mercantilists.

This branch of Economics deals with the economy as a whole or totality, including the Macro factors. The scope of macroeconomics does not involve studying the individual units of an economy. But the economy studies the total and average of the entire economy. The major factors include national income, total employment, total savings and investments, aggregate demand and supply, and the general price level.

The scope of macroeconomics revolves around the determination of income and employment. Therefore, it is known as the “theory of income and employment.”

Control over the inflation and deflation cycle was only possible by choosing the current economic policies. These policies were formulated at the macro level. Moreover, governments’ participation through monetary and fiscal measures has increased. Therefore, the use of macro analysis is irrefutable.

So now, we understand that macroeconomics is a specialized field of Economics. It focuses on the economy through the aggregate of the individual units to determine a large impact on the complete nation.
All the prominent policies and measures are based on this concept. For example, the per capita income determines the National income. This is an average of the total earnings of all the citizens in the nation .

The following table will help you get a good understanding of the two branches of economics:

Basis of Distinction	Microeconomics	Macroeconomics
Meaning	It is the study of individual units in a country’s economy	It is the study of a nation’s economy and its aggregates
Nature	Static	Dynamic
Area of Action	It is applied to the internal environment	It is applied to the external environment
Scope	Deals with several issues related to: Demand Supply Equilibrium Product Pricing Private Consumption	Deal with several issues related to: Income Employment Distribution Money General Price Level
Focus	Studies individual market segments in the economy	Studies the entire economy of a country as a whole

Scope of Macroeconomics

Macroeconomics is an essential field of study for economists. The scope of macroeconomics is immense. Government, financial bodies, and researchers analyze a nation’s general national issues and economic well-being. It mainly covers the major fundamentals of macroeconomic theories and policies.

The Macroeconomic theories involve economic growth and development, national income, money, international trade, employment, and general price level. In contrast, macroeconomic policies cover fiscal and monetary policies. The study of problems like unemployment in India, the general price level, or the disequilibrium in the balance of payment (BOP) is a part of the macroeconomic study.

The scope of macroeconomics covers numerous subject matters. Some of these are as follows:

Macroeconomic Theories

It is understandable that the Government is the regulating body of a nation. It considers the various critical aspects that directly impact the lives of the citizens. There are six theories under the scope of macroeconomics:

1. Theory of Economic Growth and Development

The growth of an economy also comes under the study of macroeconomics. The resources and capabilities of an economy are evaluated based on the scope of macroeconomics. It influences the increase in national income and output at the environmental level. They have a direct impact on the economic development of an economy.

2. Theory of Money

Macroeconomics assesses the impact of the reserve bank on the economy, the inflow and outflow of capital, and its effects on job rates. The frequent change in the value of money caused due to inflation and deflation has adverse effects on a nation’s economy. They can be cured by taking monetary and fiscal policies and direct economic control measures.

3. Theory of National Income

It includes different topics related to measuring national income, including revenue, spending, and budgeting. The macroeconomic study is vital for assessing the economy’s overall performance in terms of national income. At the onset of the Great Depression of the 1930s, it was essential to investigate the triggers of general overproduction and unemployment.

This led to the creation of data on national income. It helps forecast the level of economic activity and income distribution among various citizens.

4. Theory of International Trade

It is an area of study focusing on exporting and importing products or services. In brief, it points out the effect on the economy through cross-border commerce and customs duty.

5. Theory of Employment

This scope of macroeconomics assists in determining the level of unemployment. It also determines the causes that lead to such conditions of unemployment. Hence, this affects the production, supply, consumer demand, consumption, and expenditure behaviour.

6. Theory of General Price Level

This refers to the study of commodity prices and how specific price rates fluctuate due to inflation or deflation.

Macroeconomic Policies

The RBI and the Government of India function jointly to imply the macroeconomic policies for the nation’s improvement and development. It is classified into the following two sections:

1. Fiscal policy

It is one of the effective tools of macroeconomics that helps ensure a country’s economic stability. It refers to how the expenditure meets the deficit income, which explains itself as a form of budget decision under the scope of macroeconomics.

2. Monetary policies

The Reserve Bank is establishing monetary policy in coordination with the Government. These policies are the measures taken to maintain economic stability and growth by regulating the different interest rates.

Importance of Macroeconomics

Till now we have studied the nature and scope of macroeconomics. Now let us understand the importance of macroeconomics in multiple areas:

• Macroeconomics is a vital concept that considers the whole nation and works for the economy’s welfare.
• It helps prevent economic fluctuations and prepare for any financial crisis or long-term negative situations.
• The fiscal and monetary policies system depends entirely on the analysis of the widely held macroeconomic conditions in the nation.
• Macroeconomics mainly aims to help the Government and the financial bodies maintain economic stability in the country.
• This stream of economics gives a broader perspective of social or national issues.
• It ensures or checks the country’s economy and financial position properly.
• Analyzing macroeconomics theories and issues helps economists figure out the causes and possible solutions to such macro-level problems.
• Dealing with various economic conditions through macroeconomic data opens the door to growth for the country.

Macroeconomics Constraints

The scope of macroeconomics comprises a wide range of areas. However, certain constraints are affecting the scope of macroeconomics. An economist needs to analyze the following problems while studying macroeconomics:

• Business activities also result in societal costs like deforestation and land degradation. The government carries out clear laws and legislation to regulate such social expenses. These regulations serve as a barrier for business organizations.
• The economic conditions of a nation have a critical impact on the activities of every firm, either directly or indirectly. Different economic patterns or variables affecting the industries include the GDP, job rates and conditions, revenue, banking, and pricing policies.
• Many organizations trade in international markets. They are sensitive to the fluctuations in the economy of other countries, exchange rates, prices, and other varied factors. Hence, such changes may influence the economic conditions of the country. This might also end up affecting business organizations.

Summing up

Macroeconomics is the aggregate study of the entire economy of a nation. The way of allocating resources is determined using the principles of macroeconomics. Be it your everyday life or industrial working areas, macroeconomics has its presence in every field. Having a dynamic nature, it deals with the continuous changes in an economy.

There is a great importance of macroeconomics in the financial model of a country. It helps the government to curate solutions to various economical problems. It plays a vital role in attaining the economic stability of a country.

The scope of macroeconomics is extensive. It exerts influence on both individuals as well as the government’s economic frameworks.

Macroeconomics also serves as the foundation of many economic policies. It lays the basis of a regional decision-making mechanism in a nation. It throws light on how the economy of a country works.
But the policies underpinned by this concept usually have an outspread impact. It requires an observational, logical, and incredible approach.

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Frequently Asked Questions

Q.1 What is the nature and scope of macroeconomics?

Ans. Macroeconomics can be defined as the aggregate study of the entire economy. It deals with the study of various topics such as national income, aggregate demand, and supply, total consumption, total investment, etc.

Scope of macroeconomics include:

• Gives an understanding of the functioning of the economy.
• Formulating several economic policies such as the balance of payments, fiscal policy, monetary policies, and so on.
• Plays an important role in determining the national income of the country.

Q.2 Is the scope of macroeconomics unlimited?

Ans. The scope of macroeconomics is really wide as it has a multi-dimensional approach to various aspects of the economy. It covers a vast range of subject matters like inflation & deflation, income & employment, growth and development of the nation, public finance, general price level, and much more. Macroeconomics also has a sharp edge in practical applications.

Q.3 What are the four main factors of macroeconomics?

Ans. Macroeconomic factors refer to the indicators of growth or decline of the financial conditions of the economy. These factors help economic analysts in evaluating the financial health of a country. The nature of these factors depends on their way of effect. The four main factors of macroeconomics are:

• Fiscal Policy
• Interest Rates
• Inflation
• Gross Domestic Product (GDP)

Q.4 What are 5 macroeconomic variables?

Ans. Macroeconomics presents a wide branch of knowledge. It can also be studied through the statistical models used in econometrics called econometric models. These models are based on the key elements of the macroeconomic framework, that is, macroeconomic variables. The five macroeconomic variables are as follows:

• Aggregate Taxes
• Private Consumption
• Public Expenditures
• Aggregate Output
• Balance of Payments

Q.5 What are the characteristics of macroeconomics?

Ans. Macroeconomics has several characteristics, some of those are:

• It is the study of aggregates. It deals with the economy as a whole.
• The macroeconomic analysis is interdependent upon the economic variables.
• It is based on general equilibrium analysis.
• It is a policy-oriented science.
• It focuses on determining income and employment levels.
• The nature and scope of macroeconomics are dynamic, that is it copes with the changes in the economy.