1. INTRODUCTION TO
MACROECONOMICS

2. Microeconomics is the study of how households and firms
make decisions and how these decision makers interact in the
broader marketplace. In microeconomics, an individual chooses to
maximize his or her utility subject to his or her budget constraint.
Macroeconomic events arise from the interaction of many
individuals trying to maximize their own welfare. Because
aggregate variables are the sum of the variables describing
individuals’ decisions, the study of macroeconomics
is based on microeconomic foundations.

3. What is Macroeconomics?
 Microeconomics v/s macroeconomics
 Macroeconomics is concerned with
aggregates and average of the entire
economy, such as national income,
aggregate output, total employment, total
consumption, savings and investments,
aggregate demand, aggregate supply,
general level of prices etc.
 In macroeconomics we study how these
aggregates and averages of the economy
as a whole are determined and what
causes fluctuations in them

4.  Macroeconomics is concerned with the behavior of
the economy as whole…with booms and
recessions, with economy’s total output of goods
and services, the growth of output, the rate of
inflation and unemployment, the balance of
payment, and exchange rate
 Macroeconomics focuses on the economic
behavior and policies that affects consumption and
investments, trade balance, determinants of wages
and prices, monetary and fiscal policies, the money
stock, budget, interest rate and national debt

5. Important issues in
macroeconomics
 Why does the cost of living keep rising?
 Why are millions of people unemployed, even when
the economy is booming?
 What causes recessions? Can the government do
anything to combat recessions? Should it?
 What is the government budget deficit? How does it
affect the economy?
 Why are so many countries poor?
 What policies might help them grow out of poverty?
Macroeconomics, the study of the economy as
a whole, addresses many topical issues:

6. Economic models
…are simplified versions of a more complex
reality
 irrelevant details are stripped away
…are used to
 Make testable predictions that can, when proven,
…
 … explain the economy’s behavior
 devise policies to improve economic performance

7. Economists use models to understand what goes on in the economy.
Here are two important points about models: endogenous variables
and exogenous variables. Endogenous variables are those which the
model tries to explain. Exogenous variables are those variables that a
model takes as given. In short, endogenous are variables within a
model, and exogenous are the variables outside the model.
Price
Demand
Q
*
P
Supply
Quantity
*
This is the most famous economic
model. It describes the ubiquitous
relationship between buyers and
sellers in the market. The point of
intersection is called an equilibrium.

8. Macroeconomic Analysis
 Helps in understanding the complicated
economic system
 Formation and understanding of national
economic policy
 Tool for the solution of economic problems
related to output, employment, and national
income
 Individual are ignored
 Individual differences are overlooked

9. Issues and Problems in Economics
 What to produce
 Allocation of resources
 How to produce
 For whom to produce
 Problems of efficiency and growth

10. Goals of Macroeconomic Policy
 Full employment
 High standard of living
 Price stability
 Reduction of economic inequality and
removal of poverty
 Rapid economic growth
 External balance v/s overall balance in
economic relations with the rest of the
world

11. Objectives of Macroeconomic
Policies
 High and rising per capita incomes
 Avoiding excessively high inflation
 Efficient use of human and non-human
resources with minimum possible
unemployment of labour
 Poverty removal and removal of extreme
inequalities of income
 Avoidance of persistent imbalance in
foreign trade and excessive resorts to
foreign capital

12. Review Questions
 What is macroeconomic?
 What is the difference between
microeconomics and macroeconomics?
 What are the major issues in macroeconomic
analysis?
 Why do we need to study macroeconomics?
 What is macroeconomics model? Why do we
use macroeconomic models?
 What are the objectives of macroeconomic
policies?