Macro vs Microeconomics


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This article on Macro vs Micro Economics attempts to analyze the differences between the two most important branches of Economics viz. Macro and Microeconomics and helps understand various economic issues and its effects on investors.

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Macro vs Microeconomics

  1. 1. Macro vs. Micro Economics By edu CBA
  2. 2. What is Economics? • Economics is omnipresent and form an integral part of our lives. • Economics influences the prices of the goods and services we buy, as well as the income we earn at our jobs. The economic condition of the country whether may it be inflation or unemployment directly affects our finances, growth, and many other areas that permit us to be self-sufficient in our lives. • Economics is derived from a Greek word ‘Oikonomikos’. If we break the word up, ‘Oikos’, means ‘Home’, and Nomos’, means ‘Management’. • Hence economics is the study of how the available resources are managed and organized to deal with the needs and wants of the society.
  3. 3. Meaning Micro-Economics • Micro economics studies the decisions made by individual and business concerning the distribution of resources and prices of goods and services. Macro-Economics • Macroeconomics, studies the behavior of not only particular company or industries but whole economy. • It deals with a specific industry or a sector, the connections of firms and households in the market. • It includes understanding how unemployment, price levels, growth rate affects the economy wide aspects such as the Gross National Product (GNP). • For example, microeconomics would study how a company could lower its prices to increase its product demand in the market. • For example, macroeconomics would look at how an increase/decrease in net imports would affect a nation's capital account.
  4. 4. Micro economics Macro economics It deals with the decision making of single economic variables such as the demand, price, consumer, etc. It deals with averages and aggregates of the entire economy such as national income, aggregate output, aggregate savings etc. It is narrow in scope and interprets the small constituents of the entire economy. It has a wide scope and interprets the economy of a country as a whole. It is also known as the price theory because it It is also known as the income theory because it explains the process of economic resources allocation explains the changing levels of national income of an on the foundation of relative prices of several goods economy during a period of time. and services. It deals with the flow of various factors of production from a single owner to a single user of those resources. It deals with the circular flow of income and expenditure between different sectors of the economy. It helps in developing policies appropriate resource distribution at firm level. It helps in developing policies appropriate resource distribution at economy level such as inflation, unemployment level etc.
  5. 5. Micro and Macroeconomics Interaction • Looking at the above mentioned differences it appears that these two studies of economics are different but in reality they are inter-related and complement each other since the issues that they address are overlapping. For example, increased inflation (a macroeconomic effect) would increase the prices of raw materials required by the companies to manufacture products which would in turn also affect the price for the final product charged to the public. • When we talk about macroeconomics while studying the constituents of output in nations economy we also have to understand the demand of single households and firms, which are micro economic concepts. • Similarly when we study the investment policies of businesses- a micro economic concept we cannot do it without learning about the effect of macroeconomic trends in economic growth, taxation policies etc.
  6. 6. Inflation Economic variables affecting equity investors • Inflation signifies a rise in general level of prices over a period of one year. • When inflation is at a low rate, the stock market reacts with a rush to sell shares. • High inflation influences the investors to think that companies would hold back on spending; this leads to a decrease in revenue. Now, the higher cost of goods coupled with the drop in revenue pushes the stock market to drop. Interest Rates • Interest rates as established by the Central bank and individual banks can have an effect on the stock market. • Higher interest rates indicate that money has become more expensive to borrow. In order to recompense for the increased interest costs, businesses would have to cut down on costs leading to lay off workers and this affects the company’s earnings adversely. • All of this supplements to a drop in the stock market.
  7. 7. Fiscal Policy • They are the government spending policies that influence macroeconomic conditions. • The most direct influence of fiscal policies on the financial market is through taxation. • The government can try to change the tax rates; it can impose new taxes or abolish existing ones or can use measures to broaden the tax base. In each of these cases, it will affect the income and consumption pattern of a large number of people. Foreign Market • Foreign market is a market in which participants are able to buy, sell, exchange and speculate on currencies. • When the worldwide economy is down, goods and services cannot be sold abroad as they used to be. This eventually leads to decrease in the revenue and as a consequent effect cause the decline in the stock market.
  8. 8. Knowledge is like a line with no ends… To know more on this topic click on the link below omics/macro-vs-micro-economics/
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