MICRO ECONOMICS MACRO ECONOMICS
Study of individuals and business
Looks at higher up country and
Decisions regarding the allocation of
resources and prices of goods and
Studies the behavior of the economy as a
whole and not just on specific
companies, but entire industries and
Focuses on supply and demand and
other forces that determine the price
levels seen in the economy
Looks at economy-wide phenomena, such
as Gross National Product (GDP) and how it
is affected by changes in unemployment,
national income, rate of growth, and price
Microeconomics takes a bottoms-up
approach to analyzing the economy
Macroeconomics takes a top-down
IMPORTANCE OF MACRO ECONOMICS
• Understanding working of economy:-Macroeconomics gives bird’s eye
view of the economic world. It helps in understanding how the
macroeconomic variables behave in the aggregate by the study of the
national income, aggregate output, gross saving and output, national
• Formulation of economic policies:-Provides a sound basis for the
formulation of government’s economic policy for the removal of
poverty, employment and price stabilization based upon reliable
statistics of the aggregate variables.
• Controlling economic fluctuations:- Economic fluctuations like trade
cycle, inflation, deflation etc. need to be handled appropriately in
appropriate period to correct them. This will give a finite direction to the
economy. For this the knowledge of macroeconomics is essential.
• Helpful in international comparisons:-Only macroeconomic variables
like national income, total output, aggregate demand, and consumption
behavior and investment patterns of different countries can be easily
• National Income:-National income is the barometer that scales the
growth of a country. It analyses the overall performances of the
economy within a given period of time and allow us to compare that
performance with the post.
• Studies other economic problems:-Studies the problems of
unemployment, inflation, economic instability and economic growth
and enriches our knowledge of functioning of the whole economy by
studying level of national income, output, investment, saving, and
LIMITATIONS OF MACRO ECONOMICS
• The macro economies ignore the welfare of the individual: If national
saving is increased at the cost of individual welfare, it is not considered
a wise policy.
• The macro economics analysis regards aggregates as homogeneous
but does not look into its internal composition: If the wages of the
clerks fall and the wages of the teachers rise, the average wage may
remain the same.
• Difficulty in the measurement of aggregates: It is difficult to measure
the big aggregates.
• Indicates no change has occurred: The study of aggregates make us
believe that no change has occurred even if there is a change. It
indicates that there is no need of new policy. For example, a 5% fall in
agricultural price an 5% rise in industrial prices does not affect the
• It is not necessary that all aggregate variables are important: If
national income in the country goes up, it is not necessary that the
income of all the individuals in the country will also rise.
Macro Economic Variables/Indicators
• National Income
• Export and Import
• Government Expenditures
• Transfer Payment
• Rate of Interest
• Demand for Labor
• Supply of Labor etc.
Stock Variable verses Flow Variable
Those variables whose values are measured from particular point of time
such as weight of a car, water in a tank etc..
Similarly, In macro economics we have lots of stock variables such like
supply of money, the deposits in the bank, the amount of wealth possess by
a person etc.
Are those variables whose values are measured from particular period of
time such as speed of a car during ten (10) minutes.
In macro economics national income, consumption, saving, investment and
rate of interest are all flow variables.
Endogenous and Exogenous Variables
Endogenous Variable: The variables whose values are determined
within the model are known as endogenous variables.
In two sector economy
Y is endogenous variable, The purpose of this model is to find the value of Y.