Prior to Keynes, the business cycles were considered to be inevitable, and there was no concrete approach to solve these problems. These economists known as classical economists focused only on the micro aspects of the economy. The Great depression of 1930 left many of these economists helpless. In this backdrop, Keynes came up with a new approach to look at the economy. "The General Theory of Employment Interest and Money“ a book by J.M. Keynes

1. INTRODUCTION
TO MACRO
ECONOMICS
UNIT-1
PRINCIPLES OF MACRO
ECONOMICS

2. Economic Analysis
• Human wants are unlimited while the resources are
limited/scarce
• Therefore the central problems that arises are:
a) What to produce
b) How much to produce Production
c) How to produce Allocation of resources
d) For whom to produce Distribution
• Economics theories or analysis deals with the basic
propositions of how human beings or individual economic
units behave against the problem of scarcity and react to the
observed changes.

3. Economic Analysis
• Human beings often face problems of scarcity
and choice
• the aspect of choice occurs as consumers can
satisfy only some of their wants while they have
to forgo others
• The freedom of choice gives rise to opportunity
cost which is the next best alternative choice that
has been foregone

4. Economic Analysis
• opportunity cost is the real cost of a choice and
can be applied not only to consumer choices at
the micro level but also community choices at the
macro level
• major focus of economic analysis is on how
individual economic unit have to make a choice
among the limited resources.

5. Two Branches of Economics
ECONOMICS
MICRO MACRO

6. Definition of Macro Economics
• According to Shapiro,“Macroeconomics deals
with the functioning of the economy as a whole”
• Therefore this branch of economics deals with
the economic system as a whole. It examines the
behaviour of economic aggregates such as
aggregate income, consumption, investment and
the overall level of prices.
• Aggregate behaviour refers to the overall
behaviour of households and firms together.

7. Development of Macro
Economics
• Microeconomics deals with the behaviour of
individual entities like individuals markets firms
households etc. Thus it looks into the micro
aspects of economy.
• Whereas macroeconomics studies the problems
from the broader aspects of the economy and
studies the behaviour of an economy as a whole

8. Development of Macro
Economics
• Keynes pioneered a new approach to macroeconomics and
macroeconomic policy.
• Any discussion on macroeconomics starts with J M Keynes
• Prior to Keynes, the business cycles were considered to be
inevitable, and there was no concrete approach to solve these
problems. These economists known as classical economists
focused only on the micro aspects of the economy. The Great
depression of 1930 left many of these economists helpless.
• In this backdrop, Keynes came up with a new approach to look
at the economy.
• "The General Theory of Employment Interest and Money“ a
book by J.M. Keynes.

9. Development of Macro
Economics
• Keynes argued that it is possible that high unemployment and under
utilisation of the capacities may take place simultaneously in an
economy.
• He also argued that government can play a bigger role during the
economic depression by effective utilisation of monetary and fiscal
policies.

10. Difference Between Micro and Macro
Economics
Points of Difference Macro Economics Micro Economics
1 Level of Study Studies the problems of scarcity and
choice at the level of economy as a
whole
Studies the problem of scarcity and
choice at an individual level
2 Economic Variable
Used
Variables like aggregate demand,
aggregate supply are used
Variables like Consumer’s demand,
producer’s supply are used
3 Economic Decisions
Taken By
Decisions are taken by institutional
economic units like-RBI, SEBI, etc.
Decisions are taken by individuals/
individual economic units
4 Focus Focus is on Social welfare at Large Focus is on profit maximization and
utlity maximisation at individual
economic units
5 Degree of
Aggregation
Aggregation at large level Limited degree of Aggregation
6 Central Issue Determination of overall level of
output and employment is the central
issue in macroeconomics
Allocation of resources is the central
issue in microeconomics

11. Scope of Macro Economics
• Estimation of National Income and Related
Aggregates
• Theory of Employment
• Theory of Money
• Theory of General Price Level
• Theory of Economic Growth and Development
• Theory of International Trade
• Business Cycles
• Fiscal Policy and Monetary Policies

12. Major Macroeconomic
Issues/Goals
• Employment
• Economic Growth and Development
• Inflation
• Business cycles
• Sustainable Balance of Payment
• Budgetary Deficit and Fiscal Policy
• Interest Rates and Monetary Policy

13. Significance or Importance of
Macro Economics
• Helpful in Understanding the functioning of an
economy
• Study of National Income
• Policy Formulation
• Study of Business Cycles
• Helpful in the Study of Microeconomics
• Estimate of Material Welfare
• International Comparisions
• Helpful in Understanding Macroeconomic
Paradoxes

14. Schools of Thoughts
• Classicals Approach
• Keynesian School of Thought
• Monetarists or Neo-Classical Theory

15. THANK YOU