Concept of Macroeconomics
Macroeconomics is the branch of economics that studies the economy as a whole. It focuses on aggregates such as national income, total output, employment, investment, saving, and price level.
Features of Macroeconomics
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Studies the whole economy
Examines aggregate economic behavior
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Aggregative economics
Also known as theory of income and employment
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Keynesian origin
Developed after Keynes' General Theory (1936)
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Macro meaning
"Macro" means large (from Greek word makros)
Scope of Macroeconomics
1
Theory of national income
Measurement and determination of national income
2
Theory of employment
Analysis of employment and unemployment levels
3
Theory of money
Money supply, demand, and monetary policy
4
Theory of general price level
Inflation, deflation, and price stability
5
Theory of economic growth
Long-term economic development and growth
6
Theory of international trade
Balance of payments and trade policies
Macroeconomic Variables
Key indicators that measure the performance of an economy:
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Aggregate demand and supply
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Gross Domestic Product (GDP)
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Per Capita Income (PCI)
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Economic growth
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Inflation and deflation
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Employment and unemployment
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Balance of trade
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Demand and supply of money
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Business cycle
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Government budget
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Consumption, saving, and investment
Closed Economy
Features:
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No trade with rest of the world
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No borrowing/lending abroad
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No foreign aid or remittance
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No movement of labor across borders
Types:
Households + Business
GDP = C + I
Households + Business + Government
GDP = C + I + G
Open Economy
Features:
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Economic relations with other countries
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Imports and exports goods/services
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Can borrow, lend, and give or receive aid
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Labor and remittances move across borders
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GDP and GNP differ in open economies
Comparison: Closed vs Open Economy
Closed Economy
- No international trade
- Self-sufficient
- GDP = GNP
- Limited economic exposure
Open Economy
- Active international trade
- Global interdependence
- GDP ≠ GNP
- Greater economic opportunities