Introduction

You have already studied basic microeconomics — the behaviour of individual consumers and firms. Macroeconomics begins where that study leaves off: instead of looking at one buyer or one seller at a time, it steps back and studies the country's economy as a whole. This chapter of the CBSE Class 12 Introductory Macroeconomics course gives a simplified account of how macroeconomics differs from the microeconomics you already know.

The Big Questions Macroeconomics Asks

The questions macroeconomics deals with are the broad economic questions that concern every citizen:

• Will prices, taken as a whole, rise or come down?
• Is the employment situation of the country — or of particular sectors — getting better or worse?
• What are reasonable indicators to show whether the economy is doing better or worse?
• What steps, if any, can the State take (or the people ask for) to improve the state of the economy?

These are the kinds of questions that make us think about the health of a country's economy as a whole, and they are studied in macroeconomics at different levels of complexity. In this book the basic principles are stated as far as possible in simple language, with a little elementary algebra used here and there to introduce some rigour.

One Economy, One 'Representative' Good

If we observe a country's economy as a whole, the output levels of different goods and services tend to move together. When the output of food grain grows, the output of industrial goods generally rises alongside it; within industry, too, different goods tend to rise or fall at the same time. Prices behave similarly — the prices of different goods and services generally rise or fall together — and so does the level of employment across different production units.

This tendency is a great simplifier. Instead of tracking every commodity separately, macroeconomics can imagine a single representative good that stands in for everything the economy produces. Its level of production reflects the economy's average output, and its price and employment level reflect the general price level and the general level of employment. This is why, when big changes are under way — prices rising fast in an inflation, or output and jobs falling in a depression — the direction in which the aggregates move is usually the same as the direction for the individual commodities.

When We Look at Separate Sectors

Sometimes we deliberately step away from this "single good" picture. For certain questions the economy is better seen as a few distinct sectors whose interdependence (or even rivalry) matters — agriculture and industry, for instance, or the relationships between households, firms and the government. Treating everything as one representative good can also hide real differences: the production conditions of agricultural and industrial goods are not alike, and the labour of a firm's manager is not the same as the labour of its accountant. So in many cases, instead of a single representative good, we take a handful of broad categories — agricultural goods, industrial goods and services — and macroeconomics also studies how the output, prices and employment of these are determined.

How Macroeconomics Differs from Microeconomics

To recapitulate: in microeconomics you met individual economic agents and the motives that drive them. They were 'micro' (small) players — consumers choosing the best combination of goods to buy given their tastes and incomes, and producers trying to earn the maximum profit by keeping costs low and selling at the highest price they could get. Microeconomics was the study of individual markets of demand and supply, and its decision-makers were individuals (buyers, sellers, even companies) pursuing their own profit or personal satisfaction. Even a large company counted as 'micro', because it acted in the interest of its own shareholders rather than the country as a whole. 'Macro' (large) phenomena affecting the whole economy — like inflation or unemployment — were either left out or simply taken as given. The closest microeconomics came to macroeconomics was General Equilibrium: the simultaneous equilibrium of demand and supply in every market of the economy.

Macroeconomics, by contrast, tries to address situations facing the economy as a whole. Adam Smith, the founding father of modern economics, had argued that if buyers and sellers in each market simply follow their own self-interest, economists would not need to think separately about the wealth and welfare of the country. But over time economists found they had to look further. First, in some cases markets did not — or could not — exist. Second, in other cases markets existed but failed to bring demand and supply into equilibrium. Third, and most importantly, society (the State, or the people as a whole) often chose to pursue important social goals unselfishly — in areas like employment, administration, defence, education and health — for which the combined effects of individual microeconomic decisions had to be modified. To do this, macroeconomists had to study how taxation and other budgetary policies, and policies affecting the money supply, the rate of interest, wages, employment and output, actually work in the markets.

Who Makes Macroeconomic Decisions, and Why

Macroeconomics therefore has deep roots in microeconomics — it studies the aggregate effects of the forces of demand and supply — but it goes further, dealing with policies that deliberately modify those forces to follow choices a society makes outside the market. In a developing country like India such choices include reducing unemployment, improving access to education and primary health care, providing good administration, and providing adequately for national defence. Two simple features stand out:

• Who are the decision-makers? Macroeconomic policy is set by the State itself or by statutory bodies such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), each pursuing public goals defined by law or by the Constitution of India. These are not the goals of individual agents maximising private profit or welfare, so macroeconomic decision-makers are fundamentally different from individual ones.
• What do they try to do? They often go beyond narrow economic objectives, directing the deployment of a country's resources towards public needs like those above. Such activities are not aimed at private self-interest; they are pursued for the welfare of the country and its people as a whole.