Macroeconomics- Indian Economy Notes: NCERT Notes UPSC
Macroeconomics attempts to study the ‘macro’ (meaning ‘large’) phenomenon affecting the economy as a whole. It usually simplifies the analysis of how the country’s total production and the level of employment are related to attributes, also called variables, like prices, rate of interest, wage rates, profits, etc.
In simple terms, macroeconomics studies the behaviour of the entire economy such as the aggregate output levels of all the goods and services in an economy, general price levels of goods and services, employment level in different production units, etc.
Macroeconomics forms an indispensable part of the UPSC exam preparation and hence should be studied in detail. Before proceeding further let’s first understand the difference between Microeconomics and Macroeconomics.
Distinction Between Microeconomics and Macroeconomics
|It studies the behaviour of the individual or small economic agents.||It tries to address situations facing the economy as a whole.|
|It studies the demand and supply of individual market segments.||It studies the aggregate effects of the forces of demand and supply in the economy.|
|It focuses on consumers’ choices, tests and preferences and income.||It focuses on consumption levels in an economy and national income.|
|The decision-makers are any individuals, firms, households, business units, etc.||Macroeconomic policies are pursued by the State itself or statutory bodies like the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and similar institutions.|
|The ultimate goal is profit maximisation.||The ultimate goal is macroeconomic stabilization.|
Note: Even a large company is ‘micro’ in the sense that it had to act in the interest of its own shareholders which was not necessarily the interest of the country as a whole.
Importance of Macroeconomic Studies
Adam Smith, the founding father of modern economics, had suggested that if the buyers and sellers in the market take decisions based on their own self-interest, there is no need to think of the wealth and welfare of the country as a whole separately. But it was found that in some cases:
- The markets did not or could not exist.
- The markets existed but failed to produce an equilibrium of demand and supply.
- In a large number of situations, society (or the State, or the people as a whole) had decided to pursue certain important social goals unselfishly (in areas like employment, administration, defence, education and health) for which some of the aggregate effects of the microeconomic decisions made by the individual economic agents needed to be modified.
Therefore, it is crucial to study the effects of taxation and other budgetary policies, money supply, interest rates, wages, employment and output in the market.
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The Emergence of Macroeconomics
- Macroeconomics emerged as a separate subject in the 1930s due to John Maynard Keynes, a British economist.
- The classical school of thought, before Keynes, believed that all the labourers who are ready to work will find employment and all the factories will be working at their full capacity.
- However, the Great Depression of 1929 and the subsequent years saw the output and employment levels in the countries of Europe and North America fall by huge amounts. It affected other countries of the world as well.
- Demand for goods in the market was low, many factories were lying idle, workers were thrown out of jobs and the unemployment rate touched new heights.
- These events led to the persistent development of macroeconomic frameworks explained by Keynes.
- His approach was to examine the working of the economy in its entirety and examine the interdependence of the different sectors.
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- Today, the economic system of most developed countries is capitalistic in nature, where the production activity is mainly carried out by capitalist enterprises.
- A typical capitalist enterprise has one or several entrepreneurs, who exercise control over major decisions and bear a large part of the risk associated with the enterprise.
- Factors of Production: They are the inputs required for the production of goods and services. The factors of production are capital, land, labour and entrepreneur.
- Revenue: The money that is earned by enterprises by selling goods and services is called revenue.
- Profits: It is the earnings of the entrepreneurs. It is the part of the revenue that remained after the payments of rent (on land), interest (on capital) and wages (on labour).
- Investment expenditure: It is the expenditure made out of profits in buying new machinery or building new factories so that production can be expanded. These expenses raise productive capacity.
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