Chapter 1- ''Introduction''
The basic questions of the study of Macroeconomics are the broad economic questions that concern all citizens as a whole, e.g.,
Will the prices rise or fall? Is the employment condition of the country or some sectors of the economy getting better or worse? What would be the reasonable indicators to show that the economy is better or worse? What steps can the State/Govt. take, or the people ask, in order to improve the condition of the economy?
If we closely observe the economy of a country as a whole, it will appear that the output levels of all the goods & services in the economy tend to move together. Within a particular sector of the economy (e.g., industrial goods) also, output of different kinds of goods in that particular industry tend to rise or fall together. Similarly, prices of different goods & services, generally, tend to rise or fall simultaneously. We also see that employment levels in different production units go up or down together. And, due to this simultaneous rise or fall in different production units of an economy arising out of their close relationship, the task of analysing an entire economy becomes easier as we can think of a single good as representative (rather than analysing them individually) of all the goods & services produced in the economy. The representative good/the price level/the employment level will reflect the general level of production/price level/employment level of the economy.
In Macroeconomics, the analysis of how the country’s total production and the level of employment are related to attributes (called ‘variables’) like prices, rate of interest, wage rates, profits, etc., are simplified by focussing on a single imaginary commodity and what happens to it.
For certain purposes, the interdependence/rivalry of two different sectors of the economy (e.g., agriculture and industry) or the relationship between sectors (e.g., household, businesses and govt.) help us understand some things happening to the economy much better, than by only looking at the economy as a whole.
While focussing on a representative good in the process, we may be overlooking some vital distinctive characteristics of individual goods. So, in many cases we may take a handful of different kinds of goods. Macroeconomics tries to analyse how the output levels, prices and employment levels of these different goods are determined.
The closest that microeconomics got to macroeconomics was when it looked at General Equilibrium (the equilibrium of supply & demand in each market in the economy).
Economic agents:- those individuals/organisations (whether they are consumers/ producers/govt/corporations/banks, etc) who take economic decisions
Macroeconomics tries to address situations facing the economy as a whole.
Macroeconomics shows two simple characteristics that are evident in dealing with the situations:
(1)Who are the macroeconomic agents/decision makers/players? Macroeconomic policies are pursued by the Govt/statutory bodies like the RBI, the SEBI, etc Each such body could have one or more public goals (goals intended towards welfare of the public) to pursue as defined by law or Constitution of India. These goals are different from the self-interest seeking & profit-maximising goals of individual economic agents.
(2)What do the macroeconomic agents/decision makers/players try to do? Very often, they go much beyond economic activities and engage in directing the deployment of economic resources for public needs with an aim to pursue the welfare of the country’s economy and its people as a whole.
EMERGENCE OF MACROECONOMICS
Macroeconomics emerged as a separate branch of Economics after John Maynard Keynes (J M Keynes) published The General Theory of Employment, Interest and Money in 1936 in which he argued that govt. intervention is necessary to overcome economic slowdowns. Keynes, it was dominantly thought that all the labourers who are ready to work will find get employment and all the factories will be working at full capacity. But, the Great Depression of 1929 (when output & employment levels in Europe and North America fell sharply, demand for goods was very low, many factories didn’t have any work, workers were thrown out of jobs) changed this dominant thinking. From 1929 to 1933, unemployment rate (defined as the number of people who aren’t working and are looking for jobs divided by the total number of people who are working or looking for jobs) in the USA rose from 3% to 25%. Keynes book was an attempt to theorise that the economy may have long-lasting unemployment. His approach, unlike his predecessors, was to examine the (i) economy’s working in its entirety and (ii) interdependence of different sectors. And, the subject of macroeconomics was born.
CONTEXT OF THE PRESENT BOOK OF MACROECONOMICS
The book examines the working of a capitalist economy where production activities are carried out by capitalist enterprises. In a capitalist enterprise, there are one or more entrepreneurs (people who take major decisions and bear a large part of the risk as well as the rewards) associated with the firm/enterprise. They may supply/borrow the capital required to run the enterprise. To carry out the production, they also need natural resources (raw materials, plots of land, human labour. After selling the products, they earn revenue. A part of the revenue is paid out as interest (for capital), rent (for land & building), wages (to labour) and the remaining amount is retained by entrepreneurs (as profit). Entrepreneurs often use profits to add to land/building/machinery (called investment expenditure) to enhance production levels.
Capitalist countries (features : means of production are privately owned, production is for commercial sale in market, wage labour is purchased/sold at a price called ‘wage rate’) came into being during the last 3-4 centuries. Currently, we find : Some countries have capitalist system. In many underdeveloped/developing countries, agri. production is carried out by peasant families (mostly, family members provide labour) where a large part of the agri. produce is consumed in the family. Most of the peasant farms don’t have any significant rise in their capital position over time. In many tribal societies, land is owned by the tribe and not by the individual. In many developed/developing countries, there is a significant presence of production units which are organised on capitalist principles. These are called firms. In a firm, the entrepreneur hires wage labour, employs capital & land and, then, undertakes production activities. In a capitalist system of economy, the factors of production earn their incomes through the process of production and sale of the resultant output in the market.
In developed as well as developing countries, apart from capitalist sector, there is the institution of State/Govt. The State/Govt. frames laws, enforces them and delivers justice. In many cases the State/Govt., apart from imposing taxes and spending money on public infrastructure/education/healthcare, undertakes production.
In addition to firms and the State/Govt., there is another major sector called household sector (a single individual/group of individuals who takes/take decisions relating to his/their own consumption. Households provide job labour/workers, earn wages, save some amount and pay taxes. Indeed the markets in which the firms sell their products couldn’t have been functioning if there was no demand of goods & services from the households. Similarly, households couldn’t have got opportunity to supply workers if there was no demand of labour from the firms.
The fourth important sector is external sector (a. exports that we make to other countries, b. imports that are made into our country, c. capital that we export to other countries or the capital that flows to our country).