Introduction to Macro Economics – Class 12 latest notes
Hello students, welcome to your learning space. In this educational post, we are providing you notes on Introduction to Macro Economics. These notes are well prepared by our experts as per the needs of students keeping in view upcoming CBSE Board exams in Feb-March, 2025 for the session 2024-25. In these notes, you will get two additional things – 1. Downloadable PDF of these notes and 2. A video of MCQs on Introduction to Macro Economics.
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The word Macro originated from the Greek word ‘Makros’ which means Large. Micro word is also derived from Greek word ‘Mikros’ which means small. So, Macro Economics deals with economic problems/issues at larger level (at the level of whole economy) in comparison to Micro Economics’ small level (at individual individual).
Adam Smith-Father of Modern Economics
The Modern Economics was greatly developed after the publication of Adam Smith’s book ‘An enquiry into the wealth of nations’, popularly called just ‘Wealth of Nations’ in 1776. Due to his immense contribution in initial development of modern economics, Adam Smith is called ‘Father of Modern Economics‘.
J M Keynes- Father of Macro Economics
Macro Economics developed as a separate branch of economics after British Economist John Maynard Keynes published his famous book ‘The General Theory of Employment, Interest and Money’ in 1936. However, need for studying Macro Economics had already been felt due to market failure during the Great Depression of 1929. Norwegian Economics Ragnar Frisch is credited for dividing the study of economics into Micro Economics and Macro Economics.
Definition of Macro Economics
Macro Economics can be defined as a branch of economics which studies economic issues or problems at the level of an economy as a whole.
Difference between Micro Economics and Macro Economics
Both are the two branches of study of economics. They are quite interrelated with each other. However, there are some differences because of which we need to study them as separate branches of economics. The main differences are explained as below:
Scope and Focus
Micro Economics studies the human behaviour in relation to use of scarce resources of alternate uses at individual level like that of an individual person, a good, a firm or an industry. In contrast to this, Macro Economics studies the human behaviour in relation to use of scarce resources of alternate uses at the level of an economy as a whole like aggregate demand, aggregate supply etc.
Economic Variables
Main economic variables for study of Micro Economics are-consumer demand (demand for a good) and producer’s supply (supply of a good) etc. In comparison to this, Macro Economics has variables like aggregate demand and aggregate supply.
Degree of Aggregation
Micro Economics, though it studies economic activities at individual level, it also has some degree of aggregation like market demand of a good, study of economic activities of an industry. Macro Economics studies all the variable at aggregate level. So, it has more degree of aggregation than micro economics.
Decision-Making Agents
In Micro Economics, economic decisions are taken by individual economic agents like a firm, a producer, a consumer etc. while in Macro Economics, decision are taken by institutional economic agents like the government, central bank etc.
Analytical Methods
Micro economics follows the method of ‘Partial Equilibrium Analysis’ whereas Macro Economics follows the method of ‘General Equilibrium Analysis’ for study.
Variables Considered Constant
In study of Micro Economics, some of the variables of Macro Economics are considered constant. While in study of Macro Economics, some of the variables of Micro Economics are considered constant.
Central Problems
Central problem of Micro Economics is ‘Allocation of Resources’ whereas for Macro Economics, it is ‘Determination of Production and Employment’ at the level of an economy.
Paradox of Thrift
Paradox of thrift is a theory in economics according to which personal savings are bad for overall economic growth. This theory was popularized by J M Keynes. This theory states that personal savings can be both the boon and the bane. At the individual level, it is a boon for a person as it can financially secure his future. However, at the level of whole economy, personal savings are considered a bane because they work as leakages in the circular flow of economy and reduce overall spending in the economy. Reduction in spending can be detrimental to growth of economy as it may discourage producers to produce more due to less aggregate demand in the economy.
However, it may be noted that economies may also be benefited from savings if they are used for creation of capital goods. Capital goods increase production capacity in the economy and stimulates growth.
Great Depression of 1929
Developed economies of Europe and America faced economic depression in 1929, called The Great Depression. The situation of this acute economic recession was result of over production by producers. They believed in classic theory of ‘Supply creates its own Demand’ and produced in huge quantity. However, this theory was proved wrong in 1929 when producers accumulated huge unsold stock and the prices crashed. Crashing of prices discouraged production and soon economy was trapped in low equilibrium trap. The situation became worsened and economies of developed countries, starting from United States of America to European countries, faced the Great Depression. During this period, output plunged to lowest. GDP of USA fell by 33% during 1929-33 while unemployment rose to 25%.
A Video for you-10 MCQs on Introduction to Macro Economics
Conclusion
In conclusion, it can be said that understanding of Macro Economics is very important to have knowledge about the functioning of an economy as a whole. Macro Economics, having its roots in Greek terminology, has made its journey through the great economists like Adam Smith to J M Keynes, the latter making huge contribution in study of Macro Economics post the Great Depression of 1929 and rightly called Father of Macro Economics. Topics like difference between Macro and Micro Economics, Paradox of Thrift, Great Depression of 1929 etc. will certainly set momentum for students for further study. We hope that these notes have provided clarity of these topics. Thank You choosing us for your source of knowledge.
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