Macro Economics is a branch of economics which studies economic problem at the level of an economy as a whole. It studies aggregate economic unit. Like National Income, Aggregate Demand, General price level etc.
Difference between Micro and Macro Economics:
| Micro Economics | Macro Economics |
| It follows traditional approach to the study of economics. | It is a modern approach of economics. |
| It studies a part of economics. | It studies the entire economics. |
| It studies the individual unit of the economy. | It is a general study of the entire economics. |
| It is called as “Price Theory”. | It is called as “Income Theory”. |
| It has a narrow scope. | It has wider scope. |
| It adopts partial equilibrium analysis. | It adopts general equilibrium analysis. |
| It is based on the assumption of full employment, perfect competition etc. | It does not follow any such assumptions. |
| It explains that equilibrium is determined by demand and supply. | It explains that general equilibrium is determined by aggregate demand and supply. |
| It is concerned with problems of full employment. | It is concerned with problems of unemployment. |
| It is not and aggregate study and not much useful. | It is more realistic study and is used to solve several economic problems. |
Interdependence of Micro and Macro Economics
Micro and Macro Economics are two sides of the same coin. There is close interdependence between the two. We cannot analyse the individual behaviour without the assuming to aggregate and likewise aggregate cannot be effective unless individual variables are kept under consideration.
Micro Economics contribute towards Macro Economics in a number of ways:
1. Study of Economic Fluctuations – business cycles which are universal in every sector, are influenced by both individuals and aggregate factors. Unless we review both micro and aggregate variables, we cannot provide an appropriate solution to business cycles. Therefore, to study trade cycles, microeconomics and macroeconomics contribute significantly.
2. Basis of Economic Laws – microeconomics act as basis for macroeconomics because macro is an aggregate of individual units. The success and accuracy of aggregates depends on the individual units. Similarly, macro theories are used by micro economists.
3. Role in International Trade – both approaches are used in international trade. Economists have developed their theories on the basis of micro economics, presuming full employment of resources and mobility of factors of production. However, modern economists looked on the economy as a whole and recognised the role of aggregates. So general equilibrium is nothing but an extension of equilibrium of micro economics.
4. Balance of Payments and interdependence – Balance of payments is a burning problem for an economy. An individual sector may have favourable balance of payments whereas other sectors, unfavourable balance of payments. On the other hand, the overall position of an economy is to be assessed from aggregate position of all sectors.
5. Theory of Tariffs – many economists have propounded that modern macro approaches of imposing tariffs with the intention of correcting balance of payments position is virtually based on the theory of monopoly. So micro economics has influenced the modern macroeconomics theory.
