Macroeconomics is the study of aggregates like national income, national product, total consumption, total saving, total investment, etc. Study of macroeconomics assists to realize the operation of a complicated modern economic system. It defines and describes how the economy functions and how the level of national income and employment is determined based on aggregate demand and aggregate supply. The study of macroeconomics, therefore, makes it easier to accomplish the goal of economic growth, a higher GDP level, and a higher level of employment (use or importance of macroeconomics).
Moreover, macroeconomics explores the forces which decide and determine the economic growth of a country and clarifies/describes how to attain the highest state of economic growth and sustain it. It helps to generate stability in price levels and analyses fluctuations in business activities. It suggests policy measures to control inflation and deflation.
Thus, macroeconomics looks at aggregate issues like:
- Why do output and employment sometimes fall and how can unemployment be reduced?
- What are the sources of price inflation and how can it be kept under control?
- How can a nation increase the rate of economic growth?
- What causes unemployment to exist?
These are sorts of questions that can be answered and understood with the help of the study of macroeconomics. The study of macroeconomics is, therefore, important from two aspects: one is knowing the performance of the economy and another one is formulating macro-level policies. Hence, macroeconomics has both theoretical and practical importance. The use or importance of macroeconomics can be analyzed based on the following headings.
- 1 Helpful in Designing Public Policy
- 2 Helpful to Understand the Functioning of the Economy
- 3 Helps to Control Economic Fluctuations
- 4 Solving Various Social Problems
- 5 Measurement of National Income
- 6 Understanding General Unemployment
- 7 Evaluate the Performance of the Economy
- 8 Helps to Expand and Develop the Microeconomics
- 9 Helpful to Understand International Trade
- 10 International Comparison
- 11 Use of Macroeconomics in Business Decisions
- 12 Conclusion
Helpful in Designing Public Policy
Macroeconomic concepts and their aggregates help in designing and formulating proper public policies for the government. For the formulation of fruitful and sound public policies, the accurate and reliable statistics of the aggregate variables are the first pre-condition. As stated by Kenneth E. Boulding, economic policies are designed for a group of individuals rather than for individuals, so macroeconomics has greater relevance in the formulation of economic policies.
Helpful to Understand the Functioning of the Economy
Macroeconomics helps to understand the working of the economy in totality form. It also helps to understand how the macro variables behave in an aggregate manner. With the help of macroeconomics, we can examine the contribution of different sectors in the economy. Macroeconomic variables and their rate of change, dominating sector of the economy, etc. are the subject matter of macroeconomic theory.
Helps to Control Economic Fluctuations
Macroeconomics helps to understand the causes of upswing and downswing in the economy and it also helps to formulate the strategy to check them. Economic instability/fluctuations like trade/business cycle, inflation, deflation, etc. need to be handled properly in an appropriate period. For such the knowledge of macroeconomics is necessary.
Solving Various Social Problems
Macroeconomics is also useful to study various problems of the society such as unemployment, poverty, inequality, regional imbalance, and make necessary arrangements to solve these problems.
Measurement of National Income
Macroeconomics and its methodology are used to calculate and measure the value of national income. It is also necessary to analyze components of national income such as GDP, GNP, and per capita income of a nation.
Understanding General Unemployment
Macroeconomics helps to understand the causes, effects, and remedies of general unemployment in the economy. It also studies the major causes of unemployment in the economy and thereby increases/decreases in total consumption, production, and income.
Evaluate the Performance of the Economy
Macroeconomics is very useful to evaluate the performance of the economy. National income which is a prime macroeconomic variable is the barometer that scales the growth of a country. Its analysis the overall performance of the economy within a time.
Helps to Expand and Develop the Microeconomics
For the expansion and development of microeconomics, the study and understanding of macroeconomics are very essential. For example, the theories of microeconomics such as the law of demand, the law of diminishing marginal utility, consumer surplus, etc. are based on the collection of experience of mass consumers.
Helpful to Understand International Trade
With the help of macroeconomics, we can design and formulate the correct trade policy. Macroeconomics helps in understanding the foreign trade structure in the country.
The macroeconomic analysis helps in the international comparison on several issues like per capita income, rate of investment, level of savings and consumption, etc. between the countries. The knowledge of the determination of exchange rates between two countries is only possible with the help of the study of macroeconomics.
Use of Macroeconomics in Business Decisions
The concept of macroeconomics can be used in making business decisions. The process of applying macroeconomic theories in business decisions can be explained as:
To Estimate Output based on General Economic Trend
The general trend of the economy (the trend of macroeconomic variables of the economy) like the general trend of the economic activities of the country, investment climate, trend on output and employment, price trend, the trend of aggregate demand, etc. effect on not only the private business affairs but also to the individual firms and business policymakers. Thus, firm planning to set up a new unit of business or expand its existing size would like to ask itself- what is the general trend in the economy? What would be the consumption pattern of the society? Will it be profitable to expand the business?
To Make Effective Decisions Regarding International Trade
An economy is also affected by its trade relations with other countries, so the firm deals with exports and imports. Variations in the global market, exchange rate, and inflows, and outflows of capital in an open economy have a serious impact on its economic environment and thereby on the functioning of its business undertakings. The managers of a firm need to know the fashions of international trade, prices, exchange rate, and prospects in the international market. The study of macroeconomics ensures answers to such problems (the answer is obtained through the study of trends in international trade, BoP, FDI policy, trade policy, and international monetary mechanism and is ensured by the study of macroeconomics).
To Determine the Social Responsibility of the Firm
Policies devised by the state to manage, control and regulate the economic activities of the people influence the functioning of the private business undertakings. Besides, the firm’s activities as producers and their attempt to maximize profits lead to considerable social costs, in terms of environmental issues. Such social costs bring conflict in the interest of the firms and create social responsibility for the firms. To minimize these conflicts and direct the activities of business firms in a socially desired way government formulates different policies. Business society(managers) therefore, should be aware of the aspirations of people and give such factors due consideration in their decisions. The macroeconomic concepts and tools help in determining such costs and benefits.
There is wider use or application of macroeconomic study (use or importance of macroeconomics). In macroeconomics, issues like the situation of unemployment/employment, inflation, economic growth, poverty, savings, investment, etc. are studied and analyzed. The aggregate information relating to such macroeconomic variables is very useful for economic policy formulation and affects the long-term growth of an economy. Therefore, there is practical and theoretical use or importance of macroeconomics on the large aggregative scale.