Q1. Elaborate on why do you think the study of Macroeconomics is significant?

Further,
elucidate why the bifurcation of the study of Economics into micro-economics and
macro-economics is relevant and important? (10 marks)

Macroeconomics is a study of the economy as a whole. The subject of macroeconomics studies

those factors that determine the levels of macroeconomic variables and how these variables
change over time. Macroeconomics was recognised as a separate field of study after John
Maynard Keynes, a British economist, published his book, The general theory of employment
interest and money in 1936. Macroeconomics studies aggregates and averages such as average
price level, aggregate demand, total output, per capita income, total consumption, etc.
macroeconomics, in layman's terms, studies everything that has an economic impact on
individuals daily lives. Its scope ranges from economic system to economic structure to trends in
macroeconomic variables, business cycles (growth, recession, depression, recovery),
International economy, economic planning and policies, and money and capital markets. The
study of macroeconomics is significant for several reasons.

It helps to understand the overall functioning and performance of an economy. It helps in the
analysis of economic growth by observing the factors responsible for slowdown or acceleration
in growth. This helps in the identification and distinction between rich, poor and developing
countries. For example, the per capita income of Switzerland was $87,000 in 2018 and that of
India was just $2000. The reasons for such differences from one country to another is due to the
difference in the standard of living owing to their varied abilities to produce goods & services.
Labour productivity (the quantity of goods & services produced by each unit) determines a
country’s prosperity. Identification and isolation of factors such as capital, trade which play a
role in growth can put poor and developing countries on the track of economic development.

Macroeconomics helps to understand economic fluctuations which involve various phases of the
business cycle: slowdown, recession, depression, recovery, expansion and boom by analysing the
reasons behind such events, as well as their consequences. For example, During a recession
when the economy is in a slowdown, the Government is advised to adopt an expansionary fiscal
policy. It seeks to encourage economic growth through monetary and fiscal stimulus. As the
expansionary policy, the Government tries to increase aggregate demand through increased
government spending and reduction in taxes. This acts as an injection and is required when
liquidity needs to be released to increase purchasing power and combat recession. By reducing
the taxes, the Government assists in the increment of disposal income with the people, causing
an increase in their overall consumption expenditure.
Macroeconomics helps in the study of the international economy. The world’s economies have a
strong link with each other through internal and external trade. Billions of dollars are invested in
the world’s financial markets and any disruptions can cause problems on digital platforms.
macroeconomics analyses how International economies interact with each other and how
investment takes place via the foreign direct investment route. It also helps in the determination
of foreign exchange rates and international prices.
Macroeconomics helps make informed business decisions by monitoring the changes in the
macroeconomic environment and policy. For example, the threat of depression indicates that a
company must gear up for cost-cutting and revenue earning exercises. Macroeconomics helps
governments form policies including but not limited to fiscal policy, monetary policy, the Union
Budget and more. It also helps in economic planning or the allocation of national resources
according to national priorities and social objectives to achieve pre-stated goals.
Macroeconomics was recognised As a separate field of study after John Maynard Keynes, a
British economist published his book The General Theory of Employment, Interest, and Money
in 1936. “Principles of Economics” by Alfred Marshall is considered to be the first book on
Microeconomics. It is important to distinguish between macroeconomics and microeconomics
because of several reasons. While Microeconomics deals with individual agents within the
economy like the household, businesses and workers, Macroeconomics focuses on the economy
as a whole i.e. national, regional and international economies.

The need to divide the field of economics into microeconomics and macroeconomics was felt
during the economic crisis that engulfed the world during the late 1920s. While microeconomics
is supposed to analyse the choices buyers make and their impact on the supply and demand of
resources and the consequent prices of goods and services, macroeconomics studies factors like
unemployment, national income, and prices of goods that affect the economy at large.
Microeconomics focuses on the trends and changes noticed in individual markets whereas
macroeconomics focuses on bigger aspects like inflation, employment and aggregate demand.
investors use microeconomics to guide their investment decisions whereas governing entities use
macroeconomics as an analytical tool to draft economic policies. The distinction is important
because microeconomics does not answer macroeconomic questions like how government
policies can impact the economy, what can promote economic growth and what should be the
rate of inflation in a given economic scenario. This distinction also helps investors as
microeconomic variables help guide investment decisions instead of macroeconomic forecasts.
The distinction between macroeconomics and microeconomics is essential because they affect
each other and are codependent.

A change in macroeconomic indicators brings about a change in microeconomic activities, For

example, a change in the aggregate supply of labour in the economy will bring about a change in
the wages paid by an individual firm which is a microeconomic issue. Similarly,
macroeconomics is also dependent on microeconomic variables. Macroeconomics is the general
study of microeconomic units. For example, the country's employment is the sum of all
individual jobs in different sectors. National income and production is the sum of the income and
production of thousands of people and businesses. The price level shows the average. The price
that results from a corresponding calculation of the prices of all goods traded in Germany in a
financial year. Likewise, many theories of macroeconomics are derived from theories of
microeconomics.

Overall, macroeconomics is a very important subject to study and can be separated but not
altogether alienated from microeconomics. The reasons for the bifurcation are stated as above.
Like P.A. Samuelson has clearly mentioned, “There is really no opposition between micro and
macroeconomics. Both are absolutely vital. You are less than half-educated if you understand the
one while being ignorant of the other.” Macroeconomics helps calculate where a nation stands in
terms of wealth and other aspects.

Q2. Explain the concept of GDP? Elaborate on why do you think it is an important variable in
the study of Macroeconomics. Elucidate also as to what GDP fails in achieving or
communicating. (10 marks)

Gross Domestic Product or GDP is the total market value of all the final goods and services
produced within a nation’s borders in a given period of time. GDP is a measure of the nation’s
income and is used by the government for macroeconomic analysis and the formation of policies
and the Union Budget. GDP is a significant indicator of the nation’s wealth. If the GDP is rising,
it means the consumers are purchasing more and the economy is growing stronger.

There are four different types of GDP based on how it is calculated and each show a different
economic outlook. Real GDP is calculated after adjusting for inflation. The prices of goods &
services are calculated at a price level that is constantly taking a predetermined base year or
using the price of the previous year. It is considered to be the most accurate depiction of a
nation’s economy and rate of growth.

Nominal GDP is calculated without adjusting for inflation. The prices of goods & services are
calculated at current price levels. Actual GDP is the measurement of the economy of a country at
the present moment. Potential GDP is a calculation of the economy of the country under ideal
conditions like full employment.

GDP is used by the Government to determine the health of the economy and the growth rate
along with the impact of inflation or deflation. GDP can be expressed as an equation that sums
up what it constitutes: level of consumption, investment, government expenditure, the difference
in profit between exports and imports.

Y = C + I + G + (X-M)

A country’s gross domestic product tells us whether the economy is expanding by producing
more goods and services, or contracting due to less output. It is also analyzes the performance of
the country in relation to other economies around the world. It enables policymakers and central
banks to promptly take necessary action (Investopedia). If there is negative GDP growth it may
be an indicator that an economy is in or approaching a recession or down turn and a sign for the
Government to adopt expansionary monetary policy. Investors also pay close attention to the
GDP because a percentage change in the GDP, up or down, can have a significant impact on the
stock market. In lay man term a bad economy signifies lower revenue for companies and
consequently lower stock prices.

The International Monetary Fund also calculate global and regional real GDP growth to have an
idea of how quickly or slowly the world economy or the economies of a particular region of the
world are growing (IMF.Org)

GDP is a measurement of the economy in the previous year and is used to explain how economic
growth and production have impacted stocks and investments in the past (Investopedia). It
cannot be considered predictor of the future movement of the market.

Although GDP is an important indicator, it has several drawbacks. For instance, it does not take
into account non market transactions or transactions of the underground economy as it relies
primarily on official data so black market economic activities are usually not taken into
consideration. Secondly, it fails to represent the degree of income inequality in the society. The
rich keep getting richer and the poor keep getting poorer. If this is what is happening in a
blooming economy with an increasing GDP, it is not exactly a sign of social growth. It fails to
account for the cost imposed on human health and the environment of negative externalities
arising from the production or consumption of the nation’s output (Khan academy). It is limited
to a geographical region in a globally open economy. For instance it does not take into account
profit earned in a nation by overseas companies that are sent back to foreign investors. It also
does not take into account housework ands unpaid volunteer work or work people do for free and
work women do within the four walls of their homes. GDP does not take into consideration the
quality of goods. Consumers can buy short lived, inexpensive goods repeatedly instead of high
quality longer lasting goods. With time consumers spend more replacing the bad quality goods
and GDP grows as a result of waste ands inefficiency.

GDP makes no adjustment for leisure time. It is an economic goods that does not get measured in
official GDP figure. Increases in leisure time may lower thee economic growth rate but it is
essential for individuals. Lastly, disasters can raise the GDP. Disasters like earthquake people
getting sick, famines, wars etc. require soldiers, health workers, builders and other helping
hands. Rebuilding the nation after a disaster or war can boost economy and increase GDP.

Overall, while GDP is a significant indicator of growth And health policy maker contemplate
decision on interest rates, taxes and policies and economists in their research, it is not an
adequate measure of social welfare as it does not take into account several externalities and there
need to be other measures of growth that are more holistic. However, this does not discount the
importance of GDP in economics because it is one of the most Important factors for determining
the growth rate and economic status of a country and of the world over a given period of time.
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