No country’s economy can run smoothly for a very
long time, and fluctuations keep happening.
The subject of economics is vast as it covers within
its ambit both macro components and micro components.
Microeconomics deals with the smaller units in an economy
which deals with individual behavior and patterns.
However, macroeconomics is the portion which covers the
larger components concerning the whole country or region.
The term ‘macro,’ meaning big was first used in 1933
by economist Ragner Frisch followed by John Keynes.
The concept of macroeconomics existed from a
very long time starting from the 16th century.
During the 18th century, when the classical theory was at its outset,
macroeconomics played an important role in shaping the subject of economics.
The term macroeconomics was accorded with various definitions with the
passage of time and one such among the same was given by R.D. Allen
who stated that the term economics covers all the aggregates of various factors
such as total employment, overall growth, total income, and production.
Various definitions were added to the subject, and finally, a standard theory
was applied after the 18th century when various schools of thought emerged.
The first school of macroeconomics was the classical
school of thought which emerged in the late 18th century.
The main propagators of the classical theory were Karl Marx and
James Mill who believe that the economy is to be left untouched
as it already contains elements which will automatically resolve
the temporary problems and bring equilibrium at a long run.
These classical economists believed firmly on automatic mechanisms
and thus, failed to create an efficient economic system.
However, the failure in bringing a radical thought to the subject of
economics led to the Great Depression in the US economy around the 1930s.
This led many economists to change their thoughts on classical
theory and one such economist John Keynes wrote a book titled
‘The General Theory of Employment, Interest and Money’ where for the
first time, a major criticism of the Classical theory was covered,
and a new theory of macroeconomics was created and
was named as Keynesian Theory, named after Keynes.
Keynes recommended the Governments to interfere for bringing a stricter fiscal policy
through which it regulates the economy and protect the economy from Depressions.
This model was well appreciated and was followed by all the major countries.
However, after the world war, additional views on macroeconomic theory
found its place and the theory given by Milton Friedman was popularized
who propagated a more rational thought and stressed that
only fiscal policy could not sort the economic problems.
His school of thought was known as monetarism, and according to him,
the equilibrium of an economy can be obtained in a long run only if
the government releases more funds as and when the shortage is faced.
Further, after 1970, a new classical theory was promulgated by the American Economist
Robert Lucas who provided a theory of macroeconomics suitable for real business cycles.
His thoughts were more calculative and not
just speculative and thus gained popularity.
However, in today’s economy, all the schools have got relevance, and
different countries follow different theories or a combination of them.
There are various concepts of macroeconomics which
are similar to all the economies around the globe.
The concepts such as GDP, GNP, Inflation rate, Employment, and unemployment, etc.
are the parameters used to calculate the exact
position of the country in terms of economic growth.
These macroeconomic components determine whether
the country is developed or developing.
For example, a country with high GDP tends to have a more
stable and developed economy than the one with lesser GDP.
Inflation, unemployment, poverty, etc.
are negative parameters and higher these parameters,
low would be the development of the economy,
and thus, a government’s main aim is to bring these
factors down and keep the economic rate stable.
The macroeconomic principles help any economy to manage
problems like inflation, deflation, and depression.
The two important principles in this regard include
fiscal policy and financial policy or monetary policy.
Fiscal Policy is released by the Executive branch
of a Government and is usually represented
in the form of budget covering all the revenue
and expenditure of the Government in a financial
year and budget also clarifies the places as to where the revenue would be invested.
On the other hand, financial policy is given
by the Head banking institution of any nation
and contains the details regarding the production
of currency and foreign exchange rates.
Both the policies form the crux of the subject of macroeconomics
and important to determine the other components of the subject.
The overall development of an economy is
calculated with the components of macroeconomics.
Macroeconomics is very important as it provides a report of the country
to understand as to where the country exactly stands in terms of growth.
This allows the country to compare its position with other countries.
After the advent of globalization, countries have
started functioning as a single globalized economy,
and at this state, countries need to have a
uniform currency rate, which can be achieved
only by the efficient working of some of the components relating to macroeconomics.
For the same, an efficient and free government is
required, and for competing at an International level,
the interference of Government and the equal
contributions of its citizens is mandatory.