Students’ Guide to The Nature and Scope of Macroeconomics

Students’ Guide to The Nature and Scope of Macroeconomics!

What is Macroeconomics?

Whereas microeconomics deals with the analysis of small individual units of an economy such as individual consumers, individual firms, individual industries and markets and explains how prices of products and factors are determined.

On the basis of these prices microeconomics explains how resources are allocated among various products and how income distribution among factors is deter­mined.

On the other hand, macroeconomics is concerned with the analysis of the behaviour of the economic system in totality.

Thus, macroeconomics studies how the large aggregates such as total employment, national product or national income of an economy and the general price level are determined. Macroeconomics is therefore a study of aggregates. Resides, macroeconomics explains how the productive capacity and national income of the country increase over time in the long run.

Professor Gardner Ackley makes the distinction between macroeconomics and microeconomics more clearly when he says, “macroeconomics concerns itself with such variables as the aggregate volume of the output of an economy, with the extent to which its resources are employed, with the size of the national income, with the ‘general price level’. Microeconomics, on the other hand, deals with the division of total output among industries, products and firms and the allocation of resources among competing uses. It considers problem of income distribution. Its interest is in relative prices of particular goods and services.”

It is evident from above that the subject matter of macroeconomics is to explain what determines the level of total economic activity (that is, the size of the national income and employment) and fluctuations {i.e., ups and downs) in it in the short run. It also explains what causes the general price level to rise and determines the rate of inflation in the economy.

Besides, modern macroeconomics analyses those factors which determine the increase in productive capacity and national income in the long run. The problem of increasing productive capacity and national income over time in the long run is called the problem of economic growth. Thus, what determines rate of growth of an economy is also the concern of macroeconomics.

Thus, why is national income higher today than it was in 1950? Why does rate of unemployment in a free market economy go up in a period and falls in another period? Why do some countries have high rates of inflation, while others maintain price stability? What causes alternating periods of depression and boom (generally described as business cycles)? Why should government intervene in the economy and what policy it should adopt to check inflation, control business cycles, raise level of national income, reduce unemployment and restore equilibrium in the balance of payments are some of the important questions which macroeconomics attempts to answer.

Say’s Law and Keynesian Revolution:

Classical and neoclassical economists assumed that full-employment of labour and other resources always prevailed in the economy and concentrated mainly upon explaining how the re­sources were allocated to the production of various goods and services and how the relative prices of products and factors were determined. It is mainly because of their full-employment assumption that they concentrated on the problem of determination of prices, outputs and resource employment in the individual industries.

They believed that if there were departures from full employment, a free market economy would automatically work in way that would restore full employment of resources. They argued that involuntary unemployment and under utilisation of the productive capacity could not occur in capitalist economies if market mechanism were allowed to work freely without any interference by the trade unions.

Thus, according to them, even when deficiency of aggregate de­mand arises as it happens during the times of recession or depression, prices and wages would change in such a way that employment, output and national income would not decline. The belief of classical economists that full-employment of labour and capital stock will always exist was based on Say’s Law of Markets. According to Say’s Law, supply creates its own demand and therefore, the problem of lack of demand for supply of goods and services does not arise.

Factors which produce goods and services for supply in the market get rewards (wages, interest and rent) for their contributors to the production of goods and services produced. Thus, incomes earned become expenditure made on goods and services. Therefore, the problem of deficiency of demand does not arise. They thus could not provide adequate explanation of the occurrence of huge unemployment that prevailed during depression of 1930s in the capitalist economies. What is worse, the classical economists, particularly A.C. Pigou tried to apply the economic laws that hold good in the case of an individual industry to the case of the behaviour of the whole economic system and macroeconomic variables.

For instance, Pigou asserted that involuntary unemployment existing at the time of depression in the 1930s was due to the obstacles put up by trade unions and government and further that this involuntary unemployment could be eliminated and employment expanded by cutting down the wages. A noted British economist J.M. Keynes challenged this classical viewpoint during the early nineteen thirties when severe depression took place in the capitalist countries such as Britain and the U.S.A.

While the cut in wages may expand employment in an individual industry, the reduction in wages throughout the economy will result in fall in incomes of the working classes and is likely to cause decrease in the level of aggregate demand. The fall in aggregate demand will tend to lower the level of employment rather than expand it.

Though there were pre-Keynesian theories of business cycles and the general price level that were “macro” in nature, but it was J.M. Keynes, an eminent British economist, who laid stress on macroeconomic analysis and put forward a general theory of income and employment in his revolu­tionary book, “A General Theory of Employment, Interest and Money” published in 1936.

Keynes’ theory made a genuine break from the classical and neo-classical economics and produced such a fundamental and drastic change in economic thinking that his macroeconomic analysis has earned the names ‘Keynesian Revolution’ and ‘New Economics’. Keynes in his analysis made a frontal attack on the classical ‘Say’s Law of Markets’ which was the basis of full-employment assumption of classi­cal view that involuntary unemployment could not prevail in a free private enterprise economy.

He showed how the equilibrium level of national income and employment was determined by aggregate demand and aggregate supply and further that due to lack of aggregate effective demand equilibrium level of income and employment might well be established at far less than full-employment level in a free-market capitalist economy.

This causes involuntary unemployment of labour on the one hand and excess productive capacity (i.e. under-utilisation of the existing capital stock) on the other. His macroeconomic model reveals how consumption function, investment function, liquidity preference function, conceived in aggregate terms, interact to determine the level of national income and employment.

Further, the fall in employment in the Great Depression of 1930s and emergence of huge unem­ployment of labour which in some countries went up to 25 per cent of labour force gives unmistakable evidence that aggregate demand is not always large enough to ensure full-employment of labour and full use of productive capacity.

After Keynes, there have been significant developments in macroeconomics. Apart from what determines the level of employment of labour and use of productive capacity, modern macroeconom­ics is concerned with many more issues such as the problems of inflation, economic growth, business cycles, stagflation and the balance of payments and the exchange rate. The analysis of these six major issues describes the scope of macroeconomics. Here we shall explain only briefly what these problems are.

Major Issues in Macroeconomics:

As explained above, Keynes in his book ‘Theory of Employment, Interest arid Money’ explained how levels of income and employment were determined in a free market economy. During the Second World War period, he extended his macro-theory to explain inflation. However, after Keynes, econo­mists have further developed and extended macroeconomics. We briefly explain below the main issues in macroeconomics.

Determination of National Income:

The first major issue in macroeconomics is to explain what determines the level of employment and national income in an economy and therefore what causes involuntary unemployment. Why is level of national income and employment very low in times of depression as in 1930s in various capitalist countries of the world. This will explain the cause of huge unemployment that emerged in these countries.

As mentioned above, classical economists denied that there could be involuntary unemployment of labour and other resources for a long time. They thought that with changes in wages and prices, unemployment would be automatically removed and full employment established. But this did not appear to be so at the time of depression in the thirties and after. Keynes explained that level of employment and national income is determined by aggregate demand and aggregate supply.

With aggregate supply curve remaining unchanged in the short run, it is the deficiency of aggregate demand that cause underemployment equilibrium with the appearance of involuntary unemployment. According to him, it is the changes in private investment that causes fluctuations in aggregate demand and is therefore, responsible for the problems of cyclical unemploy­ment.

General Price Level and Inflation:

Another macroeconomic issue is to explain the problem of inflation. Inflation has been a major problem faced by both the developed and developing countries in the last fifty years. Classical economists thought that it was the quantity of money in the economy that determined the general price level in the economy and, according to them, rate of inflation depended on the growth of money supply in the economy.

Keynes criticised the Quantity Theory or Money’ and showed that expansion in money supply did not always lead to inflation or rise in price level. Keynes who before the Second World War explained that involuntary unemployment and depression were due to the deficiency of aggregate demand, during the war period when prices rose very high he explained in a booklet ‘How to Pay for War’ that just as unemployment and depression were caused by the deficiency of aggregate demand, inflation was due to the excessive aggregate demand.

Thus, Keynes put forward what is now called demand-pull theory of inflation. After Keynes, theory of inflation has been further developed and many theories of inflation depending upon various causes have been put forward. Cost-push and structuralist theories of inflation have been put for­ward. To analyse the problem of inflation is an important issue of macroeconomics.

Business Cycles:

Throughout history market economies have experienced what are called busi­ness cycles. Business cycles refer to fluctuations in output and employment with alternating periods of boom and recession. In boom periods both output and employment are at high levels, whereas in recession periods both output and employment fall and as a consequence large unemployment come to exist in the economy.

When these recessions are extremely severe, they are called depressions. What are the causes of these business cycles or ups and downs in market economies is an important macroeconomic issue which has been highly controversial. The objective of macroeconomic policy is to achieve economic stability with equilibrium at full employment level of output and income. We shall discuss various theories of business cycles and also monetary and fiscal policies to control business cycles and achieve economic stability.

Stagflation:

How to control business cycles and achieve economic stability has been a very difficult problem for the economies to solve? But during the decade of 1970s and in some later times in the subsequent decades market economies have experienced a still more intricate problem which has been described as stagflation. While in business cycles, recession or depression is accompanied by high unemployment and falling prices, in the seventies recession or stagnation was accompanied by not only high unemployment but also rapid inflation.

Since in that period high unemployment and recession (or stagnation) co-existed with high inflation, this problem was given the name stagflation. This stagflation could not be explained with the Keynesian theory which focuses on the demand side. Therefore, a new economic thought which is called Supply-side Economics emerged which explained stagflation by laying stress on the supply-side of economic activity. Stagflation is an important issue of modern macroeconomics.

Economic Growth:

Another important issue in macroeconomics is to explain what determines economic growth in a country. Theory of economic growth or what is simply called growth economics which has been recently developed a good deal is an important branch of macroeconomics. The problem of growth is a long-run problem and Keynes did not deal with it. In fact, Keynes is said to have once remarked that “in the long run we are all dead”.

From this remark of Keynes it should not be understood that he thought long run to be quite unimportant. By this remark he simply emphasized the importance of short-run problem of fluctuations in the level of economic activity (involuntary cyclical unemployment, depression). It was Harrod and Domar who extended the Keynesian analysis to the long-run problem of growth with stability. They laid stress on the dual role of investment—one of income-generating, which Keynes considered, and the second of capacity-creating which Keynes ignored because of his preoccupation with the short run.

In view of the fact that an investment adds to the productive capacity (i.e., capital stock), then if growth with stability (i.e., without stagnation or inflation) is to be achieved, income or demand must be increasing at a rate large enough to ensure the full utilisation of the increasing capacity. Thus, macroeconomic models of Harrod and Domar have explained the rate of growth of income that must take place if the steady growth of the economy is to be achieved. These days growth economics has been further developed and extended a good deal and new theories of growth have been put forward by Solow, Meade, Kaldor and Joan Robinson.

Since the above growth theories apply particularly to the present-day developed economies, special theories which explain the causes of underdevelopment and poverty in less developed coun­tries (LDCs) and which also suggest strategies for initiating and accelerating growth in them have also been propounded. These special growth theories relating to less developed countries (LDCs) are generally known as Economics of Development. We shall discuss some theories of development such as balanced growth theory of Nurkse, unbalanced growth theory of Hirschman, ‘theory of economic development with unlimited supplies of labour of Arthur Lewis in this book.

Balance of Payments and Exchange Rate:

Balance of payments is the record of economic trans­actions of the residents of a country with the rest of the world during a period. The aim to prepare such a record is to present an account of all receipts on account of goods exported, services rendered and capital received by the residents of a country and the payments made for goods imported, services received and capital transferred to other countries by residents of a country. There may be deficit or surplus in balance of payments. Both create problems for an economy.

An important effect is that the transactions in balance of payment are influenced by the exchange rate. The exchange rate is the rate at which a country’s currency is exchanged for foreign currencies. The instability in exchange rate has been a major problem in recent years which has given rise to serious balance of payments problems. During the 12 years period (1901 -2002), Indian rupee depreciated to a large extent in terms of US dollar giving rise to serious problems.

In the year 2003, the Indian rupee started appreciating against the US dollar. During the two years 1997 and 1998, currencies of many South-East Asian Countries and Japan rapidly depreciated in terms of US dollar. This creates the situation of economic crisis which needs to be overcome. Both interrelated problems of balance of payments and instability of foreign exchange rate will be analysed in a separate part of this book.

Post-Keynesian Developments in Macroeconomics:

There have been significant developments of macroeconomic ideas in the post-Keynesian era. These developments came about as a critique of Keynesian macroeconomics.

We briefly explain below the following three main developments in macroeconomics after Keynes:

(1) Monetarism

(2) Supply-side Economics

(3) Rational Expectations Theory

Monetarism:

American economist Milton Friedman, a Nobel Laureate in economics, criticised Keynes’ macro­economics and put forward a new view or idea. Milton Friedman along with Anna Schwartz published an important work “A Monetary History of the United States” in which they argued that monetary policy is the prime engine in causing fluctuations in economic activity by bringing about changes in aggregate demand. Milton Friedman made a sharp criticism of Keynes’s view that monetary policy was quite ineffective instrument in bringing about economic stability.

In fact, he asserted that mon­etary policy caused or contributed to almost all recessions he studied. He stressed that even the Great Depression of 1930s was primarily caused by the tight monetary policy adopted at that time. He further argued that the Great Depression of the 1930s did not show the failure of free-market system, but the failure of Government’s interventionist policy, especially monetary policy of the Central Bank which landed the U.S. economy into depression.

According to Friedman, it is the excessive contrac­tion of money supply by the Federal Reserve Bank System (which is the Central Bank of the U.S.A. ) that caused depression in the U.S. economy. There are differences between the monetarists and Keynesians in respect of two important issues. First issue relates to the relationship between money and supply and inflation. The second relates to the role of Government in the economy.

Monetarists led by Friedman believe that inflation is always and everywhere a monetary phenomenon. According to them, inflation is caused by the rapid expansion of money supply in the economy. Friedman and his followers restated the classical quantity theory of money and made improvements in it but retained its essence that it is the greater increase in money supply relative to growth of output that causes inflation. In order to control inflation, they suggest a constant growth rate of money supply in the economy.

An important feature of monetarism is that to achieve economic stabilisation it is opposed to the adoption of activist role by the Government. As against this, Keynesian economists emphasise that active role should be played by the Government to control business cycles and achieve economic stability.

Like classical economists, monetarists also believe that a free-market economy is inherently stable and if the economy departs from the state of full-employment, full-employment equilibrium is restored through automatic adjustments in it. Therefore, they even argue that Government or its central bank should not adopt active discretionary monetary policy, rather it should pursue a policy of stable rate of growth of money supply.

In sharp contrast to the monetarists’ view, Keynes and his followers advocate the adoption of activist role by the Government. In this respect Keynesian lays stress on the adoption of discretion­ary fiscal and monetary policies. Besides, Keynesian economists believe that expansion in money supply does not always cause inflation in the economy.

According to them, whether or not increase in money supply will lead to inflation depends on the possibility of expansion in output. When the economy is in the grip of depression, the increase in money supply is likely to lead to the large expansion in output of goods which will prevent the rise in prices. Similarly, monetarists are opposed to the fiscal policy of budget deficits and public debt. They argue for reducing taxes and lowering public expenditure so that the role of Government in the economy is restricted.

Supply-Side Economics:

In the 1970s and early eighties the problem of stagflation appeared in which high inflation was accompanied by high rate of unemployment. This problem of stagflation demonstrated that Keynes’s theory which focused on fluctuations in aggregate demand as responsible for either high unemploy­ment or high inflation could not explain the problem of stagflation in which both high unemployment and high inflation occurred together.

The failure of Keynesian economics to deal with stagflation led some economists to believe that problem was on the supply side of economic activity. The problem looked quite strange and Keynesian policies were incapable of solving it. Following Keynesian policy, if expansionary fiscal and monetary measures were taken to raise aggregate demand to remove stagnation or high unemployment, it accelerated inflation further. On the other hand, if steps were taken to lower aggregate demand to lower the inflation rate, it would have further increased the already high unemployment rate.

Supply-side economists pointed out that it was supply-shocks, delivered among others by reduction in oil supplies and increase in oil prices that caused the problem of stagflation. As a result of contraction in supply due to the adverse supply shocks, given the aggregate demand curve, price level and inflation rate could rise on the one hand and aggregate output could fall giving rise to more unemployment on the other.

Advocates of supply-side economics argued that for the expansion in aggregate supply and thereby increase in employment opportunities, incentives to work, save and invest more were re­quired to be promoted. According to them, more work or labour, and higher investment will lead to the increase in aggregate supply. The increase in aggregate supply, given the aggregate demand curve, will lead to the increase in employment on the one hand and reduction of inflation on the other. According to them, high rates of income tax serve as disincentives to work, save and invest more.

Therefore, to encourage more saving, work and investment, they advocated for the reduction in the then prevailing high rates of income tax. As a result of more work and investment, aggregate supply will increase which will not only cause employment to rise and unemployment to decrease but also lower the rate of inflation.

Besides, in the opinion of the supply-side economists the reduction in tax rates will increase income and output to such an extent that even with lower rates of taxes, the Government revenue will increase which would tend to reduce Government’s budget deficit. In this respect, the concept of Laffer curve has been put forward, according to which when rate of a tax is increased from zero upward,, Government’s revenue from it initially rises, but after a point further hike in the rate of a tax brings about decrease in revenue for the Government.

Therefore, they are of the view that higher rates of personal taxes are responsible for low tax-revenue. Therefore, they assert that with lowering of tax rates, not only national income and employment will increase through greater labour supply and investment but this will also reduce Government’s budget deficit by increasing tax revenue.

New Classical Macroeconomics: Rational Expectations Theory:

Recently a new macroeconomic theory has been put forward which is also opposed to Keynesian macroeconomic theory and policy which focused on aggregate demand for goods and services. According to this new classical macroeconomic theory, consumers, workers and producers behave rationally to promote their interests and welfare. On the basis of their rational expectations, they make quick adjustments in their behaviour.

Therefore, according to the supporters of rational expec­tations theory, involuntary unemployment cannot prevail. They argue that producers and consumers collect all the necessary information about economic situation and policies and determine their behaviour according to the rational expectations formed on the basis of all information collected. According to them, people do not make any mistakes in establishing correct relationship between economic events and Government’s policies on the one hand, and the results that follow from them on the other.

In other words, they always make correct predictions from the Government’s policies and changes in the economic environment. For example, when Government makes a deficit budget they will expect that rates of interest will rise. Therefore, they will attempt to take loans now when the rates of interest are lower so as to save themselves from paying higher interest rates in the future. Unfortunately, because of this behaviour the interests rates rise immediately rather than in future.

A significant difference between the Keynesian theory and rational expectation theory may be noted here. In the Keynesian theory deficit in Government budget leads to increase in aggregate demand and will therefore promote private investment. On the other hand, according to rational expectations theory, budget deficit will cause rate of interest to rise which will discourage private investment. Thus, according to rational expectations theory, increase in aggregate demand as a result of budget deficit is offset by decrease in private investment so that national output, income and employment remain unaffected.

Similarly, according to rational expectations theory, if central bank of a country increases the money supply, consumers, producers and workers will expect rationally that price level will rise. On the basis of these rational expectations, workers would get their wages raised, landlords will raise their rent, lenders and bankers will increase the rate of interest, and producers will raise their profit margins. As a result of these adjustments by various persons, the effect of expansion in money supply on these persons will get cancelled.

According to the rational expectations theorists, since the consumers, workers and producers themselves make adjustments to save them from the adverse effects of economic events and policies there is no need for the Government to intervene in the economy through adoption of proper macroeconomic policy. Thus, like the Friedman and other mon­etarists, supporters of rational expectations theory are opposed to the activist role by the Govern­ment.

According to them, it is very difficult to implement an activist policy successfully. They are of the view that market is usually in full-employment equilibrium and people make self-adjustments in their behaviour to protect and promote their interests. The Government cannot achieve any success in improving economic situation through its activist policy. As compared to the Government individu­als themselves are in a better position to take corrective measures to safeguard their interests.

Why a Separate Study of Macroeconomics:

Now an important question which arises is why a separate study of the economic system as a whole or its large aggregates is necessary. Can’t we generalise about the behaviour of the economic system as a whole or about the behaviour of large aggregates such as aggregate consumption, aggregate saving, aggregate investment from the economic laws governing the behaviour patterns of the individual units found by microeconomics.

In other words, can’t we obtain the laws governing the macroeconomic variables such as total national product, total employment and total income, general price level, etc by simply adding up, multiplying or averaging the results obtained from the behaviour of the individual firms and industries? The answer to this question is the behaviour of the economics system as a whole or the macroeconomic aggregates is not merely a matter of addition or multiplica­tion or averaging of what happens in the various individual parts of the whole.

As a matter of fact, in the economic system what is true of parts is not necessary true of the whole. Therefore, the applica­tion of micro-approach to generalise about the behaviour of the economic system as whole or macroeconomic aggregates is incorrect and may lead to misleading conclusions. Therefore, a separate macro-analysis is needed to study the behaviour of the economic system as a whole in respect of various macroeconomic aggregates. When laws or generalisations are true of constituent individual parts but untrue and invalid in case of the whole economy, paradoxes seem to exist.

Boulding has called these paradoxes as macro-economic paradoxes. It is because of the existence of these macro- economic paradoxes that there is a justification for making macro-analysis of the behaviour of the whole economic system or its large economic aggregates. Thus Professor Boulding rightly remarks, if is these paradoxes more than any other factor, which justify the separate study of the system as whole, not merely as an inventory or list of particular items, but as a complex of aggregates.

Professor Boulding further elaborates his point by liking the economic system with a forest and the individual firms or industries with the trees in the forest. Forest, he says, is the aggregation of trees but it does not reveal the same properties and behaviour pattern as those of the individual trees. It will be misleading to apply the rules governing the individual trees to generalise about the behaviour of the forest.

Various examples of macro-paradoxes (that is, what is true of parts is not true of the whole) can be given from the economic field. We shall give two such examples of savings and wages, on the basis of which Keynes laid stress on evolving and applying macroeconomic analysis as separate and distinct approach from microeconomic analysis.

Paradox of Thrift:

Savings are generally good for individuals. People save for some motives in view. They save meeting their needs in old age, for education of their children, for purchasing durable goods such as houses and cars and thereby raise their standards of living. Further, they save for making investment or depositing in banks which raise their income in future years. But an interesting paradox arises which shows importance of macroeconomic analysis as distinct from microeconomic analysis.

The paradox of thrift arise because it so happens that when all people in a society try to save more but in fact they are not only unable to do so but actually attempt to save more by all people cause their income or standard or living to decline. Keynes’ macroeconomic analysis helps to explain this paradox, Keynes pointed out that efforts to save more, especially at times of depression, will lower the consumption demand of the people and will therefore adversely affect aggregate demand in the economy.

The decline in aggregate demand will cause national output and income to fall and unemployment to increase. At the lower level of national income, savings will fall to the original level but the consumption of the people will be less than before which implies that people would become worse off as a result of their decision of saving more. Thus decision to save more will deepen the economic depression. It goes to the credit of Keynses’ theory of effective demand as determinant of national income and his multiplier theory (which shows that income and employment fall more than the original rise in saving) that paradox of thrift has been resolved. It clearly shows at times of depression, more savings deepen the economic crisis.

Wage-Employment Paradox:

Another common example to prove that what is true for the indi­vidual may not be true for the society as a whole is the wage-employment relationship. As pointed out above, classical and neo-classical economists, especially A.C. Pigou, contended that the cut in money wages at times of depression and unemployment would lead to the increase in employment and thereby eliminate unemployment and depression.

Now, it is true that a cut in money wages in an individual industry will lead to more employment in that industry. It is quite commonplace conclusion of microeconomic theory that, given the demand curve for labour, at a lower wage more men will be employed. But for the society or economy as a whole this is highly misleading. If the wages are cut all round in the economy, as was suggested by Pigou and others on the basis of wage-employment relationship in an individual industry, the aggregate demand for goods and services in the society will decline, since wages are incomes of the workers which constitute majority in the society.

The decline in aggregate demand will mean the decrease in demand for goods of many industries. Because the demand for labour is a derived demand, i.e., derived from the demand for goods, the fall in aggregate demand for goods will result in the decline in demand for labour which will create more unemployment rather than reduce it.

Fallacy of Composition:

We thus see that the laws or generalisations which hold good for the behaviour of an individual consumer, firm or industry may be quite invalid and misleading when applied to the behaviour of the economic system as a whole. There is thus a fallacy of composition. This is so because what is true of individual components is not true of the collective whole. As mentioned above, these are called macroeconomic paradoxes and it is because of these paradoxes that a separate study of the economic system as a whole is essential.

Macroeconomic analysis takes account of many relationships which are not applicable to indi­vidual parts at all. For instance, an individual may save more than that he invests or he may invest more than he saves, but for economy as a whole it is one of the important principles of Keynesian macroeconomics that actual savings are always equal to actual investment.

Likewise, for an individual or a group of individuals, expenditure may be more or less than the income but the national expendi­ture of the economy must be equal to the national income. In fact, the national expenditure and national income are two identical things.

Similarly, in the case of full employment, an individual industry may increase its output and employment by bidding away the workers from other industries, but the economy cannot increase its output and employment in this way. Thus what applies to an individual industry does not do so in case of the economic system as a whole.

We therefore conclude that a separate and distinct macroeconomic analysis is essential if we want to understand the true working of the economic system as a whole. As a matter of fact, microeconomics and macroeconomics are complementary to each other rather than being competitive.

The two types of theories deal with different subjects, one deals mainly with the explanation of relative prices of goods and factors and the other mainly with the short-run determination of income and employment of the society and its long-run economic growth. Professor Samuelson rightly says, “There is really no opposition between micro and macro-economics. Both are absolutely vital. And you are only half-educated if you understand the one while being ignorant of the other.”