What are the Limitations and Types of Macroeconomics (With Diagram)

Macroeconomics is that branch of economic analysis in which groups created to the whole economies, like national income, Total production, total consumption, total savings, wage level, general cost, and general price level are studied.

limitations and types of macroeconomics
limitations and types of macroeconomics

Macroeconomics deals with economic affairs in the large. It looks at the total size and shape and functioning of the ‘Elephant’ of Economics experience, rather than the working or articulation or dimensions of the individual parts.

To alter the metaphor it studies the character of the forest, independently of the trees which compose it.

We can analyze that in macroeconomics problems related to the whole economy are studied.

Features of Macroeconomics

The following are the characteristics of macroeconomics:

1. Changeability

In it, macro-units are considered as the variable (dynamic) whereas Micro units are considered static.

2. Connectedness

Macro quantity is not always the total of Microquantities, nor we can get individual quantity by Macro quantity by individual units.

Determination of the quantity of Micro and Macro is done by different methods.

The benefits of the whole society are kept in view during Macroeconomic analysis.

3. Study of the Whole Economy

Macroeconomic policies and problems related to the whole economy are studied. And the effects of these policies are not seen in individual units but in the whole society.

There is a big importance of microeconomics in an economy.

Limitations of Macroeconomics

The followings are the limitations of macroeconomics:

1. Importance Not Given to Individual Units

It is not a complete analysis because in it instead of the individual units’ the whole economy is studied collectively, So by the study of its importance is given to an undivided unit.

2. Possibility of Wrong Predictions

Policies are framed on the basis of the whole economy sometimes maybe dangerous for some firms and commodities.

For Example:

If the general price level is fixed, then it cannot be said that the price of commodities will also remain fixed because, by increasing the price of some commodities and a decrease in the price of some commodities, the general price level can remain fixed.

3. Difficult to find out Macro Quantities

It is difficult to find out macro quantities. Index number, defective of giving weight to index no.

Thus, it is very difficult to find correct data on total investment total savings, total consumption, etc.

4. No Attention to Structure and Composition of Group

Macroeconomic attention is given only to groups and totals, not to the structure and composition of the group.

Types of Macroeconomics

Macroeconomics is concerned with the study of aggregates or groups.

Following are the types of macroeconomics analysis:

1. Macro Static Analysis

It deals with an equilibrium point of macroeconomic variables at a given point in time namely total consumption, and total investment in the country.

The Macro static tells us the final equilibrium as shown in the following diagram:

types of macroeconomics
types of macroeconomics

The diagram shows that the equilibrium is at point E where national income (Y) is equal to total consumption (C), total investment (I), and government expenditures (G) which can be expressed as given below: Y=C+I+G.

2. Macro Comparative Static Analysis

It deals with the comparison of two macro static points at a given point in time.

The comparison between points E and E1 are known as macro-comparative static.

The initial point of equilibrium was at point E But after the inducement of expenditure by the government the new equilibrium is attained at point E1 which is shown in the following diagram:

types of macroeconomics
types of macroeconomics

The initial point of equilibrium was at point E where consumption and investment and government expenditure are equal to Income.

After the inducement by the government (G), the new equilibrium is attained at point E1 where the income is equal to (Y2=c+I+G+G) consumption, investment, government expenditure, and inducement of expenditure by the government (G).

The level of income changes from OY1 to OY2 and consequently the point of equilibrium shifts from E to E1 point.

The study between two points of Equilibrium is called Macro Comparative Static Analysis.

3. Macro Dynamic Analysis

It deals with the process of change or path of change between the original equilibrium and the new equilibrium.

It also explains the forces which have brought the change including the process of change the diagram source and the operation of the analysis the diagram shows the process of change.

The diagram shows the operation of the analysis.

types of macroeconomics
types of macroeconomics

The diagram shows the process of change from the initial point of Equilibrium (E) to the new equilibrium (E1).

The change is not a sudden change but it has been caused by a process and time lag.

In the beginning, the government increased the investment (G) which might have resulted in more employment, high productivity, and a high level of income.

All these variables have been motivating the government to take additional expenditures.

Macroeconomics Reports

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