IntroductionClass 12 Introductory Macroeconomics Case Study Questions

To recapitulate briefly, in microeconomics, you came across individual 'economic agents' and the nature of the motivations that drive them. They were 'micro' (meaning 'small') agents - consumers choosing their respective optimum combinations of goods to buy, given their tastes and incomes; and producers trying to make maximum profit out of producing their goods. In other words, microeconomics was a study of individual markets of demand and supply and the 'players', or the decision-makers, were also individuals (buyers or sellers, even companies) who were seen as trying to maximise their profits or their personal satisfaction. Even a large company was 'micro' in the sense that it had to act in the interest of its own shareholders which was not necessarily the interest of the country as a whole. For microeconomics the 'macro' (meaning 'large') phenomena affecting the economy as a whole, like inflation or unemployment, were either not mentioned or were taken as given. These were not variables that individual buyers or sellers could change.

Macroeconomics, as a separate branch of economics, emerged after the British economist John Maynard Keynes published his celebrated book The General Theory of Employment, Interest and Money in 1936. The dominant thinking in economics before Keynes was that all the labourers who are ready to work will find employment and all the factories will be working at their full capacity. This school of thought is known as the classical tradition. However, the Great Depression of 1929 and the subsequent years saw the output and employment levels in the countries of Europe and North America fall by huge amounts. It affected other countries of the world as well. Demand for goods in the market was low, many factories were lying idle, workers were thrown out of jobs. In USA, from 1929 to 1933, unemployment rate rose from 3 per cent to 25 per cent. These events made economists think about the functioning of the economy in a new way. Keynes' book was an attempt in this direction. Unlike his predecessors, his approach was to examine the working of the economy in its entirety and examine the interdependence of the different sectors.

In a capitalist country production activities are mainly carried out by capitalist enterprises. A typical capitalist enterprise has one or several entrepreneurs. To carry out production they also need natural resources, land, and the most important element of human labour. After producing output with the help of these three factors of production, namely capital, land and labour, the entrepreneur sells the product in the market. The money that is earned is called revenue. Part of the revenue is paid out as rent for land, as interest for capital, and as wages for labour. The rest of the revenue is the earning of the entrepreneurs and it is called profit. In short, a capitalist economy can be defined as an economy in which most of the economic activities have the following characteristics (a) there is private ownership of means of production (b) production takes place for selling the output in the market (c) there is sale and purchase of labour services at a price which is called the wage rate.