Limitations of Macro Economics

Written By Unknown on Saturday 22 June 2013 | 14:21

There are, however certain limitations of macro economic analysis. Mostly these stem from attempts to yield macro economic generalizations from individual experiences. 

1. Fallacy of Composition: 

In macro economic analysis the,’ fallacy of composition’ is involved, that is, aggregate economic behaviour is the sum total of individual activities. But what is true of individuals is not necessarily true of the economy as whole. For instance, savings are a private virtue but a public vice. If total savings in the economy increase, they may initiate a depression unless they are invested. Again, if an individual depositor withdraws his money from the bank there is no danger but if all the depositors do this simultaneously the banking system will be adversely affected. 

2. To Regard the Aggregates as Homogeneous: 

The main defect in macro analysis is that it regards as homogeneous without taking into consideration their internal composition and structure. The average wage in a country is the sum total of wages in all occupations, that is, wage of clerks, typists, teachers, nurses etc. But the volume of aggregate employment depends on the relative structure of wages rather than on the average wage. If, for instance, wages of nurses increase but of typists fall, the average may remain unchanged. But if the employment of nurses fall and typists rises much, aggregate employment would increase. 

3. Aggregate Variables may not be Important Necessarily: 

Aggregate variables which form the economic system may not be of much significance. For instance, the national income of a country is the total of all individual incomes. A rise in national income does not mean that individual incomes have risen. The increase in national income might be the result of the increase in the incomes of a few rich in the country. Thus a rise in the national income of this type has little significance from the point of view of the community. Prof. Boulding calls these difficulties as, “macro economics paradoxes”, which are true when applied to a single individual but which are untrue when applied to the economic system as a whole”. 

4. Indiscriminate Use of Macro Economic is Misleading: 

An indiscriminate and uncritical use of macro economics in analyzing the problems of the real world can often be misleading. For instance, if the policy measures needed to achieve and maintain full employment in the economy are applied to structural unemployment in individual firms and industries, they become irrelevant. Similarly, measures aimed at controlling general prices cannot be applied with much advantage for controlling prices of individual products. 

5. Statistical and Conceptual Difficulties: 

The measurement of macro economic concepts involves a number of statistical difficulties. These problems relate to the aggregation of micro-economic variables. If individual units are almost similar aggregation does not present much difficulty. But if microeconomic variables relate to dissimilar individual units, their aggregation into macro economic variable may be wrong and dangerous.

Notes provided by Prof. Sujatha Devi B (St. Philomina's College)
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