Before we proceed to discuss macroeconomic theories, it will be useful to get acquainted with some of the basic concepts and approaches widely used in macroeconomic studies.
Stock and flow variables
Macroeconomics uses certain economic aggregates, called macroeconomic variables, to assess the performance and to analysis the behavior of an economy. Macroeconomic variables that figure in macroeconomic studies are generally grouped under (i) stock variables, and (ii) flow variables another kind of variables used in macroeconomic analysis are called rates, expressed in terms of percentage rates, percentage rate of economic growth, inflation savings, investment interest, etc, a brief description of stock and flow variables is given below.
The stock variables refer to the quantity or value of certain economic variables given at a point in time, on 31st march 2006 or 31st December 2007, in other words, the variables that are measured with reference to a point in time are stock variables, for example, the water stored in at tank at a point in time is a stock variables and number of books in a library on a particular data is a stock variables. In economics, the stock of capital in a country, the number of persons employed the total money supply, all at a point in time, are some examples of macro stock variables.
The flow variables, on the other hand are the variables that are expressed per unit of time per our per week per month or per year. For example, GDP, aggregate consumption aggregate saving aggregate investment aggregate exports, aggregate imports etc. are macro flow variables.
It is important to note that the classification of stock and flow variables, as given above is a matter of convenience and practice. Conceptually, it is difficult to make an all-purpose classification of macroeconomic variable between stock and flow, for given the purpose of analysis a flow variables can be interpreted as a stock variables and vice versa. For example national income is a flow variables, by it can be treated as stock for the year of reference. Similarly, employment is a stock variable, from head-count point of view, but from the view point of work effort in terms of man-hours, it can be treated as a flow variable.
It is important to note that the classification of stock a flow variables, as given above, is a matter of convenience and practice. Conceptually, it is difficult to make an all-purpose classification of macroeconomic variables between stock and flow. For given the purpose of analysis, a flow variable can be interpreted as a stock variable and vice versa. For example, national income in a flow variable but it can be treated as stock for the year of reference. Similarly, employments is a stock variable, form head-count point of view, but form the view point of work effort in terms of man-hours, it can be treated as a flow variable.
Equilibrium and disequilibrium
The concepts of equilibrium and disequilibrium are widely used in both microeconomic and macroeconomic analyses. While microeconomics uses, in general partial equilibrium analysis macroeconomic analysis is largely of general equilibrium nature10.
In economic since, equilibrium refers to a state or situation in which opposite economic forces demand and supply, are in balance and there is no in-built tendency to deviate from this position, matchup fines equilibrium as a constellation of interrelated variables so adjusted to one another that no inherent tendency to change prevails in the model which they constitute.
This is the state in which the opposite forces (demand and supply) are in imbalance. The factors causing disequilibrium arise out of the working process of the economy. The working of a market economy is governed by such a large number of interrelated and interacting forces that a continuous balance between market forces-demand and supply-cannot be expected.
Partial equilibrium and general equilibrium analysis
Partial equilibrium analysis
Conceptually, partial equilibrium analysis is the analysis of a part of the economy, isolated and insulated through assumption from the influence of change in the rest of the economy. In simple weeds when only a part of the economy or economic phenomenon is analysed in isolation of the rest of the economy, the analysis is partial equilibrium analysis, partial equilibrium analysis is widely used in microeconomic analysis, partial equilibrium analysis is based on ceteris paribus assumption, it assumes that all other things or variables, specially the related ones, remain constant.
General equilibrium analysis
General equilibrium analysis is carried out where the objective is to analysis the economic system as a whole without using the restrictive assumptions of the partial equilibrium analysis. General equilibrium analysis is carried out by taking into account the interrelationships and interdependence between the various elements of the economy. It allows all the interrelated factors to vary in reaction to one another and seeks to analyse the simultaneous equilibrium of all the process and output all the related goods and it shows how equilibrium of all related sectors or markets is simultaneously determined.
Static comparative static and dynamic analysis
In general sense of the term static means in a state of rest or in a state of motionlessness,’ For example, A table placed in a room, a book lying on the table, and a car parked on the road is in the state of rest or motionlessness. But an economy is never in the state of rest.
Comparative statics is a comparative study of economic conditions at two static equilibrium positions at two different pints in time. In a comparative static analysis, in fact we are comparing the equilibrium values of the system corresponding to the two equilibrium positions with one another.
In contract to static approach dynamic approach is adopted to study an economy in motion. When a macroeconomic phenomenon is analysis under changing or dynamic conditions, it is called dynamic analysis. Dynamic analysis is adopted to study an economy under dynamic conditions. In a dynamic economy, the economic factors and forces keep changing. An economy in motion raises certain issues which cannot be handled through static and even comparative static approaches.
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