Scope of macroeconomics
1. Theory of national income
Macroeconomics deals with the various concepts of national income, it’s different elements, methods of measuring national income and difficulties in the measurement of national income.
2. Theory of employment
Macroeconomics also studies problems related to employment and unemployment. It analyses causes, consequences, and types of unemployment. It also studies different factors determining the level of employment such as effective demand, aggregate demand, aggregate supply, aggregate consumption, aggregate investment, etc.
3. Theory of money
Theory of money is an important part of macroeconomics. Under it, the demand and supply of money are studied. The change of employment, banks and financial institutions are also parts of its study.
4. Theory of general price level
The determination and changes in the price level are studied under macroeconomics. Problems concerning inflation or rise in general price level and deflation or fall in general price level are studied under macroeconomics.
5. Theory of economic growth
The study of theories of economic growth is an important part of macroeconomics. It studies the economic growth of both developed and developing countries. The monetary and fiscal policies of the government are also studied under it.
6. Theory of international trade
Macroeconomics also studies trade among different countries. The theories of international trade, gain, and losses of international trade, tariffs, and protection, etc are studied under macroeconomics.
On the basis of economic relations in international trade, the economies of the world can be classified into the following two types:
A. Closed economy
An economy which does not participate In international trade is called a closed economy. This type of economy is completely self-sufficient or under-developed. According to P.A. Samuelson and Wales. Do Nordhaus, “An economy that does not engage in international trade of goods and capital with other countries is the closed economy.”
The concept of a closed economy is only theoretical because such an economy is not in existence in the real world. All the countries of the world are involved in external trade.
Features of a closed economy
- A closed economy has no economic relationship with the rest of the world.
- It neither imports goods and services nor exports to foreign countries.
- It neither borrows from the foreign countries nor lends to them.
- A citizen of a closed economy cannot go to work in other countries and foreigners are also not allowed to work in the domestic country.
- GDP and GNP of the closed economy are equal.
Types of a closed economy
i) Two sector economy
The closed economy which consists of only household and business sector is called a two-sector economy. There are no government and foreign sector for import and export in a two-sector economy. Therefore this is completely a hypothetical concept. In this economy, GDP is the sum of consumption expenditure made by the household sector and investment expenditure made by the business sector.
ii) Three sector economy
The closed economy which consists of household, business and government sector is called three sector economy. There is no foreign sector in this type of economy. This is also a theoretical concept. In this economy, GDP is the sum of consumption expenditure made by the household sector, investment expenditure made by the business sector and government expenditure.
GDP= C+I + G
B. Open economy
An economy which participates in international trade is called an open economy. It involves in export and import of goods and services. Such type of economy is also known as the four-sector economy because it consists of the household sector, business sector, government sector, and the foreign sector. In this economy, gross domestic product is the sum of consumption expenditure, investment expenditure, government expenditure, and net export. Net export is the difference between export and import.
In modern days, all economies of the world are open economies. The economies are inter-dependent with each other. The degree of openness of the economies is increasing due to the increase in globalization of the world.
According to P.A. Samuelson and W.D. Nordhaus,” An economy that engages in international trade of goods and capital with other countries is called open-economy.”
Features of Open economy:
- An open economy has economic relation with the rest of the world.
- An open economy has trade relations with other countries of the world.
- An open economy borrows and lends to other countries.
- An open economy gives and takes foreign aids.
- A citizen of an open economy can go to other countries to work and foreigners are also allowed to work in the domestic
- In an open economy, GDP and GNP are different.