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Karnataka Class 12 Commerce Economics Limitations Of Macro-Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Macro-Economics : The Karnataka State Open University established on 1st June 1996 vide Karnataka Govt. Notification No. ED 1 UOV 95 dated 12th February 1996 – KSOU Act 1992 is considered to be a reputed Open University amongst the open learning institutions in the country. Keeping in view the educational needs of our country, in general, and state in particular the policies and programmes have been geared to cater to the needy. For more than 18 years, KSOU has redefined the way students are educated, with the aim of imparting knowledge by professionally managed, multi- disciplinary and multi- faceted oasis.

To outreach the pre-defined vision, university proudly launched its premium ICT Enabled programs with a belief that these programs would help fresh graduates, working professionals and even home based learners to learn the skills which would help them face the challenges of life and turn them into the next generation of leaders who will ensure the vitality of their regions.

Karnataka Class 12 Commerce Economics Limitations Of Macro-Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Macro-Economics :  The Economist’s Dictionary of Economics defines economics as “the study of the production, distribution, and consumption of wealth in human society.” Saint Michael’s College answers the question, “what is economics?” with brevity: “most simply put, economics is the study of making choices.” Indiana University answers the question with a longer, more academic approach stating that “economics is a social science that studies human behavior…[it] has a unique method for analyzing and predicting individual behavior as well as the effects of institutions such as firms and governments, or clubs and religions.”

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Karnataka Class 12 Commerce Economics Limitations Of Macro-Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Macro-Economics : Macroeconomics (from the Greek prefix makro- meaning “large” and economics) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes national, regional, and global economies. Macroeconomics and microeconomics, a pair of terms coined by Ragnar Frisch, are the two most general fields in economics. In contrast to macroeconomics, microeconomics is the branch of economics that studies the behavior of individuals and firms in making decisions and the interactions among these individuals and firms in narrowly-defined markets.

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Macro economists study aggregated indicators such as GDP, unemployment rates, national income, price indices, and the interrelations among the different sectors of the economy to better understand how the whole economy functions. Macro economists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance.

Karnataka Class 12 Commerce Economics Limitations Of Macro-Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Macro-Economics :  The significance of the study of micro-economics remarkably increased after it was developed and popularised by J.M Keynes.But macro-economics has following limitations.  Macroeconomic analysis has been gaining strength ever since the publication of J.M. Keynes’ General Theory of Employment Interest and Money. Inductive method has, however, posed the danger of excessive generalization of individual experiences to the system as a whole. Such pitfalls need to be avoided if macroeconomics is to serve as a handmaid of public policy. Let us outline such pitfalls as the limitations of macroeconomics:

Karnataka Class 12 Commerce Economics Limitations Of Macro-Economics

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 microeconomics variables relate to dissimilar individual units, their aggregation into macro economic variable may be wrong and dangerous.

1. Excessive Generalization:

As hinted above, generalization of individual observation to the system as a whole may lead to erratic inferences about the system as a whole. For instance, a loss incurred by one firm in an industry does not necessarily imply losses to all other firms in it. Likewise, hospitality shown by one Indian does not imply that each and every Indian will show the gesture.

2. Obsession of Aggregative Approaches:

Excessive thinking in terms of lumping the individual units together may lead to erratic inferences. Individual units possess individualistic traits. They are non-homogeneous in character. One can’t add up two apples and three oranges to make any meaningful aggregate.

3. Fallacy of Deductive Inferences:

Inferences deduced about individual units from the aggregative tendency may not always be true in respect of individual units as well. For instance, a general rise in prices may not affect all the sections of the community in the same manner. A consumer suffers from rising price level while a producer benefits from it.

4. Inconsistency between Overall and Individual Changes:

A hike in prices of industrial output and a fall in prices of the agricultural products may offset each other to lead to no rise in the general price level. On the basis of stability of the general price level, one who believes that no policy change is called for in the circumstances would certainly jeopardize the cultivators’ interests.

5. Problems of Measurement of Aggregates:

In many cases measurement of aggregates involves serious problems. You will learn more about such problems in higher classes.

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Karnataka Class 12 Commerce Economics Limitations Of Macro-Economics Notes

Karnataka Class 12 Commerce Economics Limitations Of Macro-Economics : To conclude, macroeconomic analysis, by itself, may not provide a true picture of an economy. It may appear like the top surface of an ocean appearing calm and unruffled from above yet harboring quite a few storms underneath. To locate the trouble spots, it is microeconomics analysis that is called for.

  1. Danger of excessive thinking in terms of aggregates :There is danger of executive thinking in terms of aggregates which are not homogeneous.For example,2apples +3apples=5 apples is the meaning full aggregate,similarly 2 apples +3 oranges is meaningful to some extent.
  2. Aggregate tendency may not affect all sectors equally :For example,the general increase in price affects different sections of the community or the different sectors of the economy differently.The increase in general level of price benefits the producers,but hurts the consumers.
  3. Indicates no change has occured: The study of aggregates make us believe that no change has occured even if there is a change.It indicates that there is no need of new policy.For example,a 5 percent fall in agricultural price an d5 percent rise in industrial prices does not affect the price level.
  4. Difficulty in the measurement of aggregates:There are at times,difficulty in the measurement of aggregates.It is difficult to measure the big aggregates.This problem has now been more or less erased by the use of calculators and the things which are not homogeneous.
  5. The fallacy of composition:The aggregate economic behavior is the sum of individual behavior.This is called fallacies of composition.What is true in case of an individual may not be true in the case of economy as whole.For example,individual saving is a virtue,wheres the public saving is vice.According to K.E.Boulding “These difficulties are aggregative paradoxes which is true when used to one person,but false when used to the economy as a whole.

Karnataka Class 12 Commerce Economics Limitations Of Macro-Economics Notes

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