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:
Image Source: 2.bp.blogspot.com
1. Excessive Generalization:
ADVERTISEMENTS:
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:
ADVERTISEMENTS:
In many cases measurement of aggregates involves serious problems. You will learn more about such problems in higher classes.
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 harbouring quite a few storms underneath. To locate the trouble spots, it is microeconomic analysis that is called for.