is not one of the limitation of macroeconomics
Answers
Explanation:
1. Excessive Generalisation:
Despite the immense importance of macroeconomics, there is the danger of excessive generalisation from individual experience to the system as a whole.
If an individual withdraws his deposits from the bank, there is no-harm in it, but if all the persons rushed to withdraw deposits, the bank would perhaps collapse.
2. Excessive Thinking in terms of Aggregates:
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Again, macroeconomics suffers from excessive thinking in terms of aggregates, as it may not be always possible to have the homogeneous constituents. Prof. Boulding has pointed out that 2 apples + 3 apples = 5 apples is a meaningful aggregate ; 2 apples + 3 oranges = 5 fruits may be described as a fairly meaningful aggregate ; but 2 apples + 3 sky scrapers constitute a meaningless aggregate ; it is the last aggregate which brings forth the fallacy of excessive aggregative thinking.
3. Heterogeneous Elements:
It may, however, be remembered that macroeconomics deals with such aggregates as aggregate consumption, saving, investment and income, all composed of heterogeneous quantities. Money is the only measuring rod. But the value of money itself keeps on changing, rendering economic aggregates immeasurable and incomparable in real terms. As such, the sum or average of heterogeneous individual quantities loses their significance for accurate economic analysis and economic policy.
4. Differences within Aggregates:
Under this approach one is likely to overlook the differences within aggregates. For example, during the first decade of planning in India (from 1951-1961) the national income increased by 42% ; this, however, doesn’t mean that the income of all the constituents, i.e., the wage earners or salaried persons increased by as much as that of entrepreneurs or businessmen. Hence, it takes no account of differences within aggregates.
5. Aggregates must be functionally related:
The aggregates forming the main body of macroeconomic theory must be significant and mutually consistent. In other words, these should be functionally related. For example, aggregate consumption and investment expenditures—which form part of the macroeconomic theory (Y = C + I) would have no importance, if they were not functionally related to the levels of income, interest and employment. If these composing aggregates are mutually inconsistent or are not functionally related, the study of macroeconomic theory will be of little use.
6. Limited Application:
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Macroeconomics deals with positive economics in the sense of an analysis or how the aggregate theoretical models work—these are far removed from policy applications. These models explain the functioning of an economy and working of things in abstract and precise terms. Their abstraction and precision make such models unsuitable for use due to changes in significant variables from time to time and from one situation to another. But these limitations may be taken more in the nature of practical difficulties in formulating meaningful aggregates rather than factors invalidating the immense importance of macroeconomic analysis.
With the commencement of Keynes’ General Theory and his basic equation, Y = C + I; interest in the study of macroeconomics has deepened. Significant breakthroughs in the computation of national income accounts (the study of which forms the very basis of macroeconomics) prove it beyond doubt that the limitations of macroeconomic studies are not insurmountable.
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