Introduction — Class 12 Economics

Macroeconomics studies the economy as a whole, focusing on aggregates such as total output, the general price level, employment and growth rather than individual markets. It treats the many goods of an economy as a single representative good whose price and output reflect the economy’s averages, because aggregate variables tend to move together. The subject emerged as a separate branch after John Maynard Keynes published The General Theory of Employment, Interest and Money in 1936, prompted by the Great Depression of 1929 when output and employment in Europe and North America collapsed and classical economists could not explain prolonged unemployment. The book studies the working of a capitalist economy, where production is carried out by private firms using factors of production — land, labour, capital and entrepreneurship — which earn rent, wages, interest and profit, and where output is produced for sale in the market using wage labour. Macroeconomics views the economy as four interacting sectors: households (who consume, save and supply labour), firms (who produce), the government (the State, which taxes, spends and frames laws), and the external sector (which trades through exports and imports and capital flows). Macroeconomic decision-makers such as the government and the Reserve Bank of India pursue public goals like full employment and price stability rather than private profit.