Interdependence of micro and macro economics

Interdependence of micro and macro economics

Microeconomics and macroeconomics are two major branches of economics. So, they both are interdependent. Firm wise, individual wise, sector wise, district wise study of any economic activity is microeconomics. Overall study of all those study is macro study. So, any change in firm or individual or sector or district strongly affect to the national or macro economy. It way the policy made for national or macroeconomics brings the change in those different sectors or micro studies. So, close and particular analysis is microanalysis where as overall analysis of all economic activity is macro analysis. Economist Gardner Ackley has clearly said, “The relationship between macroeconomics and the theory of individual behavior is a two way street. On the one hand, microeconomic theory provides building blocks for the aggregate theories. But macroeconomics also contributes to microeconomic understanding.” Same way Edward Shapiro has made clearer with these words, “Strictly speaking, there is only one ‘economics’. Macroeconomic theory has a foundation in microeconomic theory and microeconomic theory has a foundation in macroeconomic theory.” The interdependence between these two branches of economics can be explained in following two topics:

a. Dependence of microeconomics in macroeconomics

Microeconomics matters deeply depend upon the macroeconomic activity. For example, price, rate of interest, rate of profit, wages etc all are known as microeconomic topics. But all they depend upon macroeconomic behavior. Price, rate of interest, wage are determined by their demand and supply in country not by individual demand and supply. Same way, profit of any firm depends upon the nature of market, aggregate demand, national income, and general price level in economy. Aggregate demand, price level, national income, employment etc are deeply affected by macroeconomic fluctuations. Thus, change in macroeconomic indicators brings the change in microeconomic activities.

b. Dependence of macroeconomics in microeconomics

Macroeconomics is overall study of microeconomic units. For example, employment of the country is the sum of all individual employment in different sectors. National income and national output is the sum of income and output of thousands of person and firms. Price level shows the average price, which comes through the appropriate calculation of prices of all transected commodities in the country in a fiscal year. Same way many theories of macroeconomics are derived from microeconomics theories. For example total consumption function and total investment function are based on the behavior of individual consumers and firms respectively. Thus, as a conclusion, it can be said that the study of macroeconomics comes throughout of microanalysis.

Being two broad branches of economics, each is paralyzed in the absence of other. P.A. Samuelson has clearly mentioned, “There is really no opposition between micro and macroeconomics. Both are absolutely vital. You are less than half educated, if you understand the one while being ignorant of the other.”