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Limitations of macroeconomics

Limitations of macroeconomics

Limitations of macroeconomics

In spite of the growing popularity of macroeconomics, it is not free from limitations. The limitations of macroeconomics are as follows: 

1. Dependence on individual units:

Several conclusions of macroeconomics are based on the sum total of individual units. In fact, it is not correct, because what is true for individuals may not necessarily be true for the whole economy. For instance, an individual may save in terms of money but if everybody starts saving, the aggregate demand will fall causing a reduction in national income. It will result in a fall and not a rise in aggregate saving. Prof. Samuelson has called it, "Fallacy of Composition." According to him, the tendency of excessive generalization on the part of macroeconomics is to apply individual experiences to the economy as a whole, is not proper. 

2. Heterogeneous units:

Under macroeconomics, heterogeneous units are studied. These units are measured in different ways. It is not possible to express these units in uniform numbers or homogeneous measure. Prof. Boulding has illustrated this point as follows: 

7 apples + 8 apples = 15 apples ( it is a meaningful aggregate) 
7 apples + 8 Oranges = 15 fruits ( it is also a meaningful aggregate) 
7 apples + 8 houses = ( it is a meaningless aggregate) 

The above illustration proves that it is not possible to aggregate and express in a proper way, heterogeneous units. Such units are measured in terms of money in economics. However, money value is not the true measure of their value-in-use. 

3. The composition of the structure of the aggregate is more important than the aggregate itself:

Macroeconomics studies aggregate but as matter of fact, it is the composition of the structure of the aggregate, which influences an economy more than the aggregate itself. Supposing, price-level in 2018, and 2019 remain constant but it does not imply that no change in prices took place in 2019. It is possible that prices of food grains might have fallen in 2019 and that of industrial goods might have risen correspondingly, keeping the general price-level constant. Thus, for a proper study of an economy, knowledge of the composition of the structure of the aggregate is as essential as the aggregate itself. 

4. Different effects of aggregates:

Another difficulty in the study of macroeconomics is that it does not study the different effects of an aggregate on different sectors of an economy. In other words, the macroeconomics tendency has not a uniform effect on all sectors of an economy. For example, a rise in rice-level benefits the traders and the industrialists but the wage-earners are the losers. 

5. Limited application:

Another limitation of macroeconomics is that most of the models relating to it have only theoretical significance. They have very little use in practical life. Moreover, it is very difficult to measure various aggregates of macroeconomics. 

6. It ignores the contribution of individual units:

Macroeconomics analysis throws light only on the functioning of the aggregates. However, in real life, the economic activities and decisions taken by individual units on a private-level have their effects on the economy as a whole. Such effects are not known by the study of macroeconomics alone. 

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