Microeconomics or Macroeconomics—Which is More Important and Relevant? This debate comes up frequently in academia. This article does not intend to enter into this discussion. Suffice it to say that both are important, each related and interrelated in its own way.
Broadly speaking, microeconomics deals with individual and firm-level decision-making, which is probably relatively quantitative and decisive. In comparison, macroeconomics aggregates a level analysis of various variables and their relationships, relying on many assumptions and factors that may or may not be amenable to precise quantification, and more It’s esoteric. Macroeconomics is a field that has, in some ways, continued to evolve, gaining attention in the post-Keynesian era.
Microeconomic issues routinely provide a reality check for individuals and businesses, and they have little choice but to pay attention to these issues. Macro issues are of an overarching nature and set the tone for the overall economic environment. Macro issues do not immediately affect individuals, but by their very nature they attract the attention of everyone in society, and public discussion of these issues is very common.
Such arguments become more pronounced when the economy is not doing well or facing difficult times. This is a global phenomenon, but let’s stick to the Indian scenario.
These days, discussions on topics such as GDP, inflation, unemployment, budget deficits, and current account deficits are ubiquitous in public life: in print, electronic, social media, and even drawing-room conversations. became.
Many such discussions often devolve into heated debates involving all sorts of international comparisons, but we discuss the assumptions and methodologies made in calculating the various macro figures on which the arguments are based. Part of this callousness stems from the feeling that “everybody’s problem is nobody’s problem”.
Listening to some of the public debates and debates, I wonder if expert advice on such matters is no longer needed!
in the case of inflation
Let’s take the example of “inflation”. Rampant high inflation is a cause for concern around the world. Many commentators have compared India’s inflation rate to figures from other regions. India prides itself on having much lower inflation than many developed countries like the US and Europe.
Well, there are different categories of inflation indices, they are calculated for different purposes, and they are calculated in different ways. The CPI figures used by the RBI for inflation targeting are released monthly by the Ministry of Statistics Program Implementation and indicate the percentage change in the CPI for that month compared to the same month of the previous year (e.g. January 2022 vs January 2021). ). .
Other countries may use different types of inflation indices and calculate them differently. Different countries have different index commodity baskets, constituent weights, and structural adjustments.
Compared to the year-over-year (yoy) comparison used in India, another approach might be a month-to-month (mom) comparison (for example, Jan 2022 against Dec 2021). The former approach may be subject to base-effect bias, while the latter approach may be subject to seasonal factors.
Of course, comparing Indian inflation to US inflation is not an apples-to-apples comparison. Also note that while inflation targeting is legally mandated for her RBI in India, the US Fed has no such legal mandate. Moreover, the impact of rising inflation on India’s marginalized population is much more severe given the large difference in her average per capita income and income disparity between the two countries.
Now come to professionals working in the field of macroeconomics. Some institutions, including public institutions, regularly publish figures for various macro indicators and also make forecasts for the future.
And there are many economists/experts who make their living from this activity.
Increasingly, these institutions and experts seem to be taking advantage of the ambiguity and jargon typical of macroeconomics. Many of them come out to two decimal places to indicate false beliefs, but they keep changing all the time.
Indeed, many exogenous or unpredictable factors are involved, such as geopolitical conditions, international oil prices, actions of the US Federal Reserve, monsoons, etc. However, we will highlight the “disclaimer” and make it interim rather than stating what we are conveying as gospel truth. I have never heard of an individual who lost their job because they made a wrong prediction.
Contrast this with company-level reporting of financial performance and future projections. Heads turn and responsibility for mistakes is fixed. Remember the harsh criticism and regulatory actions credit rating agencies had to face in 2018 for failing to timely predict major NBFC defaults. Or take the example of monthly budgeting for an average low-income family household. cause serious problems in life.
Even some of the traditional concepts used in macroeconomics are cryptic and can be stated rather simply and objectively. For example, expressing government budget deficits as a percentage of GDP is a well-established practice, but to make the numbers easier to identify, why not express them as a percentage of the total budget size? ? Note that the deficit to GDP ratio looks relatively optimistic, because higher inflation, in addition to higher tax revenues, also increases nominal GDP. Benefit from rising inflation!
Politicians may have their own reasons and impulses to cite macroeconomic figures that are appropriate to the situation without necessarily entering into the assumptions made in their calculations.
However, some institutions and experts hallucinate, let the imagination run wild, conduct exhaustive analysis, and derive macro figures without disclosing assumptions or giving proper disclaimers. That’s completely unethical.
The author is a retired IAS Officer and former Chairman of SEBI.
September 18, 2022