It explains the total elements of the economy and their relation to the equilibrium state of the whole economy at a particular point in time. In other words, macro static economy explains the static equilibrium position of the economy.
The following equation reflects the final position of equilibrium:
Y = C + I where, Y = aggregate income
C = aggregate consumption and
I = aggregate investment
The concept of macro statics can be further explained with the help of the following figure:
In the above diagram, national income is measured along X-axis whereas consumption and investment along Y-axis. Aggregate demand curve (C+I) and aggregate supply curve (450 line, Y=C+I) of an economy are intersected at point E. Point E is the equilibrium point where the equilibrium level of national income is OY. As aggregate demand and aggregate supply refer to the same point of time at equilibrium point E, it is static analysis.
Consumption and investment curve (C+I) is an aggregate demand curve because the demand of all goods and services in an economy arise from either the consumption or investment made by all the individuals of that particular economy. Similarly, Y = C+I curve which refers to national income curve is aggregate supply curve. It is because, from the total supply of goods and services made by all individuals, income is generated which is called national income of an economy. Thus we can term total supply of an economy as national income.
Comparative macro statics
Comparative macro statics is concerned with the comparative study of different equilibrium positions attained in an economy resulted by macro variables. It is concerned with the comparison of two or more successive equilibrium positions. But it tells nothing about how the system moves from one position to another.
The comparative macro static diagram can be illustrated as follows:
In the above diagram, national income is measured along X-axis whereas consumption and investment along Y-axis. E indicates the original equilibrium point where aggregate demand curve (C+I) and aggregate supply curve (450 line) are intersected. OY is the equilibrium level of national income. When there is an increase in the level of investment, the aggregate demand curves shifts from C+I to C+I+âˆ†I. Consequently, the new equilibrium level of national income is OY1 and the point of equilibrium is E1. So, comparative macro statics is concerned with the comparison of these two equilibrium points E and E1 that are obtained in an economy.
Macro dynamics analyses the process by which the economy moves from one equilibrium point to another as a result of the change in macroeconomic variables. It explains the each and every step of change involved in attaining new macroeconomic equilibrium point. Macro dynamics studies all the changes, changing path, the equilibrium position of an economy before and after the change.
Macro dynamics can be explained further with the help of the following diagram:
In the above diagram, national income is measured along X-axis whereas consumption and investment along Y-axis. The original equilibrium point is E where the level of income is OY. With the increase in the level of investment ie. âˆ†I, equilibrium point shifts from E to E1 and the level of national income increases from Y to Y1. Thus macro dynamics studies the process by which the equilibrium point shifts from point E to E1. The process of shift of equilibrium is as: Due to increase in autonomous investment, aggregate demand increases. This increase in aggregate demand puts pressure to increase supply thereby increases national income. If this demand and supply curve reach its new equilibrium point then it is settled if not then the same process continues and the income goes on increasing till the final equilibrium point E1 is reached. Thus macro dynamics deals with the path taken by the economy to move from point E to E1. In the diagram the path taken is shown with the short dotted line which is in between point E and E1.