Macroeconomics is that branch of economic theory which studies economy in its totality or as a whole. Expressed alternatively, macroeconomics is the study of broad economy-wide aggregates. Aggregate demand, aggregate supply, level of employment, price level, rate of inflation etc. are some of the important macro aggregates. It analyses what determines the real GDP and what causes unemployment and rise in general price level. It examines inter-relationship among various economic variables. Thus it studies not one economic unit like household, a firm, an industry but the whole economic system. It is like analysing the economic 'forest' as distinguished from the 'trees' that comprise the forest. Examples of macroeconomics are : national income, national savings, aggregate supply, level of employment, price level, rate of inflation, balance of trade etc. Since subject matter of macroeconomics revolves around determination of level of income and employment, therefore, it is also known as 'Theory of Income and Employment'.

Distinction between Microeconomics and Macroeconomics.

Briefly put (i) Microeconomics is the study of individual economic units like a consumer, a firm (producer) whereas macroeconomics is the study of economy as a whole and its aggregates like national income, total employment, general price level.

(ii) Central problems of microeconomics is price determination and allocation of resources but that of macroeconomics is determination of level of income and employment.

(iii) Main tools of microeconomics are demand and supply of the particular commodity/ factor whereas tools of macroeconomics are aggregate demand and aggregate supply of the whole economy.

(iv)    Microeconomics analyses how equilibrium of a consumer, a producer or an industry is attained but macroeconomics is concerned with determination of economy's equilibrium level of income, employment and output.

(v)    Microeconomics deals with determination of prices of individual goods and individual factors of production but macroeconomics deals with general price level and nation's incomes.

(vi)    Microeconomics explains how resources are allocated and how total production is distributed among cooperating factors of production but macroeconomics explains how productive capacity and national income of a country increase overtime.

1. Economy. 'An economy is a system by which people get their living' — A.G. Brown. People earn incomes by rendering productive services so as to get goods and services for satisfaction of their wants. Thus an economy is a system that (i) helps to produce goods and services, and (ii) enables people to earn income for buying goods and services. Hence all such institutions and organisations operating in a defined area which produce goods and services and enable people to earn incomes are collectively called an economy. It is an integrated system of economic activities concerning consumption, production, exchange and distribution of wealth.

2.    Goods. All physical and tangible things (objects) which are used to satisfy peoples' wants and have economic value (i.e., command price) are called goods., e.g. shirts, shoes, books, pens, chairs etc.

3.    Services. Services are non-material (intangible) goods, which cannot be seen, touched, stored or shifted and have power to satisfy people's wants and needs, e.g., services of manager, doctor, teacher, chowkidar etc. Services are tasks performed for someone and have economic value.

4.    Wants. Wants are mere desires to possess irrespective of price and capacity to buy the object (commodity) whereas demand is an effective desire backed by purchasing power to buy the commodity at a particular price.

5.    Resources. Goods and services which are used to produce other goods and services are called resources. These are categorised as natural resources (land), human resources (labour and entrepreneur) and manufactured resources (capital). Land, labour, capital and entrepreneur are conventionally called factors of production.

6.    Households. A household is an institutional unit (a family unit) whose main activity is consumption. Households supply factor services to firms. It is a group of persons normally living together and taking food from a common kitchen.

7.    Firms. A firm is an institutional unit which produces goods and services for the market. It is also called an enterprise owned and operated by an individual or by group of individuals.

8.    Commodities. Goods and services for sale in the market are called commodities. Mind, goods denote material goods whereas services denote non-material goods but the term commodities include both goods and services.

9.    Production. Production is an activity which produces material goods and services. Alternatively production is a process through which inputs are transformed into output (finished product). Mind, the term 'product' denotes both goods and services.

10.    Consumption. The process of using up of goods and services for direct satisfaction of individual or collective human wants is called consumption.

Central problems and PP curve. PP curve helps in solving central problems of an economy as explained below.

1. What to produce: In fact different points on PP curve depicting different combinations of two goods (like B, C, D, E in Fig) are different choices that are open to society. It is from these choices that society has to select one with the objective of achieving maximum social welfare. For instance, if the society decides to produce more of wheat and less of tanks, it is likely to choose combination E. Conversely if it requires more of tanks, it may choose combination B or C on PP curve in Fig. In short PP curve offers various options to society in the form of different combinations of goods to choose from according to its needs and thus helps solve the problem of 'what to produce'.
   
   
2. How to produce: The central problem of how to produce is the choice problem of technique of production, i.e., labor-intensive technique or capital-intensive technique. PP curve helps to solve this problem. For instance, if the technique used in production is obsolete, the economy will operate at some point not on the PP curve but inside it. This will inspire the economy to change the technique so as to produce at some point on PP curve itself by making efficient use of its resources.
3. For whom to produce: PP curve reflects how the problem 'for whom to produce' is being solved. If the combination of goods being produced shows an increase in output of luxury goods than necessary goods, it indicates the taste of rich people is being preferred to the needs of poor people. Thus necessary changes can be made.