Macroeconomics definition
Macroeconomics is the part of economics that tracks the economy at the world level, the general economic phenomena of inflation, price levels, rates of economic growth, state income, gross domestic product (GDP), and changes in the unemployment rate.
Macroeconomics helps to identify the reasons for unemployment, inflation, economic growth, and to measure the efficiency of the economy (to predict future moves, what affects positively, what can be improved).
Macroeconomics focuses on the structure and behavior of the economy in the world. Microeconomics studies the choices of individual economic subjects (people, industries, companies, households, etc.).
Understanding Macroeconomics
Economics can be studied from 2 sides: macroeconomics and microeconomics. Macroeconomics assesses the general development of the economy in the world and analyzes unemployment, GDP, inflation, and the interrelationships of different sectors of the economy to determine their collaborative work. Based on the analysis, models of the interrelationships of these factors are created to help government agencies to develop and evaluate economic, monetary, and fiscal policies. These models also help businesses to determine strategies for domestic and global markets, and investors to forecast events and plan movements of different asset classes.
Economic policy greatly affects consumers and businesses, and the sizes of government budgets are very large, so macroeconomics deals with global issues to determine the functions of the economy and the consequences of certain measures and decisions. Macroeconomics also provides a broad view of economic trends and their impact on certain industries, and thus on individual businesses. Based on this, investors make more effective decisions.
Limits of Macroeconomics
Economic theory has limitations because it is created for ideal conditions, without taking into account details of the real world (taxation, regulation and transaction costs), including those aspects that cannot be mathematically analyzed (social preferences and conscience).
The limitations of economic theory must also cover basic macroeconomic indicators (GDP, inflation and unemployment). Economic conditions also significantly affect the results of companies and their stocks. An investor can learn information about macroeconomic statistics and use it to make a more informed decision and identify turning points.
Any particular government structure may be influenced by its choices and actions in favor of a theory and economic principles that can characterize and describe government activities and approaches to taxation, regulation, government expenditures and similar policies. This gives investors the ability to predict probabilistic events and decide which way to go.
Areas of macroeconomic research
Macroeconomics is useful to consider in terms of two specific areas of study. One area is the determinants of long-term economic growth (increasing government revenue). The other area is the causes and consequences of short-term fluctuations in state income and employment (the business cycle).
Economic growth. The increase in aggregate production in an economy is economic growth. Macroeconomists try to support economic policy and identify factors that influence economic growth positively or negatively. This contributes to development, progress, and a rising standard of living.
A Study of the Nature and Causes of the Wealth of Nations, written by Adam Smith in the 18th century, is considered a classic work. In it the author promotes the ideas of free trade, laissez-faire economic policies, and the expansion of the division of labor. It has become a fundamental work of this field of study. Later, in the 20th century, macroeconomists started to apply mathematical methods to model economic growth, which was more formal research. The mathematical model of growth is a function of physical and human capitals, labor, and technology.
Business cycles. In addition to long-term cycles of macroeconomics and change in the main macroeconomic variables, there are short-term cycles. They are superimposed on fluctuations in the main macroeconomic indicators (employment and national output), rising or falling, expanding or contracting. All this happens within the business cycles. For example, the Great Depression of the 1930s served as the basis for the development of most modern macroeconomic theories. And 2008 was a clear example of a financial crisis.
History of Macroeconomics
In the 20th and 21st centuries, the study of macroeconomics topics became much narrower and concrete, while the term itself appeared not so long ago, around the 1940s. Most of the major topics of macroeconomics (unemployment, prices, growth, and trade) had been studied before.
The origin of the modern conception of macroeconomics is explained by John Maynard Keynes. His book "The General Theory of Employment, Interest and Money" out and an explanation of the reasons for the failure of markets occurred in 1936. He illuminated the consequences of the Great Depression, when goods went unsold and workers were unemployed.
Before Keynes there was no separation into micro- and macroeconomics. The laws of supply and demand of individual commodity markets (microeconomics) were understood as the interaction between individual markets to bring the economy to a general balance (according to Leon Walras). This interaction between markets and major financial variables (price levels and interest rates) explained by the unique role of money in the economy. Money is a tool of exchange. Economists Knut Wicksell, Irving Fisher, and Ludwig von Mises came to this discovery.
Macroeconomic schools of thought
During the 20th century, Keynes' theories (Keynesian economics) split into several other schools of thought.
Classical. The classical school of thought suggests that markets can be cleared and prices, salaries, and tariffs are flexible, as long as government policies are not impeded, as shown in Adam Smith's initial theories. The term "classical economists" is a label applied first by Karl Marx and then by Keynes to refer to previous economic thinkers with whom they respectively disagreed. They did not actually separate macroeconomics and microeconomics. It is not a school of macroeconomic thought.
Keynesian. This school of thought originated in the works of John Maynard Keynes and began to separate macroeconomics and microeconomics. In this school of thought, the main focus is aggregate demand. It is a major factor in issues such as unemployment and the business cycle. Proponents believe that active government involvement through fiscal policy (increasing spending during recessions to encourage demand) and monetary policy (stimulating demand with lower rates) helps to control the business cycle. According to them, there are also certain tightnesses in the system. For example, "sticky" prices, which prevent the proper distribution of supply and demand.
Monetarist. This doctrine originated with Milton Friedman. Monetarists claim that the most effective tool for managing aggregate demand is monetary policy. Monetarists are more attracted to a stable rate of inflation. They follow the rules of policy and recognize its limitations, which make economic settings impractical.
New Classical. The purpose of this school of thought is to introduce the microeconomic fundamentals into macroeconomics in order to smooth the theoretical differences of two subjects. In this school of thought, microeconomics and its models are the basis. In the claims of New Classical economists, unemployment is voluntary and discretionary fiscal policy is destabilizing. They also believe that monetary policy can control inflation. According to the doctrine, all participants try to maximize their utility and have rational expectations, which they include in macroeconomic models.
New Keynesian. This school also sees the introduction of microeconomics into macroeconomics and traditional Keynesian economic theories. The New Keynesian school claims to consider rational expectations from the actions of households and firms, but also considers market failures, embracing "sticky" prices and wages. This "stickiness" allows the government to make macroeconomic conditions better through fiscal and monetary policies.
Austrian. This school is one of the oldest. It is currently experiencing a resurgence in popularity. This doctrine does not strictly separate micro- and macroeconomics, but applies its theories mainly to microeconomics, which has its resonance in macroeconomic subjects. For example, money and banking play a role in connecting (microeconomic) markets to each other and over time. This is monetary policy. According to Austrian theory, it influences the synchronization of (macroeconomic) fluctuations in economic activity.
Macroeconomics vs. Microeconomics
Microeconomics covers the small factors that affect the choices of individuals in a company. Macroeconomics looks at the global level. Factors that go into both economies usually affect each other. For example, a company needs workers. The existing supply of workers is influenced by unemployment in general.
The main difference between the two economies is that the movement of some components of one economy may differ from the movement of similar components in the other economy. Keynes has the concept of the Paradox of Thrift. Its basic idea is that it is possible for one person to create wealth by saving money, but when most people simultaneously try to increase their savings, it can lead to a stagnation of the economy and a reduction of wealth in the aggregate.
Microeconomics is about details, i.e., possible events under certain choices of people. People are divided into subgroups (buyers, sellers, and business owners) and these subgroups interact under the laws of supply and demand for resources. They use pricing mechanisms (money and interest rates) to coordinate.
