So what is Economics all about? Is it social science, or is it art? Some just after hearing the word conceive a notion that economics is all about money. You might also feel economics is about “economizing”, and the speculations never cease to flow.
Confused? Don’t be.
Concisely, economics is about decisions and choices that we make per diem — the choices we make about the various approaches to use resources under definitive restraints. You have to be extremely calculative with your preferences and not turn it into waste.
There are two ways to ponder the concept of economics: macroeconomics and microeconomics. As the term, itself states, macroeconomics deals with the bigger picture of the economy.
If we put it simply, it is concerned about how the economy operates as a whole and the way it relates to the different sectors to interpret how the aggregate functions, this includes stressing over the development of conditions like unemployment, inflation and GDP. Macroeconomists form models to explain the co-relation between these factors for the use of the government to help them to construct and evaluate economic, monetary and fiscal policies.
What is macroeconomics?
Macroeconomics is a vital topic in the field of study of economics as it deals with the behavior of the factors that functions immensely and creates a substantial impact on the overall economy. It takes into account the condition of inflation, price inconstancy, GDP, rate of economic growth, national income and employment upheaval.
Let’s delve deep into the topic, shall we?
Unlike microeconomics that only addresses the individual choices made by the consumers, firms and other actors, macroeconomics enlists the entire contribution of the nation towards the growth of the economy in terms of performance and structure. Considering the big scale budgets and its impact on the consumers and businesses, macroeconomics essays a significant role in focusing only on pertinent issues.
If economic theories are to be appropriately implemented, it would shed light and give better insights on how economies operate and what are the ramifications of long haul policies and decisions. Macroeconomics theory provides a better understanding of the individual businesses and investors about the choices and their impact and to maximize consumer utility.
Economic theories emphasize economic development and decode how the economy behaves and facilitates with best solutions to influence and solve any particular phenomena. Macroeconomic theories aim to explain events associated with the macro economy. The most significant considered are unemployment, inflation and level of aggregated production.
For a better understanding of the topic, let’s get informed about its origin.
History of its development
The design of the macroeconomic structure has been instrumental in the formation of human societies from ancient times, but its method is newly conceived. Earlier the majority of economic analysis dealt with the statistics of microeconomics and individual consumers, firms and industries. The classical school of economic thought is the predominant principle that derived its fundamentals from Scottish economist Adam Smith’s theory of self-regulating markets.
Adhering to this principle, the economists unanimously stated that rising unemployment and recessions are inescapable phenomena. If left unaided, these market systems would solve these interim problems single-handedly while the intrusion of government would be highly ineffective and destructive in this case, to say the leas
The modern idea about macroeconomics was conceptualized from John Maynard Keynes and the publication of his book The General Theory of Employment, Interest and Money in 1936. In his book, Keynes explained The Great Depression, when goods remained unsold, and workers remained unemployed. The Great Depression was the most extreme and extended economic collapse of employment in modern world history. It began with the U.S. stock market crash of 1929 and continued till 1946 after World War II.
Before Keynes’s interpretation came into limelight, economists could hardly differentiate between micro-macroeconomics. Leon Walrus described that the microeconomic laws of supply and demand that function in the individual goods market are implemented to bring the economy into evenness.
According to economists such as Knut Wicksell, Irving Fisher, and Ludwig Von Mises, the network between goods market and factors like price levels and interest rates are explained through the significant role that money essays in the economy as a medium of exchange.
The 20th century saw the rise of Keynes’s theory that digressed into several other schools of thoughts.
Now that we are done with the definition and the origin of macroeconomics let’s learn about its various facets.
Areas of Macroeconomic Research
Macroeconomics is divided into a broad spectrum, but the nature of its objective find its representatives in two areas of research. The first is the factors that serve as a component for the economic growth of the nation. The second field of study is about the causes and consequences of fluctuations in the national economy and employment.
Economic growth deals with aggregate production in an economy. Macroeconomists tend to assess the factors that are involved in the growth and retard of the economy of a nation, to amend the issues and promote development for a rise in living standards.
The business cycle, also known as the economic cycle or trade cycle is the fluctuation of gross development pay (GDP). The tenure of the business cycle is time containing the single rise and fall of economic status in sequence. It is measured by the advancement rate of the real gross domestic product.
Macroeconomic School of Thoughts
There are schools in which the field of macroeconomics is divided into. Each school is furnished with contrasting opinions about the functioning of the markets and the contributors.
Through Adam Smith’s Wealth of Nation 1776, the idea of classical economics came into vogue; the elementary of the book is that the wealth of a nation is not measured by the riches of the monarch but of the entire nation. The prime objective of the classical economists was to analyze and uphold the policies that lead to the rise in economy and incorporate more such factors that would promote the growth.
John Maynard Keynes’s The General Theory of Employment, Interest and Money (1936) marked the beginning of Keynesian economics. It was written during the era of The Great Depression when unemployment rose up to 25% in the United States and 33% in some countries.
Keynesian economist deals with aggregate production, while the macroeconomists tend to assess the factors that are involved in the growth and retard of the economy of a nation, to amend the issues and promote development for a rise in living standards. According to them, the development in the economic status of a country can only be brought with the intervention of government through fiscal policies.
A monetarist is a kind of economist who believes that the whole structure of economics, its fluctuations and its performance is measured by money supply. It is a school of thought in monetary economics that stresses over the area of function of the government in controlling the money in circulation. They postulate that the variation in the money supply is instrumental to the cause of fluctuation in the national output and thus leading to a rise in price levels and even inflation.
Importance of Macroeconomics
Why is Macroeconomics significant? Given below are the reasons that you need to know:
- It helps us to have an idea of how the economy as a whole operates and to understand the complex functioning of the economic system. Macroeconomics is about aggregate demand and aggregate supply and the factors that are affected by its influence. The factors being, national income and employment.
- It projects a path for us to achieve the goal of economic growth, a higher GDP and a higher level of employment. Its main objective is to figure out the factors that involve in the development of the financial status of a nation and explain how to reach the highest state of economic growth and to preserve it.
- It brings equilibrium in the price level and assesses the fluctuation in business activities and also suggests policy measures to curb national economic issues like inflation and deflation.
- Macroeconomics provides us with components that determine the balance of payments, apart from that it also states the reason behind its deficit and provides remedial measures.
- Without considering the whole economy (that is macro-level) the issues of inflation or rise in unemployment cannot be resolved.
- Without any detailed knowledge about the economic system as a whole, no policies or decisions could have been made to coordinate with the international economic policies.
- Last but certainly not the least is that macroeconomics has protected us from the dangers of application of microeconomic theory to the problems that invited the policies to consider the economy as a whole and not of an individual.
Limits of macroeconomic analysis
Some of the limitations of microeconomics are listed below:
- Though the significance of macroeconomics is undeniable the dangers of excessive generalization from an individual perspective to the system as a whole persists.
- That macroeconomics is always about aggregate production and aggregate supply; it often suffers from excessive thinking in terms of aggregate as the data might not always be homogeneous.
- Since the whole basis of economic growth is determined on the value of money; it becomes difficult for the government to produce figures and statistics of aggregate supply, aggregate consumption and aggregate production as the value of money keep on changing.
- Macroeconomic theoretical models deal with the total economy. These models explain the functioning of an economy and working of things in an abstract or precise manner that, at times, seems inaccurate.
- The aggregate that forms the base of the macroeconomic theory should be collaboratively accordant and significant.
Macroeconomics is thus a complex branch of economics that studies the behavior and performance of the economy as a whole. It counts the aggregate changes of the economy in terms of employment, GDP and inflation.
The entire motive of the blog is to present one of the vital yet complex topics of economics in a transparent way. Macroeconomics is one of the less tapped areas in economics and required to be conferred in an easy way. I hope this blog will help you in understanding the idea and straighten out the complex notion about it.
An MBA graduate with a keen interest in marketing, author MajaKazazicis an employee of a globally acclaimed organization, HQ in Stanford University. Despite her intensely demanding job, he has indulged herself into a noble deed of working on assignments for the students to help them out for their respective projects. He has worked on 500 projects so far and is widely appreciated for her effort and excellent command over the topic.