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A Beginner’s Guide to Macroeconomics

  • Yamini
  • Jan 08, 2022
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What Is Macroeconomics?


Macroeconomics is a branch of economics that focuses on the overall economy including the market or other systems that operate on a large scale. Macroeconomics covers economy-wide phenomena like inflation, price levels, rate of economic growth, national income, gross domestic product (GDP) along changes in unemployment levels. 


Macroeconomics is involved with the performance, structure, and behavior of the entire economy, unlike microeconomics, which deals with specific factors in the economy (such as people, households, industries, etc.).


The two main areas of macroeconomic research are economic growth in the long term and business cycles in the short term. It includes looking at variables like unemployment, GDP, and inflation. It develops models explaining relationships between these factors. 


Such macroeconomic models and forecasts are used by government entities for the construction and evaluation of economic, monetary, and fiscal policy. Businesses use these to set strategies in domestic and global markets. Investors make use of these models to predict movements in various asset classes.


Macroeconomic theory enables individual businesses and investors to make better decisions through a better understanding of the effects of broad economic trends and policies on their industries. (source)


The common noteworthy factors include changes in economic output, inflation, interest and foreign exchange rates, and the balance of payments. It joins the innumerable policies, solutions, resources, and technologies that foster large-scale economic development. If proper macro-management is carried out, then poverty reduction and social equity would cease to be things of the future. 


It would not be wrong to say that macroeconomics is the study of whole economies. It involves the detailed study of large-scale or general economic factors. It is the aggregate of economic activity and deals with the overall financing and allocation of resources.


History of Macroeconomics


Unemployment, prices, growth, and trade have concerned economists almost from the very beginning, though their study has become much more focused and specialized through the 20th and 21st centuries. 


Works by Adam Smith and John Stuart Mill addressed issues to be recognized as the domain of macroeconomics. Macroeconomics, as it is known today, can be defined as beginning with John M.Keynes his book "The General Theory of Employment, Interest, and Money" (1936). 


Keynes's theory attempted to explain why markets may not be clear. Throughout the 20th century, Keynesian economics diverged into a multitude of schools of thought.


Limitations of Macroeconomics


Often, theories are developed in a vacuum without certain real-world details like taxation, regulation, and transaction costs. The real world is complicated and includes matters of social preference and conscience that do not lend themselves to mathematical analysis.


Even with the limits of economic theory, it is worthwhile to follow the major macroeconomic indicators like GDP, inflation, and unemployment. 


The performance of companies is affected by the economic conditions in the environment and studying macroeconomic statistics enables investors to make better and well-informed decisions as sourced by Investopedia.



Important Areas of Macroeconomic Research


Macroeconomics has two specific areas of research that are representative of this discipline. The first area is the factors that determine long-term economic growth, or increases in the national income. The other area focuses on the causes and consequences of short-term fluctuations in national income and employment, better known as the business cycle.


  • Economic Growth


Economic growth is the increase in aggregate production in an economy. Macroeconomists study the factors that promote or retard economic growth to support economic policies that have the ability for supporting development, progress, and rising living standards.


  • Business Cycles


The levels and rates-of-change of major macroeconomic variables such as employment and national output go through fluctuations, expansions, and recessions, which is known as the business cycle



6 Macroeconomic Schools of Thought


The field of macroeconomics is organized into a number of schools of thought, with different opinions on how the markets work. 


  • Classical school 


Classical economists are of the opinion that prices, wages, and rates are flexible and markets tend to clear unless prevented by the government's intervention. The label of "Classical economists” was applied first by Karl Marx and later by Keynes to denote previous economic thinkers with whom they disagreed.


  • Keynesian School


Keynesian economics was based on the works of John Maynard Keynes and started a separate area of study from microeconomics. Keynesians focus on aggregate demand as the principal factor in unemployment and the business cycle. 


Keynesian economists believe that the business cycle can be managed by active government intervention through fiscal policy and monetary policy. Keynesian economists also believe that there are certain rigidities in the system, like prices that prevent the proper management of supply and demand.


  • Monetarist School 


The Monetarist school is a branch of Keynesian economics based on the works of Milton Friedman. Monetarists argue that monetary policy is a more effective desirable policy tool to manage aggregate demand as compared to fiscal policy. Monetarists acknowledge limits to monetary policy and adhere to policy rules that can sustain stable inflation rates.


  • New Classical School


The New Classical economic school is based on integrating microeconomic foundations into macroeconomics to resolve the theoretical contradictions between the two. This school emphasizes the importance of microeconomics and models based on that behavior. 


New Classical economists argue that all agents try to maximize their utility and have rational expectations. They believe that unemployment is voluntary and that discretionary fiscal policy is destabilizing.


  • New Keynesian School


The New Keynesian school attempts to incorporate microeconomic features into traditional Keynesian economic theories. While New Keynesians accept that households and firms operate based on rational expectations, they still believe that there are a variety of market failures, that can only be improved by fiscal and monetary policy. 


  • Austrian School 


The Austrian School is a much older school of economics being revived in terms of popularity. Austrian economic theories do not separate micro-and macroeconomics. 


The Austrian business cycle theory explains macroeconomic swings in economic activity across markets due to monetary policy and the role that money and banking play in linking microeconomic markets to each other across time. 


(Suggested Blog: Economic Institutions)


Ending Note 


While ending the blog, we can clearly see that macroeconomics is concerned with understanding economy-wide events that affect the behavior of a national or regional economy as a whole. 


Macroeconomists utilize aggregate measures like gross domestic product (GDP), unemployment rates, and the consumer price index (CPI) along with supply and demand analysis for studying the large-scale consequences of micro-level decisions.


Macroeconomics differs from microeconomics as the latter focuses on minute factors that affect choices made by individuals and companies. Factors studied in both microeconomics and macroeconomics have the ability to influence one another. 


A major difference between micro-and macroeconomics is that macroeconomic aggregates can behave differently to the way that analogous microeconomic variables do. 


(Read In Detail: Difference between Micro and Macro Economics)

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