Macroeconomics is defined as the field of economic theory that studies the productivity, structure, behavior and decision-making process of the economy as a whole, and not of its individual entities, segments or markets studied at the micro level. She considers the national, regional and global aspects. Microeconomics and macroeconomics are the two main approaches to the study of the economy.
Definition
Macroeconomics (the prefix “macro” from Greek translates to “large”) studies aggregated indicators, for example, gross domestic product, unemployment, price indices and the relationship between different sectors of the economy. Its main purpose is to find the answer to the question of how everything functions. Macroeconomists are building models that explain the relationship between indicators such as production, national income, inflation, unemployment, savings, consumption, investment, international trade, and finance. If at the micro level scientists research mainly the actions of individual agents and individual markets, then the economy is regarded as a system in which all elements are interconnected and affect success or failure.
Subject of study
This is a very wide area. However, we can say that macroeconomics is defined as an area of economic theory that studies two main aspects:
- Causes and consequences of fluctuations in national income in the short term. That is the business cycle.
- Determinants of long-term economic growth. That is, the national income itself.
Macroeconomic models and forecasts made using them are used by national governments to develop and evaluate their own monetary and fiscal policies.
Basic concepts
Macroeconomics is defined as the field of economic theory that studies the national economy as a whole. Therefore, it is not surprising that it covers many concepts and variables. However, there are three main topics of macroeconomic research. Theories may be related to production, unemployment, or inflation. These topics are important for all economic agents, and not just for researchers.
Production
National income is an indicator of the total volume of all that the state produces over a certain period of time. Since macroeconomics is defined as the field of economic theory that studies the entire national economy as a whole, it is important to evaluate production not only in kind, but also in terms of value. Output and income are often considered equivalents. They are usually expressed through gross domestic product or one of the indicators of the system of national accounts. Researchers who study the long-term perspective of output change study economic growth. The latter is influenced by such indicators as technological improvement, the accumulation of equipment and other capital resources, and the improvement of education. Business cycles can cause short-term downturns in production, that is, so-called recessions. National policies should be aimed at preventing them and accelerating economic growth.
Unemployment
Macroeconomics is defined as the field of economic theory, which, as mentioned above, deals with three main topics. Unemployment is one of them. Its level is measured by the percentage of unemployed people. This percentage does not include people of retirement age and students. There are several types of unemployment:
- Classical It appears when the salaries established in the labor market are too high, so companies are not ready to hire additional staff.
- Frictional. This type of unemployment appears due to the fact that it takes time to search for a new job - even with suitable vacancies.
- Structural. It covers a whole set of subspecies that are associated with restructuring in the economy. In this case, there is a mismatch between the skills available to people and the skills that are necessary for employment. This problem is increasingly arising in connection with the possibility of robotization and computerization of the economy.
- Cyclic. Oaken's Law speaks of an empirical relationship between economic growth and unemployment. A three percent increase in production leads to a 1% increase in employment. However, one must understand that rising unemployment is inevitable during recessions.
Inflation
Macroeconomics is determined not only through production and the number of employed labor. It is also important how the prices of goods from the consumer basket behave . These changes are evaluated using special indexes. Inflation occurs when the national economy "overheats", growth begins to occur too quickly. In this case, macroeconomics is defined as an area of economic theory that studies how to control money supply and avoid a price spike. Based on its findings, the state monetary and fiscal policy is built. For example, to reduce inflation, you can increase interest rates or reduce the supply of money. The absence of any effective actions on the part of the central bank may lead to the emergence of uncertainty in society and other negative consequences. However, one must understand that deflation can lead to a reduction in production. Therefore, it is important to stabilize prices, preventing them from fluctuating excessively in either direction.
Macroeconomic Models
In order to clearly explain how the world and national economies work, graphs are used. Macroeconomics is defined as a field of economic science that studies three main types of models:
- AD-AS. The aggregate supply and demand model considers equilibrium in both the short and long term.
- IS-LM. Investment-savings chart - a combination of equilibrium in the money and commodity markets.
- Growth Models. For example, Robert Solow's theory.
Monetary and fiscal policy
Often, macroeconomics is defined as a field of theory, the conclusions and forecasts of which can be easily put into practice. And indeed it is. To stabilize the economy, monetary and fiscal policies are often used. The main goal of these approaches is to achieve GDP growth through more full employment.
Monetary policy is carried out by central banks and is associated with controlling the supply of money through several mechanisms. For example, the state may issue cash to purchase bonds or other assets. This will reduce interest rates. Monetary policy may be ineffective due to a liquidity trap. If inflation and interest rates are close to zero, then traditional measures stop working. In this case, for example, quantitative mitigation may help .
Fiscal policy is associated with the use of government revenues and expenses to influence the economy. Suppose that in the national economy there is insufficient capacity utilization. The state can increase its expenses, the multiplier effect will be connected , and we will be able to observe an increase in the output of goods and services.
History of the theory
Macroeconomics is defined as the industry that has arisen from discussions about business cycles. The quantitative theory of money was very popular before World War II. One of its versions belonged to Irving Fisher. He formulated the well-known equation: M (money supply) * V (their velocity of circulation) = P (price level) * Q (production volume). Ludwig von Mises, a representative of the Austrian school, published a work in 1912 that first covered macroeconomic topics. A theory was formed after the Great Depression. In its modern form, macroeconomics began with the publication of the work of John Maynard Keynes, “The General Theory of Employment, Interest, and Money.” Further research on the economy as a whole was carried out by representatives of all areas, in particular monetarists and neoclassicists.