Macroeconomics is an important part of a unified economic theory. Its principles are used by the state to stabilize the market during cyclical crises and recessions. For decades, scientists have been studying what macroeconomics is. John Keynes's definition remains classic and universally accepted.
Keynes Theory
In the XX century, a new method for studying the national economy appeared. Researchers began to consider the economy of one country as a whole. So what is macroeconomics? This is a science that studies national economy within a single complex system. This approach was finally formed quite recently, although some of its signs were present in the works of the classics of political economy (Adams, Marx, etc.).
This independent science originated in the 30s of the XX century. Most of all, it is associated with the discoveries and activities of the English researcher John Maynard Keynes. His theory was impressed by the events of that turbulent era. The Great Depression took place in the late 1920s , which led to financial crises in the USA and European countries. It became clear that a failure occurred in the familiar economic system of market relations. The era has challenged scientists.
Macroeconomics and Microeconomics
John Keynes formulated what macroeconomics is in his book The General Theory of Employment, Interest, and Money, published in 1936. From that moment, the development of a new scientific discipline began. But even half a century before macroeconomics, microeconomics appeared. She does not study the whole economy as a whole, but the decisions of specific market participants. Microeconomics also explores pricing issues. Her analysis includes mechanisms for using limited resources.
So, microeconomics is dedicated to individual economic units, while macroeconomics studies the entire national economy as a whole. Keynes, in his programmatic work, explained which concepts and phenomena are most important for his new theory. These are gross domestic product, inflation, unemployment and average prices. An analysis of all this makes it possible to understand what macroeconomics is. The definition emphasizes that it is an independent science. Nevertheless, it cannot be said that macroeconomics and microeconomics exist independently of each other. They are two branches of a unified scientific theory and therefore largely interact with each other.
Criticism of Classical Political Economy
To understand what micro- and macroeconomics are, it is necessary to look at the theory to which they were opposed. And it consisted in the law of markets, which was formulated by Jean-Baptiste Say. He was a French economist who belonged to the classical school of political economy, whose peak activity occurred at the beginning of the 19th century.
The essence of his main law is that the sale of goods generates income, which, in turn, is the foundation for the formation of new demand. This conclusion extended to national economies in general, right up to the moment when John Keynes's book was published. The scientist conducted an analysis of the global crisis in the late 1920s and came to the conclusion that the mechanisms that Say formulated did not work in modern conditions.
State intervention in the economy
Keynes believed that the spontaneous market is unpredictable. Therefore, the scientist advocated strengthening state regulation of the economy. What is macroeconomics in this context? This is a state tool necessary for analyzing the state of the national economy. Authorities can use macroeconomic methods to properly regulate its condition.
Keynes's ideas resonated at the highest level. In the 60s, his theses formed the basis of the economic policies of the USA, Great Britain, Canada and Sweden. All these countries today have a high standard of living and financial stability. There is in this well-being the merit of macroeconomics as an applied science.
Macroeconomic structure
The division of a single economy into markets best shows what macroeconomics is. This science distinguishes several distinct parts from each other in the general economy. The first market is the market of factors of production. He is the most important. This includes resources such as land, labor, financial and physical capital. Some scholars also include the totality of human talents and skills in society to this list.
The next market is the market for services and goods. This is an important subject of macroeconomics. What it is? This includes the production of goods and services, that is, in other words, the formation of supply and demand - the main engines of any economy. Real values are exchanged here, therefore this market is called real.
Another important part of macroeconomics is finance. They are used in the money market and the securities market. Here capital is mobilized, loans are provided, and exchange transactions are carried out. The so-called continental model of the financial market focuses on securities, insurance companies, pension and investment funds.
Business cycles
Macroeconomic theory introduced the term economic cycles into scientific use . They are cyclical fluctuations - recessions and ups in the development of the economy. Business cycles are available in any system. They have several stages - peak, recession and bottom. Fluctuations in business activity can be irregular and unpredictable.
Scientists who investigated what macroeconomics and microeconomics are, identified the main causes of such cycles. It can be revolutions, wars, changes in investor sentiment, etc. All this affects the balance between supply and aggregate demand. The nature and nature of economic cycles are directly related to such macroeconomic phenomena as unemployment and inflation.
Overheating of the economy
Theorists have also proposed the term "overheating of the economy." This condition is a situation where a country is maximizing its financial capabilities. Because of this, oddly enough, inflation and significant price increases can occur.
They, in turn, often cause economic recession and cyclical unemployment. If a similar situation is observed in a country, the state should intervene in it. It is the theoretical foundations of macroeconomics that can come to the rescue of the authorities. Keynes and his followers studied the positive experience of overcoming the crisis. Many of the principles they formulated were used by different states during the recession. A set of measures to recover the economy is what macroeconomics and microeconomics are. The definition of these disciplines is in each thematic textbook.
Fiscal and monetary policy
States in which the government knows well what macroeconomics are, are successfully coping with cyclical crises. The stabilization policy needed to mitigate the effects of the recession is called fiscal and monetary policy.
What is their difference? In the 20th century, theorists formulated what fiscal policy and monetary macroeconomics are. The state can reduce taxes or increase its own purchases in the market. Such stabilization measures are fiscal policy. It has its drawbacks. In particular, they consist in the fact that the state can suffer serious losses and remain with a budget deficit.
Monetary policy uses other methods to stabilize the economic situation in the country. For this, the Central Bank is used. He can release additional money supply to the market. The advantage of monetary policy over fiscal policy is that when it is implemented, the banking system responds much faster to changes. This allows the economy to get out of the crisis sooner. Such a rate is also more beneficial for the population because in this case more consumer loans are issued. The main goal of monetary policy can be called ensuring price stability, production growth and full employment in society.