You have probably met microeconomics already. Macroeconomics is just microeconomics, but this time, it's on steroids. Just kidding. Seriously, though, macroeconomics is everything economics that concerns the country as a whole. Ever been to the supermarket with your usual budget for grocery shopping, but you end up with fewer groceries than usual? That's inflation. Ever turned on the news and heard complaints about a lack of jobs? That's unemployment. Ever heard all those economics experts on TV talk about GDP performance? That's economic growth or decline. These are the main features of macroeconomics we'll discuss in this introduction to macroeconomics. You'll enjoy it. Read on!
Macroeconomics Meaning
So, what is the meaning of macroeconomics? Well, the simple answer is that macroeconomics means that we are studying the economy as a whole. By the economy as a whole, we mean the entire country as an economic unit. We can then break this meaning down and say that macroeconomics studies the economic forces that act on businesses, consumers, and households as a combined unit.
Macroeconomics is the study of how the entire economy behaves as a unit.
Macroeconomics is also concerned with what happens when different economies interact on a global level. So, whenever you hear 'macroeconomics' think these words: aggregate, whole, global.
There it is! Now you know what macroeconomics means.
Fig. 1 - Macroeconomics is concerned with the aggregate and the global
Difference between Microeconomics and Macroeconomics
Now, you must be wondering what the difference between microeconomics and macroeconomics is. First, let's define microeconomics. Microeconomics is the study of how individuals, businesses, and households make decisions in allocating their limited resources to satisfy their unlimited wants. From this definition, we can immediately see that microeconomics focuses on single units and how they behave in response to the fundamental economic problem of scarcity.
Microeconomics is the study of how individuals, businesses, and households make decisions in allocating their limited resources to satisfy their unlimited wants.
Now, let's repeat the definition of macroeconomics. Macroeconomics is the study of how the entire economy behaves as a unit. Looking at this, we can spot a distinction right away! Microeconomics is looking at consumers, households, and businesses as single units, whereas macroeconomics is combining them as an aggregate!
So, what is the difference between microeconomics and macroeconomics, you ask? Your answer is that microeconomics studies individual prices, quantities, and markets, whereas macroeconomics studies how the economy as a whole behaves. In this sense, you could say that microeconomics takes place within macroeconomics, but macroeconomics is looking out for all economic agents as a combined unit.
Microeconomics studies individual prices, quantities, and markets, whereas macroeconomics studies how the economy as a whole behaves.
Just remember that microeconomics is for individual units in the country, and macroeconomics is for the whole country at once!
Types of macroeconomics
There aren't exactly several types of macroeconomics. However, your studies in macroeconomics will be based on the three main objectives of macroeconomics: output or GDP, unemployment, and price stability or inflation. So, you can just keep these in mind and think of how any topic you encounter in macroeconomics relates to these objectives.
Importance of Macroeconomics
The importance of macroeconomics cannot be overemphasized, as it makes sure that we identify the problems faced by the economy and can find solutions to them. Let's look at why exactly macroeconomics is important.
First, macroeconomics studies short-term changes in the economy. Here, economists are concerned with changes in output, employment, and prices within a business cycle.
The short-term or the short-run is not a specific time limit per se; rather, it is the period when wages and prices are sticky.
Read our article - Sticky Prices to understand more of this.
Second, macroeconomics studies long-term changes in output and the overall standard of living. This is known as economic growth. Good economic growth means that there is high output and a high standard of living. On the other hand, poor economic growth (or economic decline) means that the country's output is not so great, and the people are experiencing a low standard of living.
In the long-term or the long-run, prices and wages are not sticky.
Macroeconomics has helped us face the short-term economic problems that affect the economy while creating and preserving long-term economic growth. Without an understanding of how things work for the economy as a whole, things can go terribly bad when short-term problems emerge!
Features of Macroeconomics
Once you know what macroeconomics means as well as its importance, you begin to wonder what the features of macroeconomics are. First, keep this in mind - macroeconomics consists of objectives and the tools or instruments to achieve these objectives. Now that you have this in mind, you'll at least remember the two main categories: the objectives and the tools.
Let's tell you what these objectives and tools are. The objectives include output, employment, and stable prices. On the other hand, the instruments include monetary policy and fiscal policy. Figure 2 below illustrates the features of macroeconomics.
Introduction to macroeconomics: output
Output can be considered the most important goal since it is concerned with providing the goods and services needed by the population. Economics is about satisfying people's wants, and these wants can only be satisfied by providing what the people want. Here, it could be things like food, shelter, fun, healthcare, etc.
To measure the output of an economy, economists use the gross domestic product (GDP). The gross domestic product is the value of all final products and services produced in an economy in a given year. It is this GDP we aim to improve as economists.
The gross domestic product is the value of all final products and services produced in an economy in a given year.
As economists, we want the current year's GDP to be higher than the previous year's GDP. Maybe things can be bearable if it stays the same. But, we absolutely do not want to see the GDP go down. We have two types of GDP, the nominal GDP, and the real GDP. The nominal GDP is the dollar value of the products and services produced in an economy in a given year, using the prices at the time. The real GDP is the value of the products and services produced in an economy in a given year using constant prices.
The nominal GDP is the dollar value of the products and services produced in an economy in a given year, using the prices at the time.
Introduction to macroeconomics: employment
Employment as an objective of macroeconomics is concerned with individuals. This is because these individuals may be actively searching for a job and yet be without one. Here, the goal is to have high employment or low unemployment.
Anyway, let's define unemployment properly. Unemployment is the situation where individuals are capable of working and are actively seeking work but do not have work.
Unemployment is the situation where individuals are capable of working and are actively seeking work but do not have work.
As economists, we want low unemployment or to get rid of unemployment completely. This is because unemployment means that the economy is not using some of its resources; hence, it is not producing as much output as it can. We measure unemployment using the unemployment rate, which is the percentage of the labor force that is unemployed.
The labor force consists of all individuals who are capable of working, willing to work, and are either working or looking for work.
Introduction to macroeconomics: price stability
Inflation is the main measure of price stability. Inflation is the change in prices over time. The inflation rate, on the other hand, is the percentage change in the overall price level between the previous year and the current year. A low rate of inflation means that prices are stable, and this is desired.
Inflation is the change in the overall level of prices over time.
The inflation rate is the percentage change in the overall price level between the previous year and the current year.
We use price indexes to measure inflation. Price indexes often measure the average prices of goods and services. This means that we can compare the price index of the previous year to the price index of the current year to reveal the rate of inflation.
You should note that we do not necessarily want prices to drop. This is because prices should accurately represent how scarce some commodities are. The rarer a commodity, the more expensive it is. However, if prices increase too much, people can barely afford anything. On the other hand, if prices drop too much, businesses can barely produce anything. Therefore, we usually look for a slow rise in prices over time.
Introduction to macroeconomics: monetary policy
Monetary policy is one of the instruments used to achieve macroeconomic objectives. So, what is it? Monetary policy is the action of the central bank in managing the country's money and overall banking system. In the USA, the central bank is the Federal Reserve System, and it manipulates the short-term interest rate to combat certain economic problems like inflation.
Monetary policy is the action of the central bank in managing the country's money and overall banking system.
For instance, the central bank raises the interest rate to discourage investment and consumption. This causes the GDP to decline, reducing inflation in the process. Monetary policy typically affects areas like real estate, business investments, imports, and exports.
Introduction to macroeconomics: fiscal policy
Fiscal policy is another instrument to achieve macroeconomic goals, and it involves government actions in spending and taxation.
Fiscal policy involves government actions in spending and taxation.
In terms of government spending, this includes purchases made by the government and transfer payments made by the government.
Government spending involves purchases and transfer payments made by the government.
The purchases include the payment for goods and services such as roads and government employees. On the other hand, the transfer payments include payments made to specific groups in the country (usually for welfare purposes), such as the unemployed and senior citizens. Government spending affects how much of the GDP is consumed. Therefore, we can say that this is an instrument for economic growth.
The next type of fiscal policy is taxation, which involves deductions from the incomes of individuals. As this reduces the incomes of individuals, increasing taxes can reduce private consumption, whereas decreasing taxes can increase private consumption.
Taxation refers to the compulsory payments levied on individuals and businesses by the government.
As taxes influence private consumption and saving, investment and output are affected in the short run. Taxation can also reduce or increase prices, which affects how the overall economy behaves.
Read our explanations on Macroeconomics Issues and Inflation to delve deeper into what macroeconomics is all about.
Introduction to Macroeconomics and the Global Economy
Thanks to globalization, macroeconomics is also global! This is because the economies of different countries have become connected as the world developed. Many countries around the world have also become multicultural due to international transportation and immigration, which makes the economies of countries around the world even more interconnected. Today, countries across the globe trade with each other through imports and exports (international trade). Information technology also facilitates the trading of digital commodities and services. Realistically, these factors contribute to making macroeconomics global, since the economic activities of one country are not limited to the boundaries of that country.
You should look at our articles on Globalization and International Trade to learn more about what makes macroeconomics global.
Introduction to Macroeconomics - Key takeaways
- Macroeconomics is the study of how the entire economy behaves as a unit.
- Microeconomics studies individual prices, quantities, and markets, whereas macroeconomics studies how the economy as a whole behaves.
- Macroeconomics consists of objectives and the tools or instruments to achieve these objectives.
- The objectives of macroeconomics include output, employment, and stable prices.
- The instruments of macroeconomics include monetary policy and fiscal policy.
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