- Subject of study
- Basic concepts
- Macroeconomic models
- Monetary and fiscal policy
- The history of the development of the theory
Macroeconomics is defined as an area of economic theory that studies the productivity, structure, behavior and decision-making process of the economy as a whole, and not its individual subjects, segments or markets studied at the micro level. It considers the national, regional and global aspect. Micro- and macroeconomics are two main approaches to the study of the economy.
Macroeconomics (the prefix "macro" from Greek translates as "big") examines aggregated indicators, such as gross domestic product, unemployment, price indices, and the relationship between different sectors of the economy. Its main goal 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 primarily the actions of individual agents and individual markets, here the economy is viewed as a system in which all elements are interconnected and influence success or failure.
Subject of study
This is a very wide area. However, it can be said that macroeconomics is defined as an area of economic theory that studies two main aspects:
- The causes and effects 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 the projections made using them are used by national governments to develop and evaluate their own monetary and fiscal policies.
Macroeconomics is defined as an area 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 themes of macroeconomic research. Theories may be related to production, unemployment, or inflation. These topics are important for all economic agents, not only for researchers.
National income is an indicator of the cumulative volume of everything that a state issues over a certain period of time. Since macroeconomics is defined as an area of economic theory that studies the entire national economy as a whole, it is important to evaluate production not only in physical but also in terms of value. Output and income are often considered equivalent. They are usually expressed in terms of gross domestic product or one of the indicators of the system of national accounts. Researchers who are engaged in a long-term perspective on changing output are exploring economic growth. The latter is influenced by such indicators as the improvement of technology, the accumulation of equipment and other capital resources, 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.
Macroeconomics is defined as the field of economic theory, which, as mentioned above, deals with the study of three main topics. Unemployment is one of them. Its level is measured by the percentage of unemployed population. This percentage does not include people of retirement age and students. There are several types of unemployment:
- Classic. It appears when the wages established in the labor market are too high, so companies are not ready to hire additional staff.
- Friction. This type of unemployment arises from the fact that it takes time to search for a new place of employment - even with suitable vacancies.
- Structural. Covers a whole variety of subspecies that are associated with changes in the economy. In this case, there is a discrepancy between the people’s skills and abilities that are necessary for employment. This problem is increasingly arising in connection with the possibility of robotization and computerization of the economy.
- Cyclical. Okun's law speaks of the empirical relationship between economic growth and unemployment. A three percent increase in production leads to an increase in employment of 1%. However, it must be understood that rising unemployment is inevitable during recessions.
Macroeconomics is determined not only through the production and 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, which studies how to control the money supply and avoid price hikes. Based on its findings, the state monetary and fiscal policy is being built. For example, to reduce inflation, you can increase interest rates or reduce the money supply. The absence of any effective action by the central bank can lead to uncertainty in society and other negative consequences. However, it must be understood that deflation can lead to a reduction in production. Therefore, it is important to stabilize prices, not allowing them to fluctuate excessively on either side.
In order to clearly explain how the world and national economies work, charts are used. Macroeconomics is defined as an area of economic science that studies three main types of models:
- AD-AS. The model of aggregate supply and demand considers equilibrium in both the short and long term.
- IS-LM. The investment-savings schedule is a combination of equilibrium in the money and commodity markets.
- Growth patterns. For example, the theory of Robert Solow.
Monetary and fiscal policy
Often, macroeconomics is defined as a field of theory, the conclusions and predictions of which can be easily put into practice. And indeed it is. Monetary and fiscal policies are often used to stabilize the economy. The main goal of these approaches is to achieve GDP growth through fuller employment.
Monetary policy is conducted by central banks and is linked to controlling the money supply through several mechanisms. For example, a government may issue cash to buy bonds or other assets. This will reduce interest rates. Monetary policy may be ineffective due to the liquidity trap. If inflation and interest rates are close to zero, then traditional measures stop working. In this case, for example, quantitative easing may help.
Fiscal policy is associated with the use of government revenues and expenses to influence the economy. Suppose there is insufficient capacity utilization in the national economy. 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.
The history of the development of the theory
Macroeconomics is defined as an industry that has emerged from the reasoning 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 paper in 1912 in which macroeconomic topics were first covered. The theory was formed after the Great Depression. In its modern form, macroeconomics began with the publication of John Maynard Keynes’s The General Theory of Employment, Interest and Money. Representatives of all directions, in particular monetarists and neoclassics, were engaged in further research of the economy as a whole.