When the price of a product you want to buy goes up, it affects you. But why does the price go up? Is the demand greater than the supply? Did the cost go up because of the raw materials that make the CD? Or, was it a war in an unknown country that affected the price? In order to answer these questions, we need to turn to macroeconomics.
What Is It?
Macroeconomics is the study of the behavior of the economy as a whole. This is different from
microeconomics, which concentrates more on individuals and how they make economic decisions. Needless to say, macroeconomy is very complicated and there are many factors that influence it. These factors are analyzed with various economic indicators that tell us about the overall health of the economy.
Macroeconomists try to forecast economic conditions to help consumers, firms and governments make better decisions.
- Consumers want to know how easy it will be to find work, how much it will cost to buy goods and services in the market, or how much it may cost to borrow money.
- Businesses use macroeconomic analysis to determine whether expanding production will be welcomed by the market. Will consumers have enough money to buy the products, or will the products sit on shelves and collect dust?
- Governments turn to the macroeconomy when budgeting spending, creating taxes, deciding on interest rates and making policy decisions.
Macroeconomic analysis broadly focuses on three things: national output (measured by
gross domestic product (GDP)), unemployment and
inflation. (For background reading, see
The Importance Of Inflation And GDP.)
National Output: GDP Output, the most important concept of macroeconomics, refers to the total amount of goods and services a country produces, commonly known as the gross domestic product. The figure is like a snapshot of the economy at a certain point in time.
When referring to GDP, macroeconomists tend to use
real GDP, which takes inflation into account, as opposed to
nominal GDP, which reflects only changes in prices. The nominal GDP figure will be higher if inflation goes up from year to year, so it is not necessarily indicative of higher output levels, only of higher prices.
The one drawback of the GDP is that because the information has to be collected after a specified time period has finished, a figure for the GDP today would have to be an estimate. GDP is nonetheless like a stepping stone into macroeconomic analysis. Once a series of figures is collected over a period of time, they can be compared, and economists and investors can begin to decipher the
business cycles, which are made up of the alternating periods between economic recessions (slumps) and expansions (booms) that have occurred over time.
From there we can begin to look at the reasons why the cycles took place, which could be government policy, consumer behavior or international phenomena, among other things. Of course, these figures can be compared across economies as well. Hence, we can determine which foreign countries are economically strong or weak.
Based on what they learn from the past, analysts can then begin to forecast the future state of the economy. It is important to remember that what determines human behavior and ultimately the economy can never be forecasted completely.
Unemployment The
unemployment rate tells macroeconomists how many people from the available pool of labor (the labor force) are unable to find work. (For more about employment, see
Surveying The Employment Report.)
Macroeconomists have come to agree that when the economy has witnessed growth from period to period, which is indicated in the GDP growth rate, unemployment levels tend to be low. This is because with rising (real) GDP levels, we know that output is higher, and, hence, more laborers are needed to keep up with the greater levels of production.
•
