Loading the player...

What is 'Macroeconomics'

Macroeconomics is a branch of the economics that studies how the aggregate economy behaves. In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such as, inflation, price levels, rate of growth, national income, gross domestic product (GDP) and changes in unemployment.

BREAKING DOWN 'Macroeconomics'

There are two sides to the study of economics: macroeconomics and microeconomics. As the term implies, macroeconomics looks at the overall, big picture scenario of the economy. Put simply, it focuses on the way the economy performs as a whole. This includes looking at variables like unemployment, GDP and inflation. The government uses these factors and models to help develop its own economic policies. Through central banks, the government will come up with its fiscal and monetary policies to keep the economy in check. On the other hand, microeconomics looks at the behavior of individual factors in an economy (like people, households, industries, etc). We'll look at the differences a bit more later. 

The Study of Macroeconomics

Those working in the field of macroeconomics study aggregated indicators such as unemployment rates, GDP and price indices, and then analyze how different sectors of the economy relate to one another to understand how the economy functions.

Macroeconomists develop models explaining relationships between a variety of factors such as consumption, inflation, savings, investments, international trade and finance, national income and output. Such macroeconomic models, and what the models forecast, are used by government entities to aid in the construction and evaluation of economic policy.

Specific Areas of Research

Macroeconomics is a rather broad field, but two specific areas of research are representative of this discipline. One area involves the process of understanding the causation and consequences of short-term fluctuations in national income, also known as the business cycle. The other area involves the process by which macroeconomics attempts to understand the factors that determine long-term economic growth, or increases in the national income.

History of Macroeconomics

Macroeconomics, as it is in its modern form, started with John Maynard Keynes and the publication of his book "General Theory of Employment, Interest and Money" in 1936. Keynes offered an explanation for fallout from the Great Depression, when goods remained unsold and workers unemployed, a feat that left classical economists stumped. Keynes' theory explained why markets may not clear. This theory evolved throughout the 20th century, diverting into several macroeconomic schools of thought known as Keynesian economics, often referred to as Keynesian theory or Keynesianism.

Macroeconomics vs. Microeconomics

Macroeconomics differs from microeconomics, which focuses on smaller factors that affect choices made by individuals and companies. Factors studied in both microeconomics and macroeconomics typically have an influence on one another. For example, the unemployment level in the economy as a whole has an effect on the supply of workers from which a company can hire. Macroeconomics, in its most basic sense, is the branch of economics that deals with the structure, performance, behavior and decision-making of the whole, or aggregate, economy, instead of focusing on individual markets.

Meanwhile, microeconomics looks at economic tendencies, or what can happen when individuals make certain choices. Individuals are typically broken down into subgroups, such as buyers, sellers and business owners. These actors interact with the supply and demand for resources, using money and interest rates as a pricing mechanism for coordination.

RELATED TERMS
  1. John Maynard Keynes

    Keynes is regarded as one of the founding fathers of modern day ...
  2. Macroeconomic Swap

    A type of derivative designed to help companies whose revenues ...
  3. Economics

    Economics is a social science concerned with the production, ...
  4. Stabilization Policy

    A macroeconomic strategy enacted by governments and central banks ...
  5. Labor Market

    The labor market refers to the supply and demand for labor in ...
  6. Fundamentals

    The qualitative and quantitative information that contributes ...
Related Articles
  1. Insights

    Macroeconomics

    Find out everything you need to know about macroeconomics.
  2. Investing

    Deflation and Debt: Is the United States the New Japan?

    Discover how mainstream macroeconomics has failed Japan and why the United States should take care to avoid Japan's borrow, spend and print model.
  3. Insights

    Economic Indicators That Affect The U.S. Stock Market

    Macroeconomic factors like GDP, Inflation, and Retail Sales affect the value of your portfolio. Understanding these economic indicators is vital for every investor in the marketplace.
  4. Investing

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  5. Insights

    Inflation for Dummies

    Inflation may seem like a straightforward concept, but it is more complex than it appears. We examine its varieties and causes.
RELATED FAQS
  1. What is the difference between macroeconomics and finance?

    Dive into the world of economics by learning the key differences between macroeconomics and finance. These ideas help investors ... Read Answer >>
  2. How did John Maynard Keynes influence business cycle theory?

    Read about the impact of John Maynard Keynes on business cycle theory and the development of macroeconomics to study aggregate ... Read Answer >>
  3. What is the difference between accounting and economics?

    Discover the difference between accounting and economics by comparing and contrasting the financial discipline of accounting ... Read Answer >>
  4. What are some examples of positive correlation in economics?

    Learn the most common examples of positive correlation in macroeconomics and microeconomics, including demand and price, ... Read Answer >>
  5. How does government policy impact microeconomics?

    Read about how any type of government policy necessarily impacts the microeconomic decisions that are made by individuals ... Read Answer >>
  6. How does disposable income influence the marginal propensity to consume (MPC)?

    Learn about the relationship between disposable income and marginal propensity to consume in the classic Keynesian consumption ... Read Answer >>
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center