Macroeconomics

Macroeconomics Definition

Macroeconomics is a ‘top-down approach; it gives a birds’ eye view of the economy. It focuses on aspects and phenomena that are important to the national economy and the world economy at large. The economy is impacted by GDP, growth, inflation, government spending, borrowings (fiscal policies), unemployment, and monetary policy. 

The prices of products and services are interlinked, and macroeconomics studies the changes in these prices during economic ups and downs. Governments and institutions strategize policies based on this study. John Maynard Keynes is widely regarded as the pioneer in macroeconomics.

Macroeconomics Explained

Between micro and macroeconomics, the latter is more fascinating. It elucidates a global economic picture, a bird’s eye view. It is a ‘top-down’ approach. The study highlights how the output levels of different products and services are correlated. For example, if the price of fuel rises, then the price of goods like fruits, vegetables, and groceries will also rise. This is brought about by high transportation costs. Thus, this economics discipline aims to interlink different phenomena.

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Historically, issues like trade, prices, output, unemployment, and growth have been discussed earlier by great economists like John Stuart Mill and Adam Smiths. However, it was the famous British economist John Maynard Keynes who combined all these economic factorsEconomic FactorsEconomic factors are external, environmental factors that influence business performance, such as interest rates, inflation, unemployment, and economic growth, among others.read more.  As a result, the modern concept of macroeconomics was introduced. In 1936, Keynes published The General Theory of Employment, Interest, and Money. Keynes’ modern economics contradicted the classic theory of the self-regulating market. After the 1929’s Great DepressionGreat DepressionThe Great Depression refers to the long-standing financial crisis in the history of the modern world. It began in the United States on October 29, 1929, with the Wall Street Crash and lasted till 1939.read more, the US and Europe faced severe unemployment levels. Consequently, the aggregate output also fell drastically. Keynes studied the whole economy and correlated the behavior of different sectors and the economic factors to identify the reasons behind the fluctuation.

In macroeconomics, demand and supply refer to a broad range of aspects as both are aggregate by nature. Keynes favored demand-side economics, which impacts real GDPReal GDPReal GDP can be described as an inflation-adjusted measure that reflects the value of services and goods produced in a single year by an economy, expressed in the prices of the base year, and is also known as "constant dollar GDP" or "inflation corrected GDP."read more by increasing aggregate demandAggregate DemandAggregate Demand is the overall demand for all the goods and the services in a country and is expressed as the total amount of money which is exchanged for such goods and services. It is a relationship between all the things which are bought within the country with their prices.read more. This involves improving income levels, stabilizing unemployment, and checking government spending. The aim was to boost the spending ability of people. Supply-side economics tries to impact real GDP by increasing aggregate supplyAggregate SupplyAggregate Supply is the projected supply that a business calculates based on the existing market conditions. Various factors such as changing economic trend are considered before calculating the aggregate supply.read more. This includes adjusted tax rates, deregulation, infrastructure support, privatization, and educational reforms.  

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Macroeconomics Theories

Macroeconomics focus on the following concepts.

1. Theory of General Price Level: The prices of products and services are interlinked; economists study the changes in these prices during the economic ups and downs.
2. Theory of National Income: The country’s budgeting, income, and expenditure impacts the nation’s overall growth. This measure aims to facilitate economic equality in society.
3. Economic Growth and Development: The nation’s gross domestic product and per capita incomePer Capita IncomeThe per capita income formula depicts the average income of a region computed by dividing the total income of that area by the total population of the region. It is used to figure out the average income of a city, provision, state, country, etc.read more are development indicators.
4. Theory of Employment: It is equally important to determine the unemployment level of a nation. Unemployment affects a nation’s income, consumption, demand, supply, and GDPGDPGDP or Gross Domestic Product refers to the monetary measurement of the overall market value of the final output produced within a country over a period.read more.
5. Theory of International Trade: Countries are highly affected by cross-border selling and purchase. As trade is necessary for improving economic conditions, the stability of exchange rates is essential. Preferably, the barriers for import and export should also be minimal.  
6. Theory of Money: The central bank policies control monetary circulation. Therefore, the economists give due consideration to central bank policies and their consequences.

Macroeconomics Objectives

In 1929, the US and apparently the whole world faced a great economic depression. Most economists failed to interpret this downfall. Following are the objectives of the macroeconomics theories:

#1 – Reduce Unemployment

Macroeconomics highlights how consumer demand impacts employment levels. A fall in demand causes employee layoffs. Therefore, measures increasing demand improve the employment conditions of a nation.

#2 – Exchange Rate Stability

Exchange rate fluctuations greatly impact the cross-border selling of goods and services. Favorable export and import duties can promote economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more.

#3 – Control Inflation

A macroeconomic analysis identifies inflation. It further highlights measures that can reduce the adverse impact of inflation. 

#4 – Economic Development

We have often read about business cycleBusiness CycleThe business cycle refers to the alternating phases of economic growth and decline.read more fluctuations; the economy is dynamic. This is why economists, governments, and statutory bodies try to anticipate fluctuations. They plan based on the predictions. Therefore, despite unavoidable changes, economic growth can be ensured by making policies diligently.

#5 – Balance of Payment Equilibrium

International tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. read more activities are essential for a nation’s development. This is why economists match export receipts to import payments. They identify a surplus or deficit. If import exceeds export, the surplus is termed as the balance of paymentBalance Of PaymentThe formula for Balance of Payment is a summation of the current account, the capital account, and the financial account balances. The term balance of payments refers to the recording of all payments and obligations pertaining to imports from foreign countries vis-à-vis all payments and obligations pertaining to exports to foreign countries. It is the accounting of all the financial inflows and outflows of a nation.read more.

#6 – Decrease Government Borrowings

Governments borrow funds from other countries to fulfill short-term and long-term requirements or to repay previous loans. However, excessive borrowings can negatively impact a nation’s economy. Therefore, checking government borrowings is a vital part of this economics discipline.

Macroeconomics Examples

Let us discuss an example of macroeconomic analysis. The actual gross domestic product of Puerto Rico decreased by 2.4% in 2018. However, in 2019, GDP went up by 0.3% due to a 0.7% increase in exports. Also, a 9.1% decline in imports subsided the effects of reduced consumer and government spending. The credit for this goes to the pharmaceutical and chemical industries.

Moreover, in 2019, the government reduced its expenditure on disaster recovery activities by 11.4%. This was possible because major damage repair of the power grid was accomplished in 2018 itself. Further, consumer spending in 2019 fell by 0.5%, and durable goods sales fell by 3.6%. This was caused by the 2018 reduction in compensation offered by the government and insurance companies.

United States Current Account deficitCurrent Account DeficitCurrent Account Deficit refers to a scenario when the country’s total value of imported goods & services surpasses the value of exported ones. Generally, it is the outcome of high expenditure on imports compared to the money spent on exports. read more is another example. They simply consume more than they earn. But how does the US finance this spending then? The government borrows money by issuing sovereign debtSovereign DebtSovereign debt is the money borrowed by a country’s central government, primarily achieved by selling government bonds and securities. Treasury notes, bonds, and bills are some examples of sovereign debt issued by the United States.read more. Thus, the US runs a Capital Account Surplus.

Scope and Importance

The scope of macroeconomics is described below.

• Curtail the Impact of Recession or Inflation: Though the economic cycles cannot be avoided, their impact can be reduced significantly by implementing macroeconomic policies.
• Economic Problem Solving: Macroeconomic research and analysis identify the root cause behind a country’s economic crisis. It further facilitates the development of a problem-solving mechanism.
• Sustainable Economic Growth: The study helps deal with various macro-level issues like inflation, unemployment, and price level fluctuations.
• Policy Formation: The government and the statutory bodies make use of macroeconomic analysis for devising fiscal policiesFiscal PoliciesFiscal policy refers to government measures utilizing tax revenue and expenditure as a tool to attain economic objectives. read more and monetary policiesMonetary PoliciesMonetary policy refers to the steps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.read more. These are reforms for correcting the economy.
• Social Welfare: The study also facilitates proper resource allocation to ensure economic equality.
• Business Cycle Analysis: With the regressive study of macroeconomic conditions, economists can interpret business cycle fluctuations. As a result, necessary steps are taken to reduce the impact of economic adversities.

Limitations of Macroeconomics

Macroeconomic analysis may go wrong since it emphasizes future predictions based on past incidents. In reality, things may not fall in the same way. Moreover, a particular situation can result from multiple economic changes, which require an expert’s knowledge and efforts.

There are numerous theories for conducting such an analysis; however, these theories ignore the practical aspects like government regulations and taxation. Further, it is a complex and specialized stream that requires a high level of skill and learning.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a Guide to what is Macroeconomics and its Definition. Here we explain macroeconomics objectives, theories, & importance using examples. You may learn more about from these economics recommended articles below –

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