Macroeconomics: Definition, Overview, Goals, History & Examples
Macroeconomics
Macroeconomics is a branch of the economy that studies economic units and magnitudes at a global level, it studies the economy as an integrated whole, such as gross domestic production, employment, unemployment, imports-exports, etc.
It is the opposite of microeconomics, which studies the smallest and most elementary consumption units, such as firms, the worker, families, and the most basic variables and magnitudes such as production, consumption, and prices.
As an example, microeconomics studies the production of a rice in a factory, while the aggregate supply of rice throughout the country is studied by macroeconomics, which of course includes the supply of all goods and services or GDP.
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The field study of macroeconomics
Macroeconomics studies the behavior of the economy as a whole, it uses models such as the general equilibrium of the economy. It addresses aspects such as recessions and expansions, economic development, international relations, economic cycles, and the general price level.
Macroeconomic analysis is divided into the following theories:
- Theory of the determination of national income.
- Theory of money.
- International trade theory.
- Economic development theory.
Macroeconomics goals
The concept of the macroeconomic goals has evolved over time, the economist Adam Smith was the first to clarify this concept. Smith considered that the goal of economics is to study how the wealth of nations is created, Smith focused on production.
David Ricardo complements this concept and focuses on distribution by stating that the goal of economics is “the study of the distribution of the wealth of nations.”
Then, John Maynard Keynes, in his work on “The General Theory of Employment, Interest, and Money” states that the goal of economics should focus on “the forces that govern the volume of production and employment as a whole.”.
Keynes had the idea of finding the balance between demand and supply and paid attention to the general equilibrium of the economy. Most contemporary economists adhere to the idea of pursuing the balance of the three sectors of the economy, these sectors are production, distribution, and consumption.
He also highlights the economic growth, development, and the importance of equitably distributing the national income.
The objective of economics can also be seen from another point of view, from the individual level, social level and from the perspective of economic activity.
- At the individual level: it’s the most efficient and effective solution to satisfy the needs of each person with limited resources.
- At the social level: The goal is to achieve economic stability.
History and evolution of macroeconomics
Macroeconomics is a more recent branch of economics, it appears after microeconomics. Macroeconomics appears as a result of the fact that microeconomics alone could not study or encompass or solve the problems of the economic world.
The English economist John Maynard Keynes in his work “The general theory of the occupation of interest and money”, showed that microeconomics could not explain and solve all problems. An example is the massive unemployment that occurred due to the great depression in the 30s. In his work and with his teachings, he gives rise to economic analysis at the macro level. An economy is considered to exist before and after Keynes.
Keynes focused on concepts such as national income, total investments, the volume of exports and imports, and the level of employment, and emphasized that the state is an economic agent whose activity greatly influences the economy. Other economists developed this branch further, namely Milton Friedman, leader of “monetarism” with theories about inflation.
Importance of macroeconomics
The importance of macroeconomics represents the same importance as the economics in general, because its goal is to study the laws through which production, distribution, and consumption achieve an equilibrium.
It allows the growth and improvement of the living conditions of society, it allows reaching solutions of problems that affect it, it helps to obtain and distribute scarce goods in order to survive.
Economics makes possible the understanding of broad economic phenomena (positive economics) but also the formulation of law principles that allow the systematization of economic activity to obtain desired results. (normative economics).
See also