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Macroeconomics

Macro Economics

Introduction

Macroeconomics is a very important facet of economics. It is one of the fundamentals of the subject and in order to develop a good understanding of the study, we need to properly distinguish between macroeconomics and macroeconomics. But I’m getting ahead of myself, we need to answer an important question first; what exactly is economics?

Please read my article on economics to get the answer to that question:

What is Macroeconomics?

Now that we know the basics, we can get into the gritty details. I already discussed microeconomics in my last article. Chances are you haven’t read it already and if you have, sorry for the rehash… Either way, here’s a short description of microeconomics; microeconomics deals with individuals and their actions and interactions separately. What is macroeconomics?  The exact opposite. 

Instead of breaking up the economy into bits and pieces, we take on Goliath in all his glory. Too biblical? I figured. In layman’s terms, we study the entire economy at once rather than dissecting each actor on their own.

We don’t isolate any components and we analyze the entire concept at once, keeping in mind the intricate relationships but not focusing on them. Still too confusing? In even simpler words, we look at everyone as a single entity, the economy. That’s not exactly accurate but it’s the least complicated way to describe the word. Don’t worry, You’ll get it with a couple of examples.

Macroeconomic Concepts

Macroeconomics is a highly complex concept and is harder to explain than microeconomics. This is because you can’t view things separately. This complicates matters greatly. To help you understand the subject, I’ll outline a couple of examples of macroeconomic constructs.

Aggregate Supply and Aggregate Demand

So far we’ve been looking at demand and supply specifically for a particular seller. This is where we diverge from microeconomics. Rather than focusing on the demand and supply for a single good, we view that of the entire market when we think macroeconomically.

Still don’t get it? Suppose your friend, Vance, sells vans. If we were to view it in terms of microeconomics, then we consider how many people are buying his vans and how many vans he can produce. However, in macroeconomics, we view the total number of vans bought and sold in the entire market.

Aggregate demand and supply are very important as it gives sellers an idea of their competitors and allows consumers to analyze the entire market and identify the best price for themselves. In the mentioned scenario, both Vance and van buyers know the market price for Vans so he can charge a competing price and van buyers can scout out fair prices and bargains.

Unemployment

This is much easier to explain. Unemployment is the state of wanting to work but being unable to find jobs. That definition is a little flawed because a concept called “voluntary unemployment” exists. But that is a highly advanced discussion and given how complicated the concept we’re discussing right now is, let’s just put it on hold.

Unemployment is usually not considered part of microeconomics, this is because it is quite redundant. It is pointless to separately view every actor’s employment status as it serves no statistical or economic purpose. 

If we look at unemployment macroeconomically, things get much more convenient. We are able to get figures like the unemployment rate and set unemployment benefits and wage rates in an unbiased way.

Inflation

Inflation is the rise in prices in an economy over time. Unless you’re really young, you’ve seen it happen firsthand. Think 10 or even 5 years back, the prices of goods were cheaper. This happens because we are all earning more and more money every day so our demand increases and supply isn’t increasing at the same rate. This leads to firms asking for higher prices as they know we will pay for those prices.

Inflation
Inflation

This concept can also be viewed in terms of microeconomics. Any concept can. But again, it won’t yield any results for you. This phenomenon affects the entire economy so there is no reason to isolate components.

Now that you have viewed a bunch of examples of macrosomic per se. We have a basic understanding of the concept… Hopefully. Now you must be asking; Why on earth do I or anyone for that matter need to study macroeconomics?

Importance of Macroeconomics

It’s a valid question. Why do we need to bunch of factors together when we can view each one separately? Why lose that attention to detail and accuracy? Here are the answers to your question.

Speed

Macroeconomics may lose a little accuracy as you lob everyone together under one model but it makes the process much faster. You don’t need to analyze each actor’s behavior and evaluate their relationships. This saves a lot of time and we can be laser-focused on the topic at hand.

Focus

Speaking of focus, the removal of microanalysis allows us to spend more time and effort on the issue itself rather than contemplating every single decision made. This goal-oriented research sometimes yields more accurate results.

Objectivity

We touched on this a little when discussed wage rates and unemployment benefits but let me elaborate. When we view the economy as one single entity, decisions do not cater to any individual. We make the decision that benefits the maximum number of people possible as we try to satisfy the entire economy.

Application of Macroeconomics

“Great, I get it. We need macroeconomics but how do I apply this knowledge?” Good question. Macroeconomics has produced several theories and government policies. Here are a few examples.

Monetary Policy

Governments employ monetary policies to increase or decrease the money supply in the economy in order to balance the aggregate demand in the economy

This policy is said to be macroeconomic because it affects every business, individual, and the government itself. This is because the change in demand changes prices which influences consumers and sellers. The government is obviously impacted as they have to sell bonds or lower interest rates to control demand in the economy.

Fiscal Policy

This is a little more tricky. Rather than focusing on the money supply, this policy chooses to alter government spending and taxation to influence demand. 

Increasing government spending generally leads to a rise in demand. If the government spends more on infrastructure, for example, traveling would be much easier and so people would find it less hard to go to retail shops to purchase goods. This increases demand.

Taxation has the opposite effect. If people are taxed too heavily, they will have less money and so their demand decrease.

Buffer Theory

Countries often import workers from other countries in case of shortages in the local workforce. This practice is known as buffer theory.

Although it is rare in modern society, a variation of this was seen in West Germany due to large vacancies after their loss in the second world war.

Conclusion

I hope this article taught you something about macroeconomics. It is important to note that macroeconomics is a rather advanced concept and if you didn’t understand a lot of the things that you read here today, don’t stress out. With time and effort, this will all soon seem like a piece of cake. All you need to understand the subject is a dedication as with any great field of study. Soon, you will see that macroeconomics is one of the most fun and interesting subjects out there. Till then, keep up the good work and research, my fellow economics enthusiasts.

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